Critical essay on commodity exchange market rule 2074

The Commodities Exchange Market Rule was introduced by SEBON, was approved by the
Ministry of Finance and came into action from 9 th Mangsir 2074 onwards. For simplicity’s sake,
let’s refer to Commodities Exchange Market Rule as CEMR. So, CEMR was introduced to
regulate the previously unguided and pretty much lawless commodity exchange market of Nepal.
With CEMR, SEBON aimed to create a transparent marketplace for trading commodities, risk
management, and enhanced agricultural productivity.

As aimed as SEBON, CEMR did regulate the commodity exchange market of Nepal. It
established rules and guidelines for commodity market and market participants to follow. CEMR
defined the regulatory framework of commodity exchange market and tried to reduce the
potential of fraud and market manipulation. This rule aimed to improve the commodity exchange
market transparency. They are trying to do so by making it compulsory for prices, trading
volume and contract specifications to be disclosed. The increased market transparency then
would attract more investors to the derivative market. With the introduction of CEMR, risk
management and hedging tools have increased. Now, investors and business people, everyone
with knowledge of derivative market can hedge and manage their risk. Hence, introduction of
CEMR allows different stakeholders to manage their risk more effectively. After the introduction
of CEMR, there would be a legal place for commodity trade to take place. With this, farmers can
have access to one more financial source other than already existing financial source like banks,
cooperatives and other financial institutions. Farmers can use their produce to trade in derivative
market like deliverable future contract.

Although we finally have a rule made for commodity exchange market, a successful
implementation of this rule remains a challenge as the inadequate infrastructure, lack of
awareness and limited understanding of the commodity market among stakeholders have
hindered the market’s growth and potential benefits. CEMR in itself has much room for
improvement. As of now, much power is vested in SEBON to manipulate the operation of the
market. It would be more efficient, if they let the market move in its natural course without much
interference. Although from another perspective, one may argue that the interference of SEBON
is for the investor’s safety but too much interference in the market’s natural course would
ultimately affect the investors.

There is also limited participation from individual investors and it can be seen that commercial
banks are the ones usually investing in derivative market to hedge against foreign currency risk.
The commodity exchange market struggles to attract a wide range of participants and this is
mainly attributable to the lack of knowledge and understanding of the commodity exchange
market. So, maybe SEBON should first focus on increasing awareness of commodity exchange
market among investors and simultaneously work on improving the CEMR. Maybe investors
opinions could be taken in to update the rule. There is insufficient commodity variety in CEMR.
CEMR considers only futures as a commodity and disregards other commodity exchange
instruments. Nowadays, because of the amendment of hedging related regulations, SWAPS are
also in use, but CEMR does not mention it in the rule.