Sebi backs China model: One commodity, one exchange

Notes the adoption of such a model helped the nation influence prices globally

To deepen and grow commodity markets here, with an intention to make the country a price setter than a price taker in the segment, the Securities and Exchange Board of India (Sebi) has proposed a ‘one commodity, one exchange’ model.

At present, multiple exchanges are allowed to launch contracts in the same commodity, to enable competition and choice for investors. The Multi Commodity Exchange (MCX) is a major player in metals, precious metals and energy contracts. The National Commodity and Derivatives Exchange (NCDEX) is one in the agricultural segment; Indian Commodity Exchange (ICEX) in diamonds, paddy and steel.

Sebi feels if an exchange focuses on one or two commodities, it could be developed meaningfully. In the current system, it thinks, the exchanges' focus is on meeting the competition, rather than developing a market in their own commodities. And, liquidity gets fragmented.

An industry official who agrees said on condition of anonymity: “There is need for an approach similar to product patents for commodity contracts. When one exchange does a proper research and launched a contract, it is easier for another to duplicate that. Sebi’s proposal is good in that way — when one exchange brings some uniqueness, it would then get time and enough incentives to develop and create liquidity in that contract.”

So far India has been a major consumer or producer in wheat, rice, pulses, spices, cotton, tea, rubber, iron ore, steel, gold, silver and diamonds. In diamonds, rice, rubber, sugar and iron ore, among others, it is a major global

importer or exporter.

However, India is not yet in a position to meaningfully influence the global price. Sebi refers to this in a concept paper it issued late last week on the subject, on “global examples of some exchanges playing a significant role when they develop only one or two commodities”.

China, for example, was a major producer or consumer in several commodities but began significantly influencing global prices only after it launched exchanges focused on certain commodities. British, Malaysian and US exchanges also provide examples of how exchanges focused on one or two commodities or one segment have been able to assume a leadership role.

Sebi wants to develop a similar model in India. One where exchanges will have to select a commodity in which only that bourse can dealin -- it would then have to develop the market for that commodity in three to five years, after which other exchanges may be allowed in.

Sebi notes that when this comes about, a particular bourse “should not misuse a monopolistic position and ensure market integrity is not compromised”.

Sebi has also proposed t hat an exchange select two or three goods from a notified list of 91 commodities on which no derivative products have been launched by any other. The exchange could offer liquidity enhancement benefits and Sebi would relax the rules on daily and position limits, and daily price limits, in such cases.

Narinder Wadhwa, president, Commodity Participants Association of India, says he is not in favour. “A single exchange, single commodity approach is not advisable; it can make exchanges unviable,” he feels. “For the development of commodities markets, the regulator should consider a proposal that when any exchange wants to introduce a contract which may be traded on another exchange, the latter come out with some uniqueness in that rather than duplicating the existing contract.”