Commodities market players begin to feel regulatory heat

With the regulator Sebi stepping up its surveillance, commodities market players have begun to feel the heat and several non-serious entities are looking for an exit.
The Securities and Exchange Board of India (Sebi) began regulating the commodities derivative market about four months ago following the merger of erstwhile commodities market regulator FMC with it.
Since taking over the regulation of commodity futures market, Sebi has been slowly but steadily putting things in order in the commodities market.
Critics were apprehensive about the ability of Sebi to regulate the commodities market, mainly because of the underlying physical commodities market being fragmented and guided by various state-level laws where Sebi has no control.

While Sebi worked hard to ensure that the transition and merger was smooth, it was up for a tough task as hardly 30-40 per cent of the brokers got registered within the deadline for registration of commodities brokers till December -- mostly because of stricter fit and proper requirements, officials said.
While the total number of registered brokers has come down drastically, they said that brokers who control almost 99 per cent of the volume have decided to get registered.

The only exception seems to be small commodities exchange NMCE where a very small percentage of brokers have got registered.

NMCE faces the risk of losing its licence if the requirement of minimum 50 brokers is not met.
As brokers accounting for 99 per cent of total volume at the two largest exchanges -- MCX and NCDEX -- have decided to get registered with Sebi, it shows that only serious players have decided to get registered and those who were only marginal players seems to have decided to exit from the commodities market, the officials added.
Over the last 3-4 years, the erstwhile regulator FMC had taken a number of decisions to liberalise the trading and to provide more leeway to brokers by way of increasing the daily price limit or enhancing the circuit filter or starting the forward market.

However, Sebi last week put strict curbs on speculative trading and risky decisions.
Prior to 2011, the daily circuit filters for a commodity used to be 8-9 per cent, which was reduced by FMC to 4 per cent in 2011. In January 2015, this was enhanced to 6 per cent leading to more volatile movements in various commodities.
Daily position limits were also liberalised in December 2014 by FMC.
Normally, there are four contracts in a commodity and the monthly position limit across the months used to be equally divided -- that is 25 per cent in each of the four months. In December 2014, FMC enhanced it to 50 per cent in the near month. This meant that in the near month contract, which is the most liquid one, a broker can take up to 50 per cent of the total permissible position limit.

Sebi has now reversed that decision and brought it back to 25 per cent each month.
While Forwards contracts were permitted by FMC about a year ago, Sebi in a major decision has now banned forward contracts.
However, only one exchange was actually running this contract. The primary rationale for exchange trading is that there would be standard contracts which the participants can enter in anonymous order driven matching.
Sebi realised that forward contracts can also be used as a means to book profit or loss, the officials said. As such, forward contracts permitted about a year ago have also been banned.

To maintain market integrity, Sebi last week also sought explanation from NCDEX on the decision taken by the exchange to compulsorily close down all contracts on castor seeds.
Because of the enhanced position limits and greater circuit filters introduced a year ago, there was a suspicion in the market that some clients or brokers were likely to default.
The open interest had gone as high as two lakh tons and individual brokers had positions above 30,000 tons. This could have created a destabilisation in the commodities market.
This led to the exchange deciding on compulsory liquidation of all positions based on the closing prices of January 27. Sebi is also understood to have asked NCDEX as to what measures were taken by it while higher positions were being built in the contract.

It is understood that Sebi is looking at all the measures taken by the erstwhile FMC in the last 3-4 years and has decided to review it so as to avoid undue risk taking, speculation and manipulation.
Sebi has also decided to impose further restrictions on open position limits for futures contracts on agricultural commodities.
While Sebi has put in place a stronger regulatory regime for the commodities market, one area which remains a challenge for the market regulator is dabba trading, as per the industry executives.
Sooner the Sebi is able to curb the dabba trading menace by putting in effective measures in cooperation with the state governments, it would be better for the growth of the commodities futures market, they added.