Commodities trading may open to foreigners

SEBI, RBI mull allowing FPIs in commodity derivatives.

The Securities and Exchange Board of India (SEBI) has initiated talks with the Reserve Bank of India (RBI) to allow foreign portfolio investors into the commodity derivatives market.

“We are already in talks with the RBI on this matter,” SEBI Chairman U.K. Sinha said on the sidelines of an event on the completion of one year of merger of Forward Markets Commission (FMC) with SEBI. “The FPI regulations emanated from FEMA (Foreign Exchange Management Act) and any kind of foreign money coming into the country has to have RBI approval.”

The regulator is also keen to allow other participants such as banks, mutual funds and insurance companies in the commodities market but will do so in a phased manner after talking to other regulatory bodies.

SEBI took over as the regulator of commodity derivatives market on 28th September 2015 and since then has initiated various measures like allowing option contracts, new commodities apart from releasing guidelines for warehouse service providers and online registration of brokers, among others.

‘Cautious manner’

The regulator plans to further develop the market but would do so in a “cautious manner.”

“Our ultimate aim is to develop the market but in a cautious manner. We have strengthened our surveillance mechanism and risk management systems. Our primary aim is to align the systems in the commodity derivatives market with that of the equity market,” said Mr. Sinha.

Going ahead, the regulator plans to take more measures to encourage the participation of hedgers.

Spot polling

SEBI has already set up an advisory committee for commodity derivatives and the committee has further set up separate sub-groups to look into issues of spot polling of prices and how exchanges can rope in more hedgers.

The commodity derivatives market is dominated by two exchanges - Multi Commodity Exchange of India (MCX) and the National Commodity and Derivatives Exchange (NCDEX).

Metals and energy contracts dominate the trading at MCX, which has more than 90 per cent of market share in the commodity derivatives space.

The SEBI chairman said that the regulator is also looking at the “unduly balanced” ratio of business between the existing commodity exchanges.

“There has to be competition since lack of competition is risky,” said Mr. Sinha. “We have to look at creating enough transparent mechanisms so that others can also grow. Competition is required for the long term development of the market,” the SEBI Chairman said.

New commodities

The regulator will soon give the go-ahead for options trading in one commodity each from the agri and non-agri segment.

On the recommendation of SEBI, the government has also allowed futures trading in new commodities like diamond, brass, pig iron, eggs, cocoa and tea.

Further, the advisory committee is also deliberating on issues such as improving the liquidity of the contracts.

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