To deepen commodities derivative markets, regulator Sebi is mulling allowing new products and institutional players while an integrated database is in the works for agriculture as well as non-agri products to better understand the domestic and international trends.
Through this database, Sebi intends to become a "timely input provider" to the government in commodity market-related matters as any volatility and instability in agri-commodity prices are highly sensitive in nature and can have significant impact on the economy.
While spot markets in commodities do not come under Sebi's purview, instances of volatility emanating in underlying markets may raise questions on commodity future trading and regulation.
"In this scenario, Sebi is looking to strengthen its presence in the macro milieu of the commodity markets and evolve as a timely input provider to the government," stated the regulator's Plan of Action for this market in 2016-17.
Sebi is also working on introduction of new products such as commodity options, index futures and index while allowing institutional participants such as banks and foreign portfolio investors (FPIs) is also under active consideration.
The objectives of commodity derivatives markets are price risk management and efficient price discovery so as to enable producers, importers and exporters to hedge their risk and take sowing decision, or plan import and export.
In this regard, institutional participants are important from the perspective of providing liquidity in the market.
The regulator is also looking at detailed disclosure guidelines for the commodity derivatives market.
According to Sebi, it has been predominantly a participants market and information is available only to those participants and investors are not privy to such information.
Therefore, it is working on a policy for mandatory periodical disclosures on commodity derivatives exchanges for increased transparency and better corporate governance.
The integrated database will centralise all data pertaining to commodities -- historical as well as current, domestic as well as international, agriculture as well as non-agriculture -- and work as a feeder for Sebi's own policy formulation for commodities derivatives function.
At present, data about commodity markets, domestic and global, is dispersed and disintegrated. Domestically, commodity data scenario lacks uniformity in dissemination, frequency and coverage of variables and reliability.
Sebi feels that agricultural commodity markets are highly sensitive to demand-supply mismatches and any volatility and instability stemming from agri-commodity markets have disproportionate impact on the economy and government.
The proposed historical commodity-wise and market database on variables in the underlying market will help in timely regulation, surveillance and research, as also help portend early warning signals based on the seasonality trends and forecasts.
Sources of domestic spot market information is scattered across large number of institutions. Along with domestic data, global factors and prices, including those of close substitutes, have strong effect on Indian commodity prices.
India is a major importer of precious metals, energy, base metals and has emerged as exporter of some traded agri commodities. Commodity futures traded on Indian exchanges, which are international in nature, are impacted by price changes in key overseas futures contracts.
Sebi's Commodity Derivatives Market Regulation Department is also reviewing the spot price polling mechanism currently being used by the exchanges. The review is aimed at improving the credibility and transparency of such mechanism.
A review is also under way of warehousing norms to strengthen the warehousing facilities in the commodity futures market for ensuring integrity of the delivery mechanism through scientific warehousing and bring transparency in the warehousing field.
To prevent the misuse of futures trading by taking huge positions in the spot market and also by concentration of positions on the futures markets, various regulatory measures are being proposed.
While position limits have been tightened recently to prevent manipulation by concentration by clients or brokers, they may be reviewed so as to prevent build-up of large positions, the official said. Further need of overall open interest limit may also be reviewed.
Sebi is also looking to further strengthen the risk management framework of commodity exchanges and also review the risk management framework, including on member deposits, Settlement Guarantee Fund, stress testing and back testing for credit and liquidity risks, and default waterfalls.
Sebi's Economic And Policy Analysis Department is looking at capacity building measures for enhancing the research capability in this area.
Sebi plans to enhance its presence in the commodity market eco-system through interaction with the practitioners, academicians and researchers. It also plans to organise a conference on commodities markets which would strengthen its own understanding in the underlying markets and trends, particularly agricultural commodity markets, and also deepen interest among researchers in commodities markets.
