SEBI proposes to reform the commodities markets

Ever since the commodity market regulation came under SEBI, there have been expectations of large scale reforms. Over the last few years, the commodity market has been subject to a lot of restraints like government controls, imposition of CTT, dwindling volumes etc. The NSEL default had only served to make things tougher for the commodity markets. Mr. Tyagi had already indicated broad reforms of the commodities business and the meet surely did not disappoint…

Unified broking license… 

The regulator has approved the grant of unified broking licenses to brokers. Currently, brokers are required to house their equity broking business and their commodity broking business under separate legal entities. That requirement has been scrapped. This will not only make compliance simpler for brokers but will also go a long way in integrating the cash market, futures market and the commodities market more effectively. As a result, brokers can now conduct all their activities like equities, F&O, currencies, commodities and ETFs under a single entity. There will be no need for separate compliance and separate license for each line of activity. This has been on the anvil for quite a long time and hence it is really welcome that the regulator has taken the initiative to implement the same. For brokers, it will mean enhanced business opportunity and lesser restrictions.

Introduction of options… 

The commodity markets have been a futures-driven market since its inception. The SEBI meet has acceded to a long standing demand for the introduction of options in the commodity markets. Why is this important? Firstly, this will help the commodity markets achieve scale. The equity markets saw a manifold jump in volumes after the introduction of options and today options account for over 85% of market volumes on the NSE. Secondly, options also offer the traders in commodities an additional low-cost avenue to hedge their risk. Due to limited downside risk, many small traders prefer to deal in option. Lastly, the introduction of options will broaden the market and bring about a greater integration of the spot and futures market for commodities. Of course, the finer details of specific commodities and contract specifications are still pending. 

Commodity market boost…

The regulator has definitely made a start to widen and deepen the commodity markets. Ever since the introduction of CTT and later the NSEL scam, the commodity markets have had a tough time. A wider commodity business will help brokers de-risk their overall model. As for investors, they get an additional financial product to manage their risk and trade markets. That is a good start for sure! ©

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