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SPECIAL ARTICLE

Opportunities and Challenges of Regulatory


Convergence in Indias Financial Sector
The Case of the SEBIFMC Merger
Nilanjan Ghosh, Kushankur Dey

Various opportunities accompany the merger of the


Securities Exchange Board of India with the Forward
Markets Commission, as announced in the 201516
union budget. At the same time, important regulatory
and developmental challenges have to be overcome for
instilling efficiency in the market, along with promoting
investor protection. Whether the merger is the
beginning of financial market regulatory convergence or
merely a one-off incident can only be known with
developments over time. Similar types of opportunities
and challenges may arise in generally adopting
regulatory convergence in India.

The authors acknowledge the very helpful comments from the reviewer.
Views expressed are personal.
Nilanjan Ghosh (nilanjanghosh@orfonline.org) is with the Observer
Research Foundation, Kolkata, and the World Wide Fund for Nature,
India; Kushankur Dey (kushankurd@iimahd.ernet) is with the Indian
Institute of Management Ahmedabad.

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he union budget for 201516 saw the announcement of


the convergence of the Forward Markets Commission
(FMC), the regulator of the commodity derivatives markets, with the Securities and Exchange Board of India (SEBI),
the regulator of the capital markets. The merger will require
several legislative changes, including amendments to the SEBI
Act, 1992 and the Securities Contracts (Regulation) Act (SCRA),
1956. These legal changes required for the merger have been
incorporated in the Finance Bill, 2015 so that there is no further requirement for separate parliamentary approval. With
the President giving his assent to the Finance Bill, the changes
are automatically notified. This will usher in a new era not
only in the domain of financial markets and its regulation, but
also in the regulatory architecture of the generic financial
market in India.
Regulatory convergence is being seen as the new emerging
face of the regulatory architecture of financial markets in
many parts of the world. This has been achieved either
through the mechanism of creating a super-regulator overseeing regulators or through merger of regulators (Turner 2013).
There is now a global trend towards even greater regulatory
convergence, which accelerated after the 2008 credit crisis
and is being pursued with an enthusiasm that is sidelining the
earlier trend towards multilateral rule convergence (Broby
2013; Turner 2013). As such, the current system of financial
supervisory convergence has evolved by default. A process of
substituted compliance has become the de facto modus operandi between the UK, Europe and the US since the 2008 credit
crisis. It has been widely accepted that competition in regulation is not as efficient as cooperation, provided the same risks
are addressed by similar rules. Whether such a practice should
be accepted beyond the Western economies of the US and the
UK, which have more developed financial markets than others,
requires a major gap analysis, where a global regulatory body
such as the International Organization of Securities Commissions (IOSCO) compares regulatory oversight and outcomes to
expected standards as determined in Europe and the US under
the current status quo (Broby 2013).
The advantages and disadvantages of such a mechanism are
many. In the process, regulatory convergence has its champions and detractors in India as well (Pavaskar 2004). Regulatory convergence in the present case seems to be an outcome
of the recommendations of several committees, for instance,
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the Inter-Ministerial Task Force on Convergence of Securities


and Commodity Derivative Markets (2003); the Parliamentary
Standing Committee on the Forward Contracts (Regulation)
Amendment Bill, 2006; the Percy Mistry Committee (2007);
the Raghuram Rajan Committee (2007); the Parliamentary
Standing Committee on the Forward Contracts (Regulation)
Amendment Bill, 2010; and the Financial Sector Legislative
Reforms Commission (2013). Around eight years ago, a highpowered executive committee of the Ministry of Finance chaired
by Percy Mistry submitted a report on Making Mumbai an
International Financial Centre. The report talked of the missing
bondcurrencyderivatives (BCD) nexus, and emphasised, A series
of measures are needed to achieve market integration and convergence and thus enable economies of scale, economies of scope,
greater competition, and enhanced IFS export capability.
The Financial Sector Legislative Reforms Commission
(FSLRC) that submitted its report in 2013 felt that regulatory
convergence is one of the ways for markets to move in sync,
and exploit economies of scale and scope. It looked at two important aspects of the Indian financial sectorits legal structure and regulatory set-up. One of the most important changes
recommended by the FSLRC was merger of the SEBI, FMC,
Insurance Regulatory and Development Authority of India
(IRDA), and Pension Fund Regulatory and Development
Authority (PFRDA) into a single regulator called the Unified
Financial Agency (UFA), on the ground that all financial activity other than banking and the payments system, which
would continue to be regulated by the Reserve Bank of India
(RBI), should be brought under a single authority. So, it is noteworthy that the initiative of merging the SEBI and FMC was
well thought out, and a competent authority weighed the
merits and drawbacks of it in the light of recommendations by
several committees.
The Process of Regulatory Convergence

