Sebi mulls 'one commodity one exchange' concept

Capital markets regulator Sebi has proposed 'one commodity one exchange' concept in a bid to reduce fragmentation of liquidity and help every stock exchange develop an exclusive set of unfragmented liquid contracts.

In a consultation paper, the regulator said it has prepared a concept note on developing exchange specific unique set of commodities for trading in commodity derivatives segment and reducing fragmentation in commodity derivatives markets.

The regulator has proposed that concept should only be applicable for narrow agri-commodities and non-agri commodities should not fall under the purview.

The agricultural commodities have been classified into three categories – sensitive, broad and narrow.

The 'exclusivity' status of a commodity will last 3-5 years from the date of Sebi's clearance.

The Securities and Exchange Board of India (Sebi) has sought comments from public till January 7 on the proposal.

The main objective of developing the concept is to help every exchange develop an exclusive set of unfragmented liquid contracts on specific commodities.

In addition, the concept will ensure that the concerned exchange develops all kinds of derivative contracts on a specific commodity exclusively and brings about comprehensive development and deepening of the Indian commodity derivatives markets.

The concept will eventually help India to be in a position so as to be able to influence the global benchmark pricing of such commodities-- become price setter for such commodities, Sebi said on Tuesday.

"Even though multiple exchanges having the option of launching competing contracts on the same commodity may be good for encouraging competition and providing choice to investors, a single exchange launching contracts on a specific commodity may have bigger impact locally as well as internationally. This may be more efficient and low cost in the long run," Sebi noted.

With regards to the process for recommending exclusivity, Sebi proposed that exchanges can choose to 'block' a commodity with the regulator if that commodity is eligible for development as an exclusive commodity contract, prior to initiating an in-depth research and large-scale market interactions, by obtaining an in-principle consent letter from it.

Post the blocking, the exchanges will get one month to do detailed research and analysis of the proposed commodity and confirm the 'block' by sharing a feasibility report with Sebi. Blocking would be done based on 'First in First out' method by Sebi.

If the exchange doesn't confirm to block within a month, then the block will be automatically released on that particular commodity.

While a commodity is 'blocked' by one exchange, it cannot be blocked by another exchange. Besides, not more than two commodities can be 'blocked' or be in 'exclusive status' for an exchange at any point in time.

There should be a gap of at least one month between blocking of two separate commodities by the same exchange.

Application for product approval to regulator should be submitted within six months of confirming the 'blocking' of a commodity else, the block will be automatically released.

On failure, the exchange will not be allowed to apply for exclusivity on the same product for at least a period of one year.

The 'exclusivity' status of a commodity will last 3-5 years from the date of Sebi's approval and the exchange can discontinue the status before this period too, the regulator said.

The exchange has to take a call on whether they want to remove the exclusivity from the product only after it becomes continuously liquid for 12 months.

The regulator proposed that derivative contracts on new commodities would be traded only on a single stock exchange for a period of 3-5 years during which the said stock exchange would be allowed to launch all kind of permissible products i.e., futures, futures on options and options on goods, among others.

Narinder Wadhwa, President at CPAI, said Sebi is taking proactive steps in development of commodities derivative markets and this is one of initiatives after opening various eligible commodities to all exchanges and experiencing fragmented turnovers.

"Although we are against the idea of blocking because it is against the spirit of free markets, but for development of markets we need to try this process also as exchanges take lot of efforts to develop contracts and they need some exclusivity for some years, hope blocking is for period of 3-5 years as mentioned in paper," he added.

He further said there is a need to ensure non agri products don't fall into the purview, narrow agri commodities don't have much traction in any case.

"If executed well, the concept of 'one commodity one exchange' holds promise in terms of unifying the liquidity present across multiple exchanges, by enabling a single exchange to look after a particular commodity," Arshad Fahoum, Chief Product Officer, Market Pulse, said.

Given that India is one of the world's major producers of agricultural commodities, and that this concept would only be applied to narrow agri-commodities, efforts should be taken to ensure that the unfragmented liquidity and possible increase in volume and open interest help India become a price maker in these commodities, he added.

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