Thursday, 1 October 2015

Merger of SEBI and FMC | Significance, Challenges

  • Why the merger?
    • NSEL: A little over two years after Jignesh Shah and Financial Technologies promoted National Spot Exchange Limited (NSEL) suspended trading of all its contracts, resulting in a payments crisis amounting to over Rs 5,600 crore that still remains unresolved, the Forwards Market Commission, the commodities market regulator, was merged with the Securities and Exchange Board of India
    • FSLRC: The Financial Sector Legislative Reforms Commission (FSLRC) had earlier stressed on the need to move away from sector-wise regulation. It proposed a system in which RBI would regulate the banking and payments system, and a Unified Financial Agency (UFA) would subsume all other financial sector regulators such as SEBI, IRDA, PFRDA and FMC, to regulate the rest of the financial markets.
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  • What exactly is happening now?
    • The Forward Contracts Regulation Act (FCRA) stands repealed, and the regulation of the commodity derivatives market shifts to Sebi under the Securities Contracts Regulation Act (SCRA), 1956. 
    • SCRA is a stronger law, and gives more powers to Sebi than FCRA offered to FMC.  
  • Benefits:
    • Market players feel that commodity markets will now be better regulated, with more stringent processes — and will thus evoke greater confidence 
    • Better regulation because: 
      • As Sebi has a far superior 
        • surveillance, 
        • risk-monitoring and 
        • enforcement mechanism that market participants say will give more confidence to investors, and may help businesses grow. 
        • Sebi now also has the power to access call data records.
      • The FMC only regulated the exchanges, and had no direct control over brokers. 
    • Sebi may allow FII participation in commodities trading going forward, which would provide 
      • more depth to the markets, and 
      • increase liquidity, 
      •  investor participation and 
      • better price discovery. 
    • Sebi may introduce option contracts (call and put options) in commodities trading, thereby providing better hedging tools to investors. 
    • Sebi has said that it will oversee price determination of commodities. 
    • big confidence-booster for participants
    • Precursor to 
  • Limitations/Challenges: 
    • Sebi has all necessary infrastructure to regulate the commodities market, but some feel it lacks knowledge of the commodities market. However, since several FMC officials will move to Sebi in line with the merger, such issues are likely to be sorted out.
    • jurisdictional powers of the state government over agricultural marketing and the political sensitivities involved with farm commodities.
    • Price volatility in these cannot be compared to that in stocks or bonds. 
    • The growth of the commodity derivatives market has also been hobbled because of the lack of institutional players to impart greater liquidity in trading. 
  • Conclusion:
    • Next, the government should look at merging the insurance and pension regulators, which can then be the precursor to a unified regulator for the financial market as a whole.

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