SEBI integrates Equity & Commodity Derivative Brokers

SEBI

Sumit Agrawal

After the merger of commodity derivatives regulator Forward Market Commission’s (FMC) with Securities and Exchange Board of India (SEBI) through Finance Act, 2015, the supervision and regulation of commodity derivatives market and its brokers has been vested with SEBI.

Hitherto, qualifications for membership of a recognized stock exchange as prescribed under Rule 8 of Securities Contracts (Regulation) Rules, 1957 and Regulation 18C of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 carried a barrier between broking activity in securities market and in commodity derivative market.

According to these provisions, a stock broker or clearing member carrying on the broking activity in securities could not undertake the activity in commodity derivatives, and vice-a-versa.

To remind readers, there was an era where SEBI inspections of stock brokers used to be done with an angle if there was any fund movement inter-exchange and inter-market (securities and commodities markets) in the records of broker. Such transfer was considered prohibited between Commodities Market and the Securities Market. Adjudicating Officers of SEBI would impose penalties while holding that it “will expose securities market to the risks of the Commodities Market.” Reference is drawn to the orders in the matters of North East Broking Services Ltd and Anand Rathi Share and Stock Brokers Limited. Perhaps such orders will be