Markets Converge

SEBI takes a step to bring equity and commodity markets closer

One of the key announcements in the last Board meeting of SEBI prior to the Union Budget focused on a variety of critical issues. While there was focus on the WhatsApp leaks of results and better governance in rating agencies, the big news was the proposal to bring about greater convergence among the stock exchanges. SEBI Board has actually permitted equity exchanges and commodity exchanges to offer cross listing of products. Here is how…

Widens the competition

Currently, India has specialised bourses with the NSE and BSE focusing on equity and F&O and the MCX and the NCDEX on commodities. What SEBI now plans is to open up all the business to all the exchanges. Theoretically, NSE and BSE will be allowed to offer trading in commodities from October 2018. At the same time, MCX and NCDEX will also be permitted to offer trading in equities and F&O. Effectively, this will open the entire market for more competition. This was a challenge in the past when the commodity futures were regulated by the FMC and equity and F&O was regulated by SEBI. With both the businesses now coming under SEBI purview, these kind of cross linkages are perfectly possible. This will also be a boon for institutions in commodities. NSE and BSE have a strong institutional franchise and that can be effectively leveraged for commodities. Both FIIs and MFs can start off on commodities.

What about specialization?

In reality, however, this cross listing could be much more complex. Globally, financial markets are specialised. In the US the NYSE and NASDAQ focus on equities while CME and CBOT focus on the commodities. This specialisation is good as it brings about more of best practices in the Industry. There is one more challenge in India. The commodity spot markets continue to be regulated by the respective states with SEBI only regulating the commodity futures and options market. That leaves the risk of dual regulation open in case of the commodity markets. That could also hinder the participation of institutions in spot-futures arbitrage business.

Operational benefits for sure

The benefits emanating from this cross listing could actually be a lot more fundamental in nature. Firstly, brokers will be able to operate equity and commodity businesses with a single unified license. Secondly, the need to house the commodities business under a separate company will no longer be relevant. Thirdly, for brokers the compliance function could become more unified; saving them cost and resources. Above all, investors and traders will stand to benefit immensely. They will be able to synergize their equity and commodity trading better and trade with a single account. The real benefits of the move could be operational! ©

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