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FMC/SEBI merger: Marriage a saviour!

On the exchange front, stock and commodities exchange will have the luxury in encroaching each other’s domain.

June 19, 2015 10:26 IST | IIFL
On account of multiple headwinds, the commodity industry has been relegated into a moribund state. Systemic risk has eroded market confidence and in the process dissuaded commodity brokers and retail investors to participate on the derivatives segment. The need of the hour is to restore confidence in the commodity markets. In this respect, Budget for the fiscal year 2015-16 revealed that commodity futures market regulator Forward Markets Commission (FMC) will be merged with the capital market regulator SEBI. The government is in the process of finalising the formalities for the merger by September this year. The integration of commodity market entities with the securities segment paves the path for introduction of various products which did not materialise under the ambit of Forward Contracts Regulation Act.
 
SEBI’s regulation of commodity exchanges implies that commodity derivatives will be deemed as securities. Imperatively, this transition may usher in multitude of opportunities like Options trading, Index linked products, Exchange Trade products and Portfolio Management Services in the commodities segment. Introduction of the specified instruments will also entail varied institutional participation, including Banks, Mutual Funds, and Foreign Portfolio Investors. A robust watchdog like SEBI will ensure prudent regulation of various products and institutions. Improved depth and liquidity in the markets will also encourage innovation of further new products. Participation of a commodity value chain can be guaranteed only when there is efficient delivery mechanism. Presence of financial institutions and physical market players should encourage development of warehousing and the necessary infrastructure.
 
On the exchange front, stock and commodities exchange will have the luxury in encroaching each other’s domain. For instance, a commodity exchange can launch currency derivatives and equity trading, while a stock exchange can offer commodity derivatives. Similarly, clearing corporations and depositories will execute settlement for all segments. Multiple segments on one exchange will mitigate the cost of operations and ease the compliance issues. Post merger, commodity exchanges will also eye launch of novel products like weather and freight derivatives.
 
After more than a decade of operation by the commodity exchanges, the industry has not been able to attain the desired results. The parochial FCRA act lacked the teeth to revolutionise the commodity markets akin to the global standards. Efficient commodity markets are manifested by healthy participation of both the commercials and the non-commercials. Commercials are termed as the value chain participants who have a genuine price exposure to a particular commodity. Non-commercials can be defined as speculators, funds and arbitrageurs who intend to make profits by betting on the price trajectory.  Presence of both the segments is indispensable, as efficacy of price discovery mechanism can be determined only by liquidity and depth. In India, lack of depth and delivery mechanism has dissuaded physical players from participating and hedging on the domestic bourses. Globally, commodity markets are much bigger than the equity space, however the same has not been translated as of yet in India. Hopefully, the proposed merger can bring a change in the fortunes for the beleaguered commodity industry.

The author is Senior Analyst at IIFL

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