Should the capital market regulator, the Securities and Exchange Board of India (Sebi), regulate the commodity futures market too? This question has been thrown up by the Economic Survey, which has recommended that all financial markets should be regulated by Sebi. And since the commodity futures market has been categorised as a financial market, the suggestion is clear.
At present, the commodities market is regulated by the country’s oldest regulator since 1954, the Forward Markets Commission (FMC).
When contacted, FMC Chairman B C Khatua told Business Standard that there was no case for merging commodity futures and other financial markets for regulatory purposes as the former operated on a very different philosophy. While equity and debt markets were aimed at generating capital, commodity futures were about hedging the price risk, he said, adding that risk management was the secondary aspect in other financial markets.
According to Khatua, the equity market helped in raising risk capital for development and hence rising prices were not seen as a worry if the rise was orderly even from regulatory point of view. But in case of commodities, if prices moved up, consumers were affected and if it fell, farmers were discouraged. Hence, it always required a right balance, he said.
So, only similarities in regulatory tools such as open interest, price ceilings, circuit filters and trading limits between equity and commodity derivatives could not justify bringing both under the regulation of a single regulator, Khatua stressed.
Even underlying assets in both kinds of derivatives were different. In financial markets, including equity, the underlying assets were securities, which were long lasting. But in commodity futures, the underlying assets were real and short-lived, he said.The FMC Chairman further said that there was no logic and justification in treating commodities as an asset class as they always lost their original form once converted/processed. But shares remained shares for a lifetime and debt instruments remained so till maturity. Hence they can be assets and investment avenues, he argued.
What exactly the commodity market needed, Khatua said, was a special treatment by converging futures and physical commodity markets as futures always took signals from the spot and, based on that, indicated futures trends. Even for that, FMC was best placed and well-equipped, he insisted.
Commodity spot markets are spread across over 7,500 mandis in the country and there is no nationwide price for any particular commodity.
However, Khatua lauded the Economic Survey on one count. He said the survey was right in proposing that electronic trading should be introduced in spot markets with active involvement of Agriculture Produce Market Committees (APMCs).
It’s an open secret that since long the finance ministry has been wanting to bring commodity futures under its jurisdiction. In fact, even before commodity futures trading went national, the finance ministry had sought to regulate it. The finance ministry had made this move despite the fact that FMC was already regulating regional commodity futures exchanges across the country.
