After cleaning up the Augean stables of the country’s commodity markets, the Forward Markets Commission (FMC) is at the cross-roads. FMC chairman Ramesh Abhishek spoke to Shaji Vikraman and George Mathew on a host of issues relating to the market which was in turmoil over the NSEL payment crisis. Excerpts:
How has the commodity market changed, especially against the backdrop of the NSEL payment crisis?
I think the markets have changed significantly in the last three years. The main change is in the way the exchanges are functioning and now we have new shareholding norms which are aligned with the stock markets.
There is no influence of one person in the running of the exchange. We have a risk management system in place. We have a robust settlement guarantee fund in every exchange. We have introduced warehouse reforms and brought out uniform norms for the market. We have taken a number of steps to reduce risk at member level. There were many complaints of margin funding and by reporting daily margins, that issue has been taken care of. Besides, enormous amount of trade data is now available.
What is the fate of exchanges? Many have stopped functioning.
More than 95 per cent of the volumes in the market are from two exchanges. There were 16 regional exchanges of which 11 have closed down and five are functional. There too, the volumes are insignificant. There are six national exchanges, but trading is taking place in four. Two have closed down and volumes are insignificant at the third. It is happening in a natural evolutionary way. We would like to see more competition. We have done whatever we could to develop business.
What is the future of spot exchanges in the country?
We are encouraging spot, forward trading and futures trading in regulated exchanges. We have floated a public paper on starting call option on our exchanges. This call option window will virtually become a spot platform. The moment goods are delivered through a document of title — warehouse receipt — it becomes a forward contract. All these can be traded in our regulated exchanges. I don’t see one spot exchange. NCDEX E-market Ltd is working very well as a e-platform. People are free to set up such a platform. But so far as warehouse receipt based spot trades are concerned, this can be done on our exchanges.
How is the warehouse mechanism functioning? How can it be strengthened?
On the infrastructure side, we have told all our exchange warehouses to register with Warehousing Development and Regulatory Authority. In a short time, 80 per cent of our warehouses will be registered with them. Since WDRA Act doesn’t provide any registration norms for warehouse service providers, we have done that through a circular. Any member or client can go and inspect the warehouses. We believe total credibility of warehouse receipt is critical for the success of the market.
What is the status of the proposal to merge NSEL with Financial Technologies?
That was the draft order issued by the Ministry of Corporate Affairs. We had made the recommendation last August. The ministry acted on that. They had provided 60 days in the draft order. There is status quo order by the High Court.
FMC wants more players like banks and FIIs in the commodity market but regulators like RBI have reservations. What’s your view?
We have requested that foreign entities which are in the physical market which are importing goods from India or exporting goods to India be allowed to hedge their price risks in our market. There’s some resistance on their acceptability. We are still in discussion with the central bank. There are apprehensions on FII and bank participation.
What has been your learning experience in this tumultuous period for the commodity markets?
The important learning point has been that any financial market should be properly regulated. Secondly, the risk management has to be properly addressed. This combined with transparency has been a key learning. We were doing a number of reforms. We really need more financial literacy in the country.
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