FMC needs real-time data to stay in touch with reality

Three developments during the last two weeks will have significant impact on how commodity futures shall be regulated. The first was the non-passage of the FCRA Bill in Parliament. Second, placing the FMC chairman and the secretary of the Consumer Affairs Ministry in the High-Level Coordination Committee (HLCC) is an acknowledgement of the important role of FMC. The HLCC is an inter-regulatory coordination committee comprising the finance secretary and heads belonging to RBI, Sebi, Irda and PFRDA. Third, Parliament passed a bill providing for a mechanism to resolve disputes between financial regulators as an ad-hoc arrangement. 
Drastic steps like redrawing the reporting ministry or the merger of regulators do not go down well in India. However, in times to come, we can expect the emergence of a new role for the regulator. While FMC currently does not have the status of a financial regulator, it is apparent that FMC cannot be denied the same for long. (This may look remote under the current reporting structure to the Consumer Affairs Ministry). 

Therefore, it is imperative that the operating regulations are strengthened to ensure that we have a safe commodity dealing environment. FMC needs to develop in-house real-time market surveillance capabilities rather than rely on the capabilities that may currently exist at the exchanges. Unless regulators collect high frequency data from exchanges and encourage their staff to explore it, they risk becoming progressively disconnected with the reality that they are supposed to regulate. 

Competition alone is not the solution to market efficiencies when it comes to commodity exchanges . FMC has an array of four national commodity exchanges and two more are in the pipeline. The first three exchanges have created a niche for themselves in bullion and metals, agriculture and plantations spaces. The late entrant is trying to replicate the success and the pipeline cases seem to wager on the share value. 

We have seen exchanges in the commodity space whose promoters have and had large trading arms. In a situation when the ownerpromoter of financial entities hires professionals to execute plans for exchanges, the logic of watertight compartments does not hold any good and a conflict of interest is inherent. Do we need to remind ourselves about the spirit of “demutualisation” for exchanges or should it be restricted to letters only? 

Published in The Economic Times 16 Aug, 2010

Regional exchanges may fail FMC accreditation test

Dilip Kumar Jha  (c) The Business Standard

Mumbai August 19, 2008

Even as the Forward Markets Commission (FMC) is all set to introduce norms for regional commodity exchanges to obtain accreditation as national bourses, the move is unlikely to succeed in the prevailing market conditions.

The commodity markets regulator is finalising the norms which will allow regional exchanges to convert to national commodity exchanges, without losing their identity and core competence. FMC sources say the norms will be finalised within a fortnight.

Since the introduction of national online trading platforms, regional commodity exchanges have almost become defunct, as members switched to online trading from the inherent open outcry on regional bourses. With no new members added in the past 3-4 years, trading volumes have dried up.

“Not only did they possess appreciable domain knowledge in the respective regional commodities, they also kept futures trading alive for ages in India. So, protecting their interest is of prime importance to policy-makers,” FMC chairman B C Khatua had said recently.

In the recently-listed norms for accreditation as a national platform, the regulator had introduced a clause that the minimum net worth should be Rs 100 crore. If this is extended to regional commodity exchanges as well, almost all of them will close down.

An analyst from a broking firm said that all of them put together would scarcely have Rs 50 crore of net worth. That means barring the three national commodity exchanges — MCX, NCDEX and NMCE — most of the regional commodity exchanges would have to shut shop.

Apparently, the heads of many regional commodity exchanges are ready to meet on a common platform with their respective commodities.

“All regional commodity exchanges should merge to form a national entity, with the margins of the commodity traded on their respective platform passed on to their respective accounts. Otherwise, none of them would be able to survive alone, especially when the three national exchanges are functioning and another one is shortly launching the platform,” said an analyst.

Shyamal Gupta of Kotak Commodity said that with a net worth of Rs 100 crore, it would be impossible to generate a daily turnover of Rs 2,367 crore, with Rs 400 earned per crore of transaction.

Almost all regional commodity exchanges either offer trading in a single commodity or a majority of their small volumes comes from one contract. As the government’s efforts to delist commodities continue, fear remains whether the next victim is the actively-traded commodity on one of these exchanges.

Though the National Board of Trade (NBoT) survived the recent bout of suspension of soy oil because of the support of India’s largest edible oil producer, Ruchi Soya Industries, the launch of alternate contracts of soybean and soymeal failed to generate equal volumes as soy oil. According to analysts, other commodity exchanges may not be able to survive such sudden suspension of trading.