U.K. Sinha, chairman of the Securities & Exchange Board of India (Photographer: Dhiraj Singh/Bloomberg)

UK Sinha Seeks To Correct Business Imbalance Between Commodity Exchanges

Securities and Exchange Board of India (SEBI) Chairman UK Sinha expressed concern over the lopsided ratio of business on commodity exchanges in the country.

The market regulator will act to remove undue concentration of risks in the system, Sinha said at a conference to mark the first anniversary of the merger of SEBI with commodities regulator Forward Markets Commission (FMC).

We are also worried about one thing at this stage, the ratio of business between one exchange and other exchange and among the three exchanges that are working is not evenly balanced. So we are looking at how we can ensure that there is no undue risk created in the system by an overwhelming amount of business being in one place. So whatever is required for this purpose we will do that.
UK Sinha, Chairman, SEBI 

Sinha added that he also wants to bring more transparency in the way the commodity exchanges seek product approvals. Exchanges and their managements will have to design products along with risk management processes before they submit their proposals to SEBI.

There are currently three national commodity exchanges operational in the country - Multi-Commodity Exchange of India Ltd. (MCX), National Commodity & Derivative Exchange Ltd. (NCDEX) and National Multi-Commodity Exchange of India Ltd. (NMCE).

Concentration Concerns

UK Sinha  Seeks To Correct Business Imbalance Between Commodity Exchanges

The aggregate turnover of all three exchanges in the domestic commodity derivatives segment increased 9.1 percent to Rs 66,96,380 crore, according to SEBI’s annual report for the financial year 2015-16.

MCX commanded the lion’s share with 84.1 percent of the turnover, followed by NCDEX with 15.2 percent. NMCE accounted for 0.4 percent of the all-India turnover.

MCX has a 99 percent market share in the bullion derivatives segment, and a 100 percent market share in the metals and energy derivatives segment, while NCDEX has 86.6 percent market share in the agricultural derivatives segment, according to SEBI’s annual report.

UK Sinha  Seeks To Correct Business Imbalance Between Commodity Exchanges

Both the government and SEBI want healthy competition, but it will not be at the cost of the growth of the incumbents in any segment, Sinha said in response to a question from BloombergQuint.

We believe that lack of competition is a risky thing. But your worry that we are going to throttle the growth of the organisation and at its cost we will allow somebody else to grow, that is not the intention. The intention is to create enough transparent mechanisms so that others can also grow. We believe for the long term health of the economy or the market, it is much better if we have competition and that will continue to be our effort. But we will not stop somebody from growing. That is not the idea.
UK Sinha, Chairman, SEBI

While Sinha didn’t clarify just how SEBI hopes to achieve this goal, he said regulatory oversight is a “sure guarantee of a well functioning market.”

Our job will be to create an objective criteria with laws and rules which are evenly applied and transparently known to everybody so that others can also come up.  
UK Sinha, Chairman, SEBI

New Competition Not Coming Soon!

Even as he stressed on the need for competition, Sinha added that stock exchanges will have to wait to launch commodity platforms. New players can be included only once existing commodity exchanges align with stock exchanges in terms of risk management, surveillance and settlement guarantee funds, Sinha added.

The regulator has provided up to three years for existing commodity exchanges to meet networth criteria. SEBI also wants commodity exchanges to set up clearing corporations and create settlement guarantee funds to build the confidence of market participants.

SEBI is also in discussion with other regulators to allow domestic institutions to participate in the commodity markets. Mutual funds would be the first class of participants to be allowed to enter the commodity market, Sinha added.