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BUSINESS
Possibility of integrating commodity market with share
market
By
Devajit Mahanta
International experience shows that markets are converging not only
across products but also across geographies. Since 2002 when the first
national level commodity derivatives exchange started, the exchanges have
conducted brisk business in commodities futures trading. The value of
trading after saw a quantum jump from about INR 350 billion in 2001-02 to
INR 1.3 trillion in 2003-04, the commodity derivatives exchanges now
demanded removal of restrictions on participation of other financial system
players, particularly stock-brokers in commodity derivative. Following
their demand Ramamoorthy Committee was set up by Securities Exchange Board
of India (SEBI) to look into certain issues relating to fruitful
cooperation between these two markets. The committee was specifically asked
to examine the possibilities of: first securities brokers’ participation in
the commodities markets; second, utilization of infrastructural facilities
of stock exchanges by commodity exchanges; and third, the possibility of
stock exchanges trading in commodity derivatives.
Any rationale for convergence should hinge upon its capacity to ensure
growth, liquidity and safety of the market as well as to improve
accessibility to the public by spreading the network and reducing the
transaction costs. The existing infrastructure and institutions are being
upgraded; new exchanges have been approved with the mandate to set up
world-class infrastructure and systems; more participants with resources,
skills and expertise are being attracted from the securities markets. Even
though there are some differences in commodity and financial derivatives
markets, they have close resemblance in so far as trade practices and
mechanism are concerned. At present there are two separate Acts viz. FCI
Act 1952 and SCI Act, 1956 with Rules made there under governing the two
markets. Even though there are many similarities in the text of these Acts,
they will need to be harmonized so that, as far as possible, a common
regulatory environment can be provided for the exchanges and participants.
It would be necessary to explore if there are different approaches to
convergence so that it can be ensured that while the process of development
is accelerated further, the changes are not abrupt resulting in avoidable
disruption. The path of convergence has to address the apprehensions,
concerns of the existing stakeholders and Exchanges. The gains from
convergence have to outweigh the potential loss. Different approaches to
convergence can be thought of on the basis of extent or level of
convergence. Convergence at the level of brokerage firms- the stock brokers
have to distinct entities, one for trading in securities and the other in
commodities, each meeting the admission criteria independently. Convergence
at the Level of Policy Making- Under this Option, Department of Consumer
Affairs and Department of Economic Affairs would set up a committee through
which there could be closer coordination on policy issues connected with
Exchanges, product launches, membership, international participation, etc.
Convergence at the level of Regulators- the regulators, FMC and SEBI, would
embark upon a programme of closer coordination of their activities. This
option is clearly a step forward when compared with the existing regime,
where there is no institutional mechanism through which the regulatory work
on commodity derivatives interacts with the regulatory work on financial
derivatives.
International experience shows that markets are converging not only across
products but also across geographies. The considerations, competition and
economies of scale made possible by new technology are forcing markets to
converge. It is only the markets with strong niche or regulatory protection
that are able to retain a separate entity. Once regulatory barriers are
withdrawn, the competition will take away the business to more efficient
exchanges forcing merger and or the demise of less efficient exchanges.
Readers can send their feedback at devajitmahanta@gmail.com
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