Sebi offers the “One Commodity One Exchange” concept

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Capital markets regulator Sebi came up with the concept of “one commodity, one exchange” with the aim of reducing liquidity fragmentation and helping each exchange develop a proprietary set of unfragmented liquid contracts.

In a consultation paper, the regulator said it has prepared a concept note on developing a unique set of exchange-specific commodities for trading in the commodity derivatives segment and on reducing market fragmentation. commodity derivatives.

The regulator proposed that the concept only apply to restricted agricultural products and that non-agricultural products should not fall under the jurisdiction.

Agricultural products have been classified into three categories – sensitive, wide and narrow.

The “exclusivity” status of a commodity will last 3 to 5 years from the date of Sebi’s authorization.

The Securities and Exchange Board of India (Sebi) has invited public comment until Jan. 7 on the proposal.

The main objective of the development of the concept is to help each exchange to develop an exclusive set of unfragmented liquid contracts on specific commodities.

In addition, the concept will ensure that the relevant exchange exclusively develops all kinds of derivative contracts on a specific product and results in the full development and deepening of the Indian commodity derivatives markets.

The concept will eventually allow India to be able to influence global benchmark prices for these commodities – to become a price maker for these commodities, Sebi said on Tuesday.

“While multiple exchanges with the ability to launch competing contracts on the same product can be useful in encouraging competition and offering choice to investors, a single exchange launching contracts on a specific product can have a greater impact locally. and international. It can be more efficient and lower in cost in the long run, ”Sebi noted.

Regarding the exclusivity recommendation process, Sebi proposed that exchanges could choose to “block” a product with the regulator if that product is eligible for development as an exclusive product contract, before initiating in-depth research. and a large-scale market. interactions, by obtaining from him a letter of consent in principle.

After the block, the scholarships will have one month to conduct detailed research and analysis of the proposed product and confirm the “block” by sharing a feasibility report with Sebi. Blocking would be carried out on the basis of Sebi’s “first in, first out” method. If the exchange does not confirm the block within one month, the block will automatically be released for that particular product.

While a commodity is “blocked” by one exchange, it cannot be blocked by another exchange. In addition, no more than two products can be “blocked” or have “exclusive status” for an exchange at any time.

There should be a gap of at least one month between blocking two separate products on the same exchange.

The request for product approval to the regulator must be submitted within six months of confirming that a product is “blocked”, otherwise the block will be automatically released.

If unsuccessful, the exchange will not be allowed to request exclusivity on the same product for at least a period of one year.

A product’s “exclusive” status will last 3 to 5 years from the date Sebi is approved, and the exchange may also suspend the status before that period, the regulator said.

The exchange needs to take a call to find out if they want to withdraw the exclusivity of the product only after it has gone continuously liquid for 12 months.

The regulator proposed that derivative contracts on new commodities should only be traded on a single exchange for a period of 3 to 5 years during which that exchange would be authorized to launch all kinds of authorized products, that is to say – say futures contracts, futures contracts on options and options on commodities, among others.

Narinder Wadhwa, Chairman of CPAI, said that Sebi is taking proactive steps in developing commodity derivatives markets and this is one of the initiatives after opening various commodities eligible for all exchanges and experiencing fragmented sales. “Although we are against the idea of ​​blocking because it is against the spirit of free markets, but for the development of the markets, we must also try this process because the exchanges take a lot of effort to develop contracts and they need some exclusivity for a few years, hopefully the block is for a period of 3-5 years as mentioned in the document, ”he added.

He added that it is necessary to ensure that non-agricultural products do not fall within the scope, narrow agricultural products do not have much influence anyway.

“If executed well, the concept of ‘one commodity, one exchange’ is promising in terms of unifying the liquidity present on several exchanges, allowing a single exchange to deal with a particular commodity”, Arshad Fahoum, Product Manager, Market Pulse, mentioned.

Since India is one of the world’s major producers of agricultural commodities and this concept would only apply to restricted agricultural products, efforts should be made to ensure that liquidity is unfragmented and the possible increase volume and open interest are helping India become a price-maker country for these products, he added.

(Except for the title, this story was not edited by NDTV staff and is posted from a syndicated feed.)

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