Sebi initiates process to integrate commodity spot and derivatives markets

After meeting finance minister Arun Jaitely on Saturday, the board of Securities and Exchange Board of India (Sebi) decided to take forward the issue of integration of the commodity spot markets and the derivatives markets, originally proposed in the Budget on February 1 by the finance minister. The move is significant as even futures market require the transparent price for relevant commodities traded in the spot market.

Speaking to Business Standard, some experts said that there were several challenges in the way of integrating spot and derivatives. While derivatives were standard contracts with specified allowance in grades, in the spot markets, several varieties, qualities and grades of the same commodities were traded in the same market and they differed region-wise.

Second, there are several forms of spot market now. One is the traditional Agriculture Produce Marketing Committees (APMCs), then there is the national electronic agri spot market platform, where at present hardly any trading happens. Further, there are state level electronic spot markets, known as the Karnataka model.

In his budget speech, the finance minister had said, "The commodities markets require further reforms for the benefit of farmers. An expert committee will be constituted to study and promote creation of an operational and legal framework to integrate spot market and derivatives market for commodities trading. (Further), e-NAM would be an integral part of such framework".

However, with Sebi stepping into integration, the experts quoted above said, "(The) regulator can use its experience in regulating commodity futures for spot markets also." Even spot markets need some rules and regulations.

In APMCs or mandis, where a large part of trading on spot basis takes place, "there is a lack of transparency and the traders' lobby is stronger than that of farmers", which is the reason for farmers getting much less than what consumers are paying for, said an official.

Separately, the Union Ministry of Finance is also considering appointing a committee to discuss integration as proposed in the Budget. Vijay Sardana, an expert on commodity markets, said, "The committee should have experts who understand derivatives, functioning of APMCs and electronic market, apart from crop specific issues."

The issue needs much more deliberation as spot market price discovery is inefficient in spot markets themselves as there is no national reference price. Another person, involved in electronic spot market trading, said, "As originally proposed, state level electronic platforms should be allowed to be integrated with the national platform, e-NAM, as agriculture is a state subject and states should have the flexibility to select their platforms."

Apart from integrating spot and derivatives, the finance minister also asked the Sebi board on Saturday to look at "further integrating the commodities and securities derivative markets by integrating the participants, brokers, and operational framework". This means allowing equity and currency trading exchanges as well as commodities trading exchanges to penetrate in each other's domains.

Sebi board has also discussed, as part of their 2017-18 agenda, inter-linking of various markets such as equity, forex, and commodity. Further, it discussed allowing, in consultation with stakeholders and regulators, institutional participation in commodity derivatives markets in a phased manner. The other agendas were investing more in commodity research and designing a system of risk-based supervision for commodity brokers.

Integrating commodities and equity markets means allowing equity trading stock exchanges to penetrate in commodities and commodity exchanges to trade in equities and currencies. This would be a big reform as and when permitted, but "may not be in immediate phase", said the official aware of the process.