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In 2015, the Forward Markets Commission, the former commodities regulator, was merged into the national capital markets regulator, the Securities and Exchange Board of India (SEBI).

In April 2017, SEBI approved a proposal to integrate the spot and derivatives markets by introducing options trading in the commodities market.

Currently, SEBI only regulates derivative contracts in commodities. But in this year’s Union Budget, Finance Minister Arun Jaitley proposed that the spot market for commodities and the derivatives market be integrated.

The ministry had been consulting experts from SEBI and commodities markets and Jaitley said a committee would be formed to examine a new operational framework.

Technically, derivatives prices are supposed to be based on the prices of the underlying commodities that are traded in spot market. Experts believe the integration of spot and derivatives markets will improve regulatory control and increase transparency in spot trades and how they affect prices of futures contracts. SEBI is also counting on the reforms to increase volumes of exchange-traded commodity future contracts.

When commodities spot markets do come under SEBI’s purview through integration, the government plans tough regulations to avoid a calamity such as the USD 916 million dollar-fraud at the National Spot Exchange Ltd. (NSEL) in 2013.

The commodities exchange collapsed after it defaulted on payments to market participants and had to suspend trading.

Jaitley had proposed the integration saying farmers would benefit from reforms in the commodities market. Spot trading is largely the norm in wholesale markets or agricultural produce market committees, which means traders often outmaneuver farmers and miss out on profits.

In the latest legal news, the new SEBI Chair, Ajay Tyagi, has also said commodity markets are a priority for him so farmers and end-users gain. He noted that, aside from the Agricultural Produce Market Committee, which regulates agricultural products, most commodities in India are not regulated.

According to experts, integrating the spot and derivative markets could pose problems. While derivatives are standard contracts that have specific qualities and grades, the spot market allows several varieties, qualities and grades of the same commodities to be traded in the same market, with some regional variations.

Analysts also warn that volatility in the agricultural commodity market can have a rub off effect on economic policy.

As yet, there is no clarity on how the new framework will address agricultural and non-agricultural commodities.

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