Explained: What is SEBI’s ‘one commodity, one exchange’ proposal?

India could soon have a “one commodity, one exchange” policy in place, if the capital markets regulator has its way.

The Securities and Exchange Board of India (SEBI) has proposed such a policy in a bid to reduce fragmentation of liquidity and help every stock exchange develop an exclusive set of un-fragmented liquid contracts.

What has SEBI said?

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

What is SEBI’s main rationale behind the new proposal?

SEBI says the idea is to help every exchange to develop an exclusive set of un-fragmented liquid contracts on specific commodities.

Moreover, SEBI thinks the new mechanism will ensure that the concerned exchange develops all kinds of derivative contracts on a specific commodity exclusively and bring about comprehensive development and deepening of the Indian commodity derivatives markets.

The concept will eventually help India to be in a position so as to be able to influence the global benchmark pricing of such commodities, SEBI said.

“Even though multiple exchanges having the option of launching competing contracts on the same commodity may be good for encouraging competition and providing choice to investors, a single exchange launching contracts on a specific commodity may have bigger impact locally as well as internationally. This may be more efficient and low cost in the long run,” SEBI noted.

So, will this mean that commodity-exclusive exchanges will cease to exist?

In its concept paper, SEBI has proposed that the ‘exclusivity’ status of an exchange will last for three to five years from the date it gives the exchange the approval to trade. The exchange can end the choose to discontinue the exclusivity status before the stipulated period.

The exchange has to take a call on whether they want to remove the exclusivity from the product only after it becomes continuously liquid for 12 months, Moneycontrol reported, citing the SEBI note.

The regulator proposed that derivative contracts on new commodities would be traded only on a single stock exchange for a period of three to five years during which the exchange would be allowed to launch all kind of permissible products – futures, futures on options and options on goods, among others.

But what about agricultural commodities that are politically sensitive?

Agricultural commodities have been classified into three categories – sensitive, broad and narrow. The regulator has proposed that the concept should only be applicable for narrow agri-commodities.

SEBI describes a sensitive commodity as one which is prone to government intervention or price manipulation. A ‘broad’ commodity will be one with average deliverable supply for past five years of at least 10 lakh metric ton and at least Rs 5,000 crore in monetary terms. Commodities that don’t fit in the sensitive and broad categories will be designated as narrow.

And what about non-agricultural commodities?

SEBI said it may not be appropriate to segregate non-agri commodities into ‘narrow’ and ‘broad’ for the purpose of adopting the ‘One Commodity One Exchange’ policy, as in the case of agricultural commodities, based on annual physical market size. The regulator suggested that the policy should not be allowed in those non-agricultural commodities where India is not a major producer.