30 pieces of silver

Two pieces of impending legislation show a lack of strategy on the part of the finance ministry when it comes to the architecture of financial regulation. The first concerns regulation of commodity futures markets. Worldwide, it is seen that commodity futures, such as futures on gold or crude oil or milk or wheat, are merely financial products. There is no difference between the institutional capacity required to trade gold futures, compared with futures on (say) Infosys. There are economies of scale in thinking of all futures as one. It is easier to only build one legal framework and one regulator. The great derivatives exchanges of the world, like CBOT or CME, trade all kinds of futures under one roof, with a single regulator. In India's case, considerable legislative effort and institution-building at Sebi are at hand for trading financial futures. That could be available, off the shelf, for commodity futures. Trading services will be cheaper if an exchange can pay one fixed cost and then trade more kinds of products.

Such convergence improves competition. If there is a separation between NSE and BSE trading financial futures, from the NCDEX, MCX, NMCE and others trading commodity futures, then each is shielded from competing with the other. This is like saying that Tata Engineering makes trucks, and is hence prohibited from competing in the car market. Users of both markets will benefit from full competition between the two groups of exchanges. Instead, excuses about small farmers are being used to defend turf when it comes to completely non-farming activities such as trading futures on crude oil or gold.

The second piece of impending legislation is an amendment to the RBI Act. It proposes to give RBI the power to "give directions ... to all agencies ... dealing in securities, money market instruments, foreign exchange, derivatives, or other instruments of like nature as the Bank may specify from time to time". Through this land-grab, the RBI will become a super-regulator in Indian finance. The RBI is already overloaded with too many functions, many of which have conflicts of interest with the core task of monetary management. Worldwide, central banks are shedding extraneous finance and fiscal functions, and refocusing purely on monetary policy. But this amendment seeks to give legislative support to a third pond of exchanges, this one overseen by the RBI. The commodity futures pond is a country cousin of the equity pond in many ways, but the RBI pond is even worse.

If we look outside India, the world is headed towards unified screens where every conceivable financial product is traded. We merely drive up costs when financial players are forced to make three companies with three memberships and three trading screens for three ponds. Internationally, there is intense competition between all kinds of exchanges, ranging from venerable old exchanges like the NYSE to new start-ups that are just websites. Just as with cars or phones, competition fuels innovation and drives down prices. The licence raj where three groups of exchanges are forced to non-compete with each other is bad economics. These two pieces of legislation reflect the absence of strategic thinking on the part of the ministry of finance.