Apparently, it seems that the SEBIFMC merger is driven by the


recommendations of the FSLRC. But, there are drivers embedded in market development too. It is worth noting that the FMC
before the merger was not an autonomous regulator, unlike
the other market regulators. The commission operated under
the aegis of Ministry of Consumer Affairs, Food and Public
Distribution until 2013 and was mandated to regulate commodity futures markets. The union budget of 201314 declared
that there is no difference between commodity derivatives and
security derivatives, while imposing the commodity transaction tax (CTT) in the same way as with security derivatives.
The FMC was brought under the Ministry of Finance in 2013.
The need for an autonomous and strong regulator for the
commodity markets has been long expressed in the academic
literature (Sahadevan 2012: 108), as also in policy circles (FCRA
Amendment Bill 2010). Public perception of the steady growth
of capital markets under the regulatory control if the SEBI has
strengthened the need to put in place an equally powerful statutory regulator for commodity markets, especially because the
scale of its effect is significantly larger than that of the capital
markets (Sahadevan 2012: 108).
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Eventually, the Finance Bill 2015 aims at materialising the


merger of the FMC with the SEBI. The merger process is to be
actualised between September 2015 and early 2016. To effect
the operation of the SEBI as an independent or autonomous
regulator of both capital markets and commodity derivative
markets under the Ministry of Finance, Parts II and III of the
bill have introduced amendments in the statutes governing securities/capital markets and commodity forward/futures markets. Section 28A is introduced as a clause in the Amendment
of the Forward Contracts (Regulation) Act (FCRA), 1952. The
clause states that all recognised associations under the FCRA
shall be considered as stock exchanges under the SCRA, 1956.
Under the SCRA, the bill is required to amend the definition of
securities under Section 2(ac) to include commodity derivatives and forward trading in its ambit. In addition, an amendment to Section 18A is said to empower the central government
to proclaim certain contractscommodity price index, option
in commodities, weather derivatives and index investment,
among othersas derivatives (Ghosh 2015a).
While the SEBI provides commodity exchanges adequate
time to comply with the SCRA until the FCRA, 1952 is repealed,
a stockbroking entity needs to be set up under the aegis of the
SEBI. The entity is to be independent and can work closely with
clearing houses of commodity/stock exchanges (Mondal 2015).
Though not clear till now, the apparent impression is that this
merger with phasing out of the FCRA and amendment of the
SCRA will actually blur the difference between commodity and
stock exchanges by creating a greater fungibility between
securities currencies and commodities.
The question that automatically arises isdoes the SEBI
have the regulatory bandwidth and expertise to handle this
gamut of new regulatory responsibilities? Apparently, the SEBIs
expertise in monitoring and surveillance of capital markets is
illustrious, while the FMC has demonstrated its ability in regulating commodity derivatives markets. It has been said in
many quarters that commodity derivatives are different
instruments from equities and bondsthe former is meant for
hedging, the latter for investment. Hence, different types of
expertise are needed for regulating commodity exchanges and
stock exchanges. However, this contention was challenged in
the union budget for 201314. Given the nature of participation
and characteristics of participants, the budget speech stated,
there is no distinction between derivative trading in the securities market and derivative trading in the commodities market,
only the underlying asset is different (MoF 2013: para 149).
In any case, after the merger of the SEBI with the FMC, the
latter will be converted to a department to assist the SEBI for
regulating the derivative segment in commodities. Since its
inception, the SEBI has been a professional-run autonomous
organisation while the FMC has been bureaucratic in nature, a
relatively flat organisation managed by a few government
executives. Thus, with a blend of professionals having the
required skill sets and bureaucrats, the regulatory bandwidth
of the SEBI will only increase. Further, the SEBI already has experience of regulating brokers and members of an exchange.
Since the FMCs hands were tied under the FCRA 1952, it was
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never directly exposed to brokers and members of an exchange. It used to do that through the exchanges. Therefore,
in the changed regime after the merger, the optimum combination of two different types of skill sets and experience will
infuse more rationality to the trade by offering a broad-based
yet effective platform.
Rationale for Convergence and Opportunities

The rationale for the convergence stands on several grounds.


