March 17, 2015:
The Budget has proposed the merger
of the SEBI and FMC. The Centre has given some breathing time to the FMC
on existing guidelines until Forward Contracts (Regulation) Act, 1956
is repealed. The effect of SEBI-FMC merger will soon be felt in
regulation, product-market innovation and surveillance and risk
management. In other words, SEBI has been entrusted with dual
responsibility – regulation of capital markets and commodity derivative
markets. This can have several implications to existing regional and
national level commodity exchanges, trading-cum-clearing/institutional
clearing agents and investors.
Amplification of regulation
Regulatory
supervision of economic behaviour (of agents) may be increased
manifold, justifying the role of commodity exchanges in price discovery
or risk management. Adoption of good governance practices, on one hand,
could help rationalise their existence and constitution of a diversified
board through succession planning, on the other, may be a desired
outcome of SEBI-FMC merger. A principle-based regulatory structure will
help rope in commodity and financial eco-system and infuse more
rationality in the commodity trade. The new regulator could be able to
resolve the inherent conflicts between the principal and agents.
However, experiential learning of FMC could help SEBI understand
commodities markets and their mechanics.
Trading environment
Market
environment plays a key role in transaction between related parties.
However, consequence of trading activity can affect unrelated third
parties what is known as externality, for example, notion of general
public on price rise of pulses and cereals in 2007-08. The merger could
oversee this problem in a logical manner. SEBI can issue a directive
indicating the incentive structure for affected individuals or groups
that may be pro-governance measure. This has twin benefits: one is
minimal direct intervention of SEBI and the other one, bargaining
mechanism may bring about an optimal outcome given low
negotiation/transaction costs.
Awareness drive
FMC,
before merger, has adopted a score of measures for awareness drive
relating to capacity building, sensitisation of stakeholders and
policymakers in agriculture since 2007-08. In 2012-13, the commission
has organised several awareness programmes in association with various
institutions, market agencies, and commodity exchanges.
The
commission also consented to extend the price dissemination project in
the proximity of post offices, rural branches of banks, warehouses,
co-operatives and other remote areas. For instance, FMC initiated price
dissemination project had installed 1,863 price tickers across various
parts of the country.
The new regulator, SEBI, might
collaborate with management and policy-level institutions for research
that could bridge the gap between theories and practice and thus,
enhance the veracity of research in commodities.
Traders
will be more financial literate of market mechanics that can strengthen
their strategy formulation. However, participants’ gut feeling in
exercising the contract need to be checked as information and
communication pattern often impacts the decision making processes. As
they perceive the markets differently based on their risk-return
quotients, adoption of governance practices will enhance investor
awareness.
While hedgers remain risk-averse,
speculators prefer to bear the risk. Arbitrageurs, on the other, attempt
to optimise risk-return metrics considering time and space potentially.
Therefore, the new regulator needs to explore psychologies and
prospects of investors – commercial users and financial market
participants.
Optimism with caution
The above
discussion might draw the attention of practitioners and policy makers
to an innocuous environment of trading and mutually beneficial platform
for intended buyers and sellers that the new regulator is poised to
deliver. But the blanket application of the global practices may not
bolster the functioning of commodity exchanges. Since the futures market
reduces price uncertainty and influences the decision of stakeholders
in investment and marketing or moderate their risk-return perception,
the new regulator needs to assess the utility of existing exchanges.
Probably, a thorough survey may address the concerns of SEBI: “Small is
beautiful or big is better”. While changes were made to FC(R)A Bill,
2010, the new regulator should be cautious while implementing changes in
commodities markets.
The writer is a Post-Doctoral Fellow of the Centre for Management in Agriculture, IIM-Ahmedabad. Views are personal. (B-Line)
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