On Tuesday, the Securities Exchange Board of India has proposed a one commodity one exchange policy to reduce liquidity fragmentation. As per this proposal, all the stock exchanges will have to involve in the development of a separate lot of un-fragmented contracts which are easily sellable.
There has been a proposal for developing another specific derivative commodity product in the market. This will allow the market participants to freely trade and invest in a new product apart from the existing line of commodities products.
The purpose behind this is to reduce the fragmentation in the derivatives market of the commodities. The introduction of this new concept is supposed to reduce the problem.
Contents of the Proposed Policy
The SEBI has proposed that this new policy shall be introduced only in the case of selected commodities. The narrow agricultural commodities will remain under focus as far as the new policy is concerned.
Having said that, the policy shall concern one-third of agriculture commodities as there are three main categories under this commodity, viz. (i) sensitive agriculture commodities, (ii) broad agriculture commodities, and (iii) narrow agriculture commodities.
Once the SEBI approves a particular commodity to be qualified as a specific category asset, then it shall continue to enjoy that status for a period of three to five years from the date on which such approval was granted.
Although, the power has been conferred upon the stock exchange to remove any commodity from such specific treatment. The exchange has to decide if they want to remove the exclusivity of the product after 12 months.
What are un-fragmented liquid contracts?
The concept of un-fragmented liquid contracts is an ideal way to develop an exclusive set of contracts for specific commodities. Liquidity of contracts in the market refers to the ability to transact quickly and easily in a market without affecting the price.
Unfragmented contracts are the contracts that are broken down into smaller quantities for each of buying and selling for small traders and investors. This is supposed to bring in more liquidity in the market and can increase the volume of such derivatives.
Further Key Takeaways
- A months period has been given by the Exchange Board to seek any suggestions and recommendations on the proposed policy. The industry experts’ comments have been called for.
- Under the proposed policy, once a commodity is approved as a specific category asset, it will continue to enjoy that status for up to five years. The stock exchange has the power to remove any commodity from its exclusivity. This means that they can do so after 12 months.
- The concept of commodity derivatives contracts is a vital step in developing the Indian commodity derivatives market. It will ensure that the contracts are exclusively developed for a specific commodity.
- Even though multiple exchanges can offer the same commodity contracts, it may be better if one exchange launches contracts on a specific commodity. This will encourage competition and provide choices to investors.
- The proposed framework would allow a single stock exchange to offer derivatives contracts on new commodities for a period of up to five years.
What are commodity derivatives?
A commodity derivatives contract is an investment tool that allows investors to profit from commodities without owning them. Under such contracts, commodities such as palm oil, castors seeds, cardamom, black pepper, rubber, etc are traded. The traders and investors buy and sell these contracts for investing as well as speculative purposes.
Which is the commodity exchange of India?
A commodity exchange is a place where various commodities are traded. India’s commodity exchanges are Multi Commodity Exchange (MCX), Universal Commodity Exchange (UCX), National Spot Exchange Limited (NSEL), etc
What are the categories of agricultural commodities in India?
Agriculture commodities in India are divided into three categories, sensitive agriculture commodities, broad agriculture commodities, and narrow agriculture commodities. This categorization is done based on how the price manipulation is done and how much intervention is required from the government’s end to control the prices.