First, it will improve the comparability of financial information, in terms of consistent valuation practices of both stock
and commodities businesses with respect to reliable price discovery and effective risk management.
Second, the auditability of financial statements of exchanges
and member firms may be on a par with global exchanges
since fungibility bridges the gap in the nomenclature of stock
and commodity exchanges. Improvisation in the financial
statement comparison and auditability would be the natural
outcomes of the process.
Third, worldwide there are many instances where a single
regulator has successfully regulated equities and commodities
segments as they are traded in a single regulated entity. Such
examples of regulated exchanges trading in both commodities
and securities exist in Australia (Australian Stock Exchange,
and Sydney Futures Exchange), France (Matif), the UK (London International Financial Futures and Options Exchange),
Taiwan, South Korea and so on (MoF 2003).
Fourth, from the hedging perspective, the merger reduces
the transaction cost. There are many physical market players
who have to take positions in both commodities and currencies for risk managementmore so, while dealing in international commodities such as bullion, base metals and the like.
Since these two had so far been dealt with by two different
regulators, the hedgers had to comply with two different regulatory norms. Now, with regulatory convergence, that situation will change and this has the potential to reduce the cost
of hedging.
Fifth, this merger opens up avenues for various types of
products that could not be traded under the outmoded FCRA.
These include, in particular, options and index-based products. These enormous opportunities can bring about various
product innovationsinvestment derivatives such as exchangetraded funds for silver and other metals, weather and freight
derivatives, and index futures and options trading in commodities can be introduced. In the process, it will offer arbitrage
opportunities across various segments in an exchange, and
make margin money fungible for trading across various
asset classes such as commodities, currencies and equities
(Bhayani 2015). Thus, if stock exchanges begin trading in
commodity derivatives, the same margin money can be made
applicable to all segments because the clearing corporation
will be the same. In other words, market depth and liquidity
enhancement would be an outcome of the regulatory
convergence.
Sixth, from the participation standpoint, since the
regulatory system will move to an autonomous regulator,
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avenues for banks and financial institutions are opened in the


process. This will not only help the hedging efficiency
process, but also infuse liquidity and bring in more depth to
the market.
Seventh, it will reduce or eliminate the scope of regulatory
arbitrage, a process by which agents in the principalagent
framework could have capitalised on loopholes in regulatory
systems to circumvent what they perceive as unfavourable
regulation.
Eighth, and most importantly, the merger could reduce the
potential threat of systemic risks and the cascading effect of
inter-sectoral defaults, and might bring down search or information costs. The convergence might offer flexibility to stock
brokers to operate in financial as well as in commodities markets simultaneously as it allows integration at the level of brokerage firms. These entities are required to comply with the
regulatory prescriptionscapital adequacy, various types of
margins, nature of membership, and net worth, among others
of their concerned regulator and exchanges. It may be noted
that exchanges and brokers may leverage their operations
(without having two independent entities/establishments dealing with commodities and stocks) in a uniform overarching
regulatory architecture. There need not be separate set-ups for
commodities, securities and currencies. As a natural corollary,
interoperability between stock and commodity exchanges
would take place in terms of limit order book maintenance,
order entry, margin calculation and value-at-risk analysis of
holding portfolios.
Opening the Avenue for Innovation

There are many risk management products, or, to be specific,


insurance products that lie at the interface of being commodity and securities. As argued by Ghosh (2010), India needs to
have trading in water futures and options. It has been argued
that a water futures index can reduce the scarcity value of
water, thereby helping in water conflict resolution. Such derivatives cannot be delivery-based; they should be index-based.
Delivery is a costly affair, and completely defeats the purpose
for which such a product is conceived. Many of these sustainability-related products such as weather derivatives, which can
also be linked to crop insurance products floated by banks in
the markets, are index-based and non-deliverable. In the previous regulatory regime governed by the FCRA, such products
were not allowed to be traded as the statute governing commodity markets mandates derivative products to be generally
delivery-based. Carbon credit derivatives that were floated in
India failed and there were two reasons for thatthe improper
timing of launch as carbon markets were moving down from
2009 onwards and its unattractiveness to speculators due to
the delivery clause (Ghosh 2015b).
In the face of climate change and with increasing frequency
and intensity of extreme events, there are various risk management products that are needed for Indian agriculture.
Worldwide, there are various risk management instruments
such as crop-yield insurance (linked to the productivity),
crop-hail insurance (covers against hailstorm in the US),
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multi-peril crop insurance (covers against multiple extreme


