Regulatory Updates #28: SEBI on Commodity Exchanges

Bar & Bench will bring to you the latest regulatory and policy updates from different ministries and regulatory authorities. In this edition of the Bar & Bench Regulatory Updates, we analyse the latest updates by the Securities and Exchange Board of India (SEBI)..Commodity bourses can offer higher limit to Hedgers.With a view to further incentivise increased participation by ‘genuine hedgers’, SEBI has asked Commodity Exchanges to allow hedgers additional position limits for trading in commodity derivatives and ensure such ‘hedge policies’ are properly conveyed to participants..Commodity hedging is when a company offsets risks arising out of fluctuations in raw-material prices. For instance, if a manufacturer of Product A expects prices of Product A to rise in the next three months, he will buy a position in the futures market at current prices to offset the likely price increase. Similarly, if the prices are likely to fall, he will sell in the futures market at current prices against the physical goods he holds..In India, especially in agricultural commodities, several sugar producing mills, wheat consuming companies, fast moving consumer goods entities and even metal and oil refineries and marketing companies were keeping away from hedging on commodity exchanges. Or their hedging was only to the extent of limits permissible under extant norms..As per the Circular, the additional hedge limit proposed is non-transferrable and shall be utilised only by the hedger to whom the limit has been granted and not by anyone else. Further, hedge limits for a commodity will be determined on a case to case basis and Exchanges will be required to undertake proper due diligence to ensure genuineness of the hedge limit granted..SEBI bars Commodity Exchanges from sponsoring media programmes.SEBI recently barred Commodity Exchanges from sponsoring or associating themselves with any programmes run by media channels, which directly or indirectly spread price sensitive information..The circular comes at a time when many programmes are sponsored by the National Stock Exchange, Bombay Stock Exchange, Multi Commodity Exchange, National Commodity or Derivatives Exchange in the name of investor awareness..SEBI has reiterated that, Exchanges being neutral platforms, cannot sponsor or participate in discussions including on televisions channels and social media about trading in commodity derivatives..SEBI has also asked Exchanges to ensure that their employees are not associated with any such marketing activities. It has directed exchanges to lay down a suitable code of conduct for their executives and other staff in this regard..SEBI asks Commodity Exchanges to conduct brokers’ system audit.In order to bring stability and integrity in the commodities market, SEBI has imposed the contents of the circular dated 6 November 2013 (which provides for a stock broker system audit framework and mandates Stock Exchanges to ensure conduct of system audit of its members) to brokers of National Commodity Derivatives Exchanges..The framework of system audit for brokers should cover audit process, selection norms for auditor and terms of reference for brokers..However, Type 1 brokers have been exempted from system audit based on the representations made by stock exchanges.