Sebi considers tighter regulations for agri-commodity derivatives

Even before it takes over regulating commodity derivatives from next Monday, the Securities and Exchange Board of India (Sebi) has set its eyes on strengthening regulations related to risk management for agriculture commodities derivatives.

Sebi has identified areas including exchanges' playing bigger role in settlement and delivery, forward trading, spot exchange and specially delivery-based settlements.

Sources close to the development said that the regulator wants to streamline clearing and settlement, especially delivery-based settlement that is largely applicable to agri-commodities. Agri derivatives are around one-fifth of total volumes.

It has already decided that "all commodity exchanges shall ensure guarantee for the settlement of trades including good delivery".

Sebi wants exchanges to become central counter party to all deals and guarantee settlement. This is already prevalent on equity exchanges, but can only be implemented on commodity exchanges when they set up clearing corporation for which they have been given three years.

In case of agri-commodities, exchanges ensure good delivery and settlement but they are not central counter party because of several government policies. For instance, stock limits are impacting chana trade at present and quality issues imposed by FSSAI in past which had affected black pepper trade.

Another issue Sebi is understood to have raised is that of the forward segment launched by NCDEX and NMCE. In forward segments there are no standardised contracts but buyers and sellers report their deals on the exchange’s platform. In case of default, loss to other party is made good by paying 90% of the margin collected.

However, the “regulator has yet not finalised anything on this”, said the source.

In equity derivatives, lot sizes have been increased to ensure small investors stay away from the segment. A source in the know said that the regulator is thinking of implementing similar measures for commodity derivatives. If this happens, commodity mini-contracts may lose attractiveness as their size will increase.

"Some contracts are providing good liquidity and participation from small traders,” said the source.

Also, such a step would impact all exchanges as apart from NCDEX, MCX also has active mentha, cardamom and cotton contracts while NMCE has several agri and plantation contracts and in commodities like rubber exchange whihc have a fairly good delivery record.

According to sources, Sebi also wants NCDEX to exit from its subsidiary NCDEX E-Markets.

However, an industry observer said, “NCDEX e-market is not a spot exchange and it is auction platform or service provider. Both equity exchanges also have their subsidiaries offering similar services and should be viewed in that context. Government enterprises also use services of such platforms to procure commodities for market operations.”