events such as floods, droughts, hail, and so on), crop-revenue
insurance, and the like. Further, even weather derivatives
products such as High Degree Day (HDD) and Cold Degree Day
(CDD) are in vogue. While insurance companies or banking institutions worldwide have conceived such products, globally
these institutions access the futures or derivatives markets for
their own risk management. However, in India, the statute
does not allow access to the commodity derivatives markets.
Even the Banking Regulation Act, 1949 prohibited institutional access to commodity markets, though banks can access
stock markets. One of the reasons cited was that the commodity markets regulator was not autonomous and did not
have enough teeth to regulate such products and institutions.
Further, as argued by S Ghosh (2015), a disguised offset process known as compensatory afforestation has taken off in
India under state and judicial patronage. Besides, India has
the credential of having hosted a more common form of offset
trading in the Clean Development Mechanism (CDM). If CDM or
related offset markets are to be developed, their associated
derivative markets should also be encouraged for risk management. Under the outmoded FCRA 1952, one cannot conceive of
such products.
With the new statutes in place, all such restrictions will be
gone. There will be more ideas to be implemented as the relevance of the FCRA will cease to exist. Despite contending
claims, the financial market in India has so far failed to play
any role in the context of sustainability (Ghosh 2015b). There
have only been proposals to trade on sustainability indices of
listed companies in the stock exchanges, which might have
some implications for the implementation of sustainable development goals, but it hardly has anything to do with groundlevel risk management, and the creation of social security. The
SEBIFMC merger opens up the avenue for innovative products
to bridge that gap. It will also open up avenues for foreign institutional investors (FII) and other foreign players to access
the markets, thereby enhancing liquidity. Hence, this might
create the opportunity for many derivative products based on
global commons (such as carbon dioxide emissions) to
succeed, which have otherwise failed in India due to lack of
foreign participation.
From the participation standpoint, since the regulatory system will move to an autonomous regulator, avenues for banks
and financial institutions are opened. This will not only help
the hedging efficiency process, but also infuse liquidity, and
bring in more depth to the market.
Necessary Ramifications and Challenges

The effect of the SEBIFMC merger as a case of regulatory convergence may be amplified in the regulatory architecture in
commodities markets, among others, in productmarket innovation, surveillance and risk management and conflict management of the regulator and exchanges/members and protection for customers (Dey 2015b). However, the implications of
the SEBIFMC merger need to be examined from an economic
and regulatory standpoint. Regulatory harmonisation in terms
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of consistency and complementarity is of crucial relevance to


the convergence (Jordan and Majnoni 2002).
Regulation, Governance and Welfare Issues

The SEBI needs to work on how to pursue financial regulatory


harmonisation and how it should instil rationality in commodity trade with the adoption of a utilitarian approach to exchanges and brokers/members. Domain expertise of the FMC
may help the SEBI understand the depth and breadth of commodity futures and its underlying markets. The most important issue is that the commodity derivatives markets will be
under a strong, autonomous regulator that can come down
heavily on illegal trading, also known as dabba trading. As
such, the FMC, through various by-laws, has acquired a few
powers but that often prove inadequate to curb practices that
are off-markets (Pavaskar 2007). With an autonomous regulator in place, more trades will come under legal purview, and
in the process help the government exchequer.
The convergence may have some positive effect on governance. Exchanges, regardless of commodity/stock, need to adopt
good governance practices to strengthen their operations by
formalising performance goals in alignment with their mission and vision. Adoption of good governance practices could
help rationalise their existence and the constitution of a diversified board through succession planning, and it may be a desired outcome of the SEBIFMC merger. A principle-based regulatory structure will help rope in the commodity and financial
ecosystem and infuse more rationality in the commodity value
chain. The new regulator could be able to resolve the inherent
conflicts between the principal and agents (Dey 2015b).
Governance may resolve inherent conflicts between the exchange and its promoters and members and help constitute a
diversified board (Poitras 2013). While talking about the regulation of the Chicago Board of Trade, Lurie (1972: 221) presented a view on the management of board in the corporation.
A basic purpose of the board was to facilitate profitable economic activities by members. Thus its directors had to sense with some accuracy
how far they could go in the areas of rule enforcement. If rules were
enforced too harshly, board members could either ignore them or decline to remain in the organisation. Another purpose of the exchange
was to rationalise the commodities market through efficient and effective regulation. The efforts of the directors to reconcile this inherent
tension between private economic activities and an ordered national
market represent a recurring theme throughout Board history.

