PK Singhal, Joint MD, MCX believes the merger between Sebi and FMC would bring about transparency to commodity market.
Capital markets regulator Sebi Tuesday proposed merger of commodities regulator FMC with it. Sebi expected the merger to be completed by September-end.
PK Singhal, Joint MD, MCX believes this merger would bring about transparency to commodity market because currently FMC has no power to regulate borkers.
Announced by Finance Minister Arun Jaitley in Budget for 2015-16, the merger wwould help streamline regulations and curb wild speculations in commodities market, while facilitating participation of domestic and foreign institutional investors and launch of new products such as options.
However, Singhal thinks Sebi may not allow FIIs and Hedge Funds to participate in the commodity market very soon and could take at least a year to decide on it.
Mumbai-headquartered FMC (Forward Markets Commission) was set up in 1953 under the Forward Contracts (Regulation) Act (FCRA) as a statutory body under the aegis of Consumer Affairs Ministry. It was brought under Finance Ministry in 2013.
Below is the transcript of PK Singhal\\'s interview with Latha Venkatesh and Varinder Bansal on CNBC-TV18.
Latha: What have you made of this sentence that commodity exchanges will be now treated on par with equity exchanges as early as September? What changes are you foreseeing?
A: I don’t see many changes because of the reason that firstly both the stock exchanges and commodity exchanges are not replica of each other. Just like, for example, in the commodity market exchanges we don’t have options, we don’t have indexes.
Latha: Are you reading U K Sinha’s statement as an indication that- that will come?
A: Yes, you are right; I am seeing that it will come. However, the point is, it will take at least a year or so because of the reason both the things should be at par. Because if we are not at par with the stock exchanges, I don’t think Sebi will allow the commodity exchanges to launch the products which stock exchanges have and similarly to stock exchanges to launch products of commodity derivatives.
Latha: I don’t think that is what he meant. The impression I got from that statement that commodity exchanges will be treated exactly as Sebi treats equities exchanges could mean that he is going to allow more foreign institution investors (FII) participation or could mean that he will allow more products, is not that the way you read it?
A: Actually, what happens is, presently the brokers of commodity exchanges are not regulated because present regulator Forward Markets Commission (FMC) is not having any power to regulate the broker. So firstly what will happen I presume is, that our brokers will have to get themselves registered with Sebi as a stock broker under the regulation of Sebi. So, personally I feel that by March 2016 this process will be over, registration of commodity broker as a proper broker just like a stock broker. Once they are registered as a stock broker with Sebi then the market regulator will have a power to regulate them.
Earlier Ministry of Finance was looking after stock exchanges. Then when Sebi came it was given six months for all the stock brokers to get themselves registered with Sebi.
However, there will be whole host of issues, like the Sebi transaction fees. Then in the second phase probably Sebi will allow the options and indexes.
Once options and Indexes are in and the commodity brokers have a taste of how to trade in options and indexes etc only then the commodity exchanges will be allowed the next step. For example there is another big difference in the commodity market the co-location is not allowed while in the stock exchanges co-location is allowed. So, there is a total difference, the commodity market earlier was under the total control mechanism without any power to the regulator. So now some relaxation will be given but I don’t think government or Sebi will give everything in one go.
Especially, with regards to the participation of FIIs and hedge funds there is another issue. If you see the recommendation of Standing Committees or Ministry of Consumer Affair which 3-4 years back when the Forward Contract Regulation Act (FCRA) bill was to be passed they had cautioned the government that this market should not be opened for FIIs and foreign direct investment (FDIs) immediately because presently Indian institutions are not allowed to trade. So, if the Indian institutions are not allowed to trade then the markets needs to dwell on this; the banks should be allowed to trade, mutual funds should be allowed to trade.
There is a big issue - Commodity market is not that vibrant, the participation in agri-commodity future market is very less and there are host lots of issues because of monsoon the prices increased by 40-50 percent if monsoon is there. So, agri-commdoties is a big issue. More over there is another issue commodity is not an asset class other than gold all other commodities are consumable and they have a definite life also specialfly agri-commodity. Therefore there are lot of differences in both the market. So, I personally feel that Sebi will go very cautiously and Sebi is doing a good job they are already their officers are having a continuous dialogue with forward market commission as well as with the exchanges, both MCX and NCDEX.
Varinder: If I understand you, you don’t believe that even if the Sebi-FMC merger has to happen by September the introduction of options or Index on the commodity markets will happen till June of 2016?
A: If not June at least March 2016.
Varinder: Just a check, whether the FCRA bill has to be passed even after the Sebi- FMC merger happens?
A: I don’t think that is required because now FCRA will not be there, FMC will not be there, so the commodity exchanges will be considered as a deemed stock exchange.
Latha: So will you see the launch of weather futures or rain futures?
A: It is a fantastic thing. The country needs an option weather futures or rain futures and all those things. However I don’t think the regulator will, Sebi will allow this so soon. However, I fully agree with you these types of products are more required than participation of FIIs or FDI’s because the country needs this, just like for example you have said rightly; what is happening now a day there is a product a commodity which is traded in NCDEX that is guar gum – guar seed so what people are doing on the rain future or weather future people are hedging on that product. So if the people have a direct rain future or weather future it is very popular in other foreign countries.
Varinder: Do you think there will be different rules for FIIs and DIIs even after the mergers of the regulators happen? I am assuming that when the merger happens the commodity exchange will be open to FIIs and DIIs for Index trading or option trading but you seem to suggest that it may be different for both?
A: I don’t know, I don’t foresee that Sebi will immediately allow FIIs and hedge funds to participate in the commodity future market. I don’t think Sebi will be in rush, I think it will take about a year or so for that.
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