Hurdles ahead for common clearing of commodities

Reforms in the commodities derivatives market regarding clearing activities are facing many challenges as they are being examined by the ministry of finance before they are implemented. The reforms were proposed by the market regulator, Forward Markets Commission.

The department of economic affairs had proposed setting up of a Common Clearing Corporation for all national commodity exchanges. An industry official said, “There are inherent risks in the one common clearing corporation for all exchanges because any problem that occurs in the clearing of one of the member exchange could affect the industry as a whole and potentially cause systemic risk.”

It is also argued that physical clearing and settlement is integral to efficient price discovery on the commodity exchanges and therefore cannot be removed from complete control of an exchange.

NCDEX, a major agri-centric commodity exchange, is the only National Commodity Exchange in the country to have a vertically integrated architecture and capability to support the growth of the commodity derivatives market. The exchange said, “In our view, for the development of integrated commodity market in India, there is also a need for a common clearing across market segments from mandis (APMC), forwards and futures as well as state government and central government procurement and sale activities.”

Even other exchanges have not fully supported the idea of common clearing. One of them said even multiple common clearing corporations could be a better option where market can make a choice and so the exchanges.

Market players see better arbitrage opportunities if clearing activity along with trading is under one roof for multi segments especially futures and forwards. If there is common clearing for various segments across exchanges then the arbitrage opportunity will be wider. However, costs shall increase to market participants.

“If delivery and trading are under the same exchange there can be better supervision and control over deliveries and surveillance can be effective. Common Clearing may go against such settlements where deliveries are happening,” said an industry official.

Most exchanges, however, welcome setting up of an electronic registry for goods deposited in the exchange accredited warehouses. Importance given to the clearing per se is also seen as a very important signal in the development of the market.