An autonomous regulator may bring about certain guidelines and terms and conditions on the functioning of the
board. Incidentally, the FMC brought about quite a few guidelines on the functioning of exchange boards.
On the other hand, since agency problem seems to have surfaced in earlier regulatory structures, the new regulator being
a principal will impose a set of checks and balances on activities of exchanges (agents) on market monitoring, surveillance,
and risk management. This might help regain market integrity, trust and completeness (Sahadevan 2012).
The inclusion of independent directors (not in relation to
promoters or members of family-run business entities) by the
SEBI might be viewed as a positive stroke to regulatory
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harmonisation. In addition, changes in surveillance of


exchanges on audit and technology adoption may be accomplished, bringing vibrancy to commodity markets.
Another challenge arises here. Despite the 2013 budget declaring the similarity of characteristics of traders trading in the
commodities and stock markets, it needs to be understood that
commodities and capital markets are fundamentally different
(Pavaskar 2004). While a rise in stock prices is viewed as a
signal towards general well-being, if the commodity derivatives market is an avenue for price discovery, a rise in prices
in the derivatives markets might lead to inflationary pressures
in the economy. Hence, commodity derivatives markets need
to be regulated with adequate price circuits, position limits,
consortium limits, and so on so that its price risk management
platform does not become a source of inflation risks. The FMCs
initiative in managing this deserves special mention. Therefore, despite the last guar gum price rise issue for which no
such empirical evidence for vilifying commodity exchanges
was found, there have been no recent allegations of futures
markets leading to inflation.
As the capital market regulator enjoys flexibility in the given
regulatory capacity, it might work on design-related issues and
contract specifications for commodity markets. So far, this has
been the domain of the exchanges, and this worked well, given
that contract design by the exchanges engendered competition
among them and led to market development on certain counts.
But, there is another framework that exists with the SEBI and
that is with regulation of the currency derivatives markets that
are traded in the stock exchanges. The currency contracts are
homogeneous and this has helped in market penetration and
risk management. So, it is now up to the SEBI to decide which
specific model or a combination of both (some working contracts left to the exchanges, some to be designed by the SEBI) is
more applicable for general well-being. Apparently, it seems
that there is a need to engender competition and so exchanges
should be encouraged to innovate further, even as the regulator may also mandate certain necessary products designed by
it to be traded for enhancing social well-being.
From the stakeholder point of view, robust risk management
mechanisms need to be in place to avoid systemic risks. So far,
in none of the regulated domains have systemic risks arisen.
Regulators in that sense have done a commendable job so far
(MoF 2003). A robust yet flexible regulatory structure can
ensure that individuals or groups in the corporation/exchange
or self-regulatory organisations cannot influence or exercise
their power adversely. Moreover, assets or profits of the corporation cannot be used for the well-being of groups that might
otherwise cause moral hazard to a majority of stakeholders.
While abusive related-party transactions might hurt minority
shareholders, audit at periodic intervals needs to be conducted
at the behest of the new regulator.
On the social welfare front, active intervention of the new
regulator and the Ministry of Finance is expected, especially in
a developing market such as India, where financial (and
commodity) markets are not so perfect or legal and other
infrastructures are relatively insufficient, in addition to varied
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risk structures and governance mechanisms (Levine 2012;


