 "Ramesh Abhishek")
The vision of the commodity derivatives market should be to create a globally competitive platform in India for price discovery, in which our market can set the price for important commodities produced or consumed here. Ramesh Abhishek 's tenure as the last chairman of the 62-year-old commodity derivatives market regulator, the Forward Markets Commission, ends on Monday. He has been promoted as secretary to the Government of India. His new posting will be announced soon. FMC is to be merged into the capital markets regulator, Securities and Exchange Board of India (Sebi). looking back on an eventful tenure, he talks to Rajesh Bhayani on what has been done and what more needs to be done. Edited excerpts:
You took over as chairman when the commodities derivatives sector was facing challenges, first due to over-speculation in commodities like guar and potatoes, and then after the NSEL crisis. What are the regulatory and market lessons learnt from these developments?
An important learning from extreme price volatility in trading of certain commodities over the years has been that the threat of physical delivery in agri futures contracts must be credible, to ensure the futures market moves in tandem with prices in the underlying market.
We found that certain entities, acting in concert with others, take far more positions in the futures market than permitted by the position limits. The guidelines on acting in concert were rather rigid and, hence, exchanges found it difficult to act against such entities. We revised the definition of acting in concert in January, 2012 and made the criteria much more flexible to address this problem. This has proved to be quite effective.
Deliverable stocks in exchange-accredited warehouses were often not sufficient in comparison with the open interest (unsquared contracts) in that commodity. This could be for different reasons, such as shortage of the commodity due to a bad crop or lean season or cornering by certain entities. We addressed this by rationalising the member and client position limits that can be taken, and a 15-day staggered delivery window where sellers can tender delivery which is randomly allocated to the buyers.
These measures ensured the threat of delivery on the exchange platform was credible. Stronger monitoring and surveillance by the Commission also helped in keeping track of the market fundamentals which impacted futures and spot prices.
What were the key decisions or developments which would have left a long-time impact for commodity derivatives?
Strengthening of corporate governance of the exchanges through revision of the shareholding structure and strengthening the regulation role of the board of directors was an important one.
Strengthening the risk management system of exchanges by setting up of a Settlement Guarantee Fund and making the warehousing system robust, strengthening convergence with the physical market through a staggered delivery mechanism, stopping expiry of agri contracts in the lean season and by designing contract designs suitably was also found successful. We have also made the markets deeper by rationalisation of position limits and daily price limits.
For investor protection, we ensured setting up of an Investor Protection Fund, sending daily SMSes and e-mail alerts to clients, quarterly/half yearly settlement of accounts by members and stopping of margin funding.
How do you see the future of the segment? What more needs to be done to see the market growing and what should be the road map?
Commodity derivative markets have huge potential for growth. This requires a very liquid and in-depth market, possible by having more products and participants, and through other appropriate policies for growth. Also needed is the development of underlying physical commodity markets, through establishment of a national market, warehousing development, warehousing receipt financing and a uniform goods and services tax.
What is your advice to Sebi in regulating the market and what challenges will the new regulator face?
The vision of the commodity derivative market should be to create a globally competitive platform in India for price discovery, in which our market can set the price for important commodities produced or consumed here.
What feelings do you take with you?
I am satisfied that we could improve the public perception of this market, by bringing a lot of discipline into it.
