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Won’t allow new commex products till liquidity assured: Sebi

CII Mutual Fund Summit 2015

Mumbai : Amid challenges from physical commodity markets, Sebi chairman U K Sinha today said the regulator will not bring in new products in the commodities derivative market unless they have enough liquidity.

The regulator is continuously reviewing the risk management framework in the commodities segment and it would take a few more months to bring in the mechanism to the level of securities market, the Sebi chief said.

“Price discovery in this country is very complex. For example, the physical market is controlled by the states and there are many obstacles and measures under the essential commodities Act.

“I am not saying it is good or bad but these are difficulties…and what is the actual stock, what is the actual crop output, such information is not available to us well in time,” Sinha told reporters on the sidelines of Thomson Reuters Risk Summit.

“That is why Sebi has been very careful in allowing trading in new commodities. We want to do that, but we want to do it very carefully, unless we are assured that there is enough liquidity in some commodities we will not go ahead,” he said.

The problems in the physical market and also the stage of development of warehousing mechanism in the country doesn’t give Sebi the comfort to progress on the same in a big way immediately, he added.

Noting that the surveillance and risk management framework in the commodity market is developing, Sinha said the process of bringing the system at par with the equities market would take a few months.

“The risk management issue in the commodities market is at a stage which is not giving us a comfort that it is as advance as it is in the securities market. We have been continuously trying to improve that system through a series of measures, for example we have weekly meetings with the exchange, we review the trades, we also use surveillance mechanism that is in place,” he said.

“A thorough review of the exercise is going on but it will take us a few months to bring it to the same level as securities market,” the Sebi chief said.

On providing settlement guarantee fund (SGF) for the commodity exchanges, Sinha said, “before introducing core SGF through our SECC regulations we provided for this money to be set aside.”

“The problem is that the commodity exchanges do not have the clearing corporations and by law, three years time is being given to them to set up such facilities. We are engaging them and preparing them on how this can be done at the earliest,” he said.

“Commodities market has huge potential of growth but we have to approach it in a cautious manner,” he noted.

Bourses are required to maintain SGF as a cushion for any residual risk, and it works like a self-insurance mechanism in the event of a trading member defaulting on settlement obligations.

Following the NSEL scam in August 2013, Commodities Market Regulator FMC was merged with Sebi in September 2015.

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