Shleifer and Vishny 1997).
The challenge arises not merely from the perspective of regulatory convergence between different markets. The issue of
regulatory convergence across different jurisdictions to prevent regulatory arbitrage and migration of risk is extremely
important. For instance, the Financial Stability Board (FSB)
and International Monetary Fund (IMF) are overseeing regulatory convergence across major jurisdictions, including through
peer reviews such as the Financial Sector Assessment Programme (FSAP), which provides in-depth examinations of
countries financial sectors. In this context, it is noteworthy
that the FSB has brought about significant regulatory structures for financialisation of commodities for Group of Twenty
(G-20) nations (Gibbon 2013). In April 2010, the FSB created
the OTC Derivatives Working Group (ODWG) that plays a pivotal role in transposing the G-20s objectives into domestic
regulations, relating to central counterparties and trade repositories. Therefore, in the context of the SEBIFMC merger,
while the challenge of regulatory arbitrage and risk migration
arises, there are international examples showing pathways to
combat such challenges.
Market Microstructure and Trade Issues

The new regulator needs to analyse whether imposition of the


CTT in futures contracts, especially in non-agricultural commodities, has increased the impact costs in trading since metals and energy account for a large share of the value in the
commodity basket (Ghosh 2015a). There is already a substantial decline in volumes after the CTT imposition and there has
not been any revival because of a rise in the total cost of transaction. Further, the revenue implication of the tax needs to be
re-examined yet again, as with a volume drop in commodity
exchanges, the actual tax collection may be less than what was
expected. This, of course, needs further deliberation and
research from the public finance perspective.
Further, the regulator and the ministry concerned need to
ensure that all the self-regulatory exchanges comply with
environmental, social and governance protocols, and that adjunct clearing houses maintain an arms-length relationship
with exchanges to curb illicit trading that may otherwise concentrate the mercantile power of traders in derivative trading.
In addition, the SEBI should issue disclosures on the participation of commercial traders or hedgers and non-commercial
traders/non-users, along with their open interest positions, at
regular intervals and devise some computational measures for
liquidity, price discovery and hedging effectiveness that may
be issued in the public interest (Kolamkar et al 2014).
The market environment plays a key role in the transaction
between parties. However, a consequence of trading activity
can affect unrelated third parties, or what is known as an
externality, for example, the notion the general public had on
the price rise of pulses and cereals in 200708. The merger
could oversee this problem in a logical manner. The SEBI can
issue a directive indicating the incentive structure for affected
individuals or groups that may be a pro-governance measure.
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This has twin benefitsone is the minimal direct intervention


of the SEBI and the other one is that the bargaining mechanism
may bring about an optimal outcome given low negotiation/
transaction costs (Dey 2015b).
Adoption of good governance practices is critical to organisation growth on a learning continuum that might have several implications at the operational or/and tactical level of the
exchange. Before permitting any innovative contract or/and
programme trading, the new regulator should weigh the pros
and cons of products and technologies from the costbenefit
point of view. For instance, high frequency trading (HFT) was
formally launched in 2008, especially in metals and energy
contracts. HFT, a predefined trading protocol aims at enhancing liquidity and hedging effectiveness by reducing trade
impact cost (Aggarwal and Thomas 2013), might affect market
stability adversely. For a year, HFT in mini- and micro-contracts
were disallowed on commixes, but was reintroduced from
January 2014, and the exchanges were asked to exercise their
discretion to choose the commodities in which the effects
would not be adverse. It has been reported that there can be
adverse effects on volatility destabilising the market at low
levels of liquidity, while there are no such effects at high levels
of liquidity (Ghosh 2014).
Market making to infuse liquidity might not be a viable
proposition for all commodities. It might work for some, as the
operating system is yet to be compatible with other operating
systems in capital markets. Hence, protectionist measures
need to be taken only after assessing the effects of liquidityenhancing measures. While metals (precious and base) and
energy products respond to innovations or shocks emanating
from global markets, insulating agricultural commodities from
external shocks or excessive price spikes may be the regulators
priority. The SEBI thus needs to protect the stakeholders,
namely, producers and processors, promoting a hedgeeffective environment and creating a level playing field for the
market participants.
Commodity, pension, and insurance markets globally are
now also avenues for investment as asset classes. In the wake
of the global financial crisis, the G-20 was very concerned,
among others, about this financialisation of commodity
markets and its disassociation from underlying economic activity,
and even set up the Nakaso Committee under the chairmanship
of the deputy governor of the Bank of Japan. Oil prices rose to
$150 a barrel when great economic uncertainty prevailed at
the onset of the global financial crisis. The financialisation of
various asset classes is one of the chief reasons why the regulation of all financial markets is being considered. While Indias
financial markets may not be as developed as those in Western
economies, they may well get there in the near future. Interestingly, the SEBIFMC merger could draw a parallel from the
US market where the merits and risks of the merger of the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) were incisively analysed
and presented before the Congress.
Congress must ultimately weight the potential benefits of a merger
against its potential risks. The major risks include (1) a potential for
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over-regulation that may result in decreased market innovation and


(2) a potential dominance of one market and regulatory perspective to
the detriment of the other. There is also an operational risk arising
from the fact that merging two agencies is at best a difficult task...
these potential risks, like the potential benefits, are also not easy to
quantify (US General Accounting Office 1995: 5).

More importantly, investment in index-linked products such


as Exchange Traded Funds (ETF) might attract financial market participants in a big way. However, market makers or fund
managers should promote active portfolio management of
such products to enhance the liquidity and magnitude of participation. The SEBI should make a concerted effort to unearth
unobserved heterogeneity in participation to the extent possible. Further, the new regulator could draw some insights from
existing commodity indices that are not allowed to be traded,
namely Dhaanya and Comdex (Dey 2015a). The lessons of
these indices might help the regulatory authority redesign existing products or facilitate some new product offerings, say
commodity mutual funds. To make such products appealing to
investors, rebalancing the portfolio with actively traded commodities on a periodic basis and respective futures/forward
prices and spot prices in a block should be taken into consideration. A unified market platform can be a welcome move to
bringing in transparency in commodity spot price polling and
legitimacy in forward/futures trade settlement, especially
agricultural commodities trade. Moreover, the regulator needs
to obtain approval from the Ministry of Finance to permit
foreign portfolio investmenta combined category of foreign
institutional investors and qualified foreign institutional buyers in index or derivative trading in commodities.
Concluding Remarks

It is yet to be seen whether this move towards regulatory convergence needs to be typified as a one-off incident or as the
initiation of a process of regulatory convergence, as is the
worldwide trend and the recommendation of the FSLRC. Only
time can say. Be that as it may, there are merits from various
perspectives in the move to regulatory convergence, as illustrated above. Yet, the challenges are also many. As such, onesize-fits-all might not work for the commodity segment and
the new regulator needs to be cautiously optimistic in market
regulation and management of exchanges and market participants. Blanket application of stock exchange practices might
not enhance the efficacy of commodity exchanges. It has to
embrace the good features already prevalent in commodity
market regulatory frameworks and the proclivity of exchanges product innovations. Rather, if a greater regulatory
convergence is envisaged bringing in other market regulators
as per the FSLRC recommendations, one needs to apply regulatory norms according to the needs of the market concerned so
as to bring about product innovation, process innovation and
safeguarding the interests of investors.
The FMC, within the ambit of the FCRA, has done its bit to
the extent possible. The SEBI has shown exemplary performance as the regulator of securities markets up to now. With the
two coming together, the possibility of good results exists. At
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the same time, the new regulator has to adopt a protectionist


approach to safeguard the interests of producers and commercial userskey stakeholders in commodities markets.
Do we have really similar types of opportunities and challenges with mergers of the PFRDA and the IRDA with the SEBI
FMC to form a Unified Financial Agency? It is difficult to
address at this stage. Commodity derivatives and stock
futures and options in terms of apparent structure may be
identical, though different in terms of their effects on the
macroeconomy, and characteristics. Stock markets are meant
for investment, while commodity markets were opened for
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Conflict, Transition and Development


February 28, 2015
War, Conflict and Development: Towards Reimagining Dominant Approaches

Vijay K Nagaraj

Protests and Counter Protests: Competing Civil Society Spaces in Post-war Sri Lanka

Harini Amarasuriya

Contradictions of the Sri Lankan State

Devaka Gunawardena

The Reintegration of Maoist Ex-Combatants in Nepal

Chiranjibi Bhandari

Myanmar: Conflicts over Land in a Time of Transition

Soe Nandar Linn

Making Pickles during a Ceasefire: Livelihood, Sustainability, and Development in Nagaland


Peeling the Onion: Social Regulation of the Onion Market, Nangarhar, Afghanistan

Dolly Kikon
GIulia Minoia, Wamiqullah
Mumtaz, Adam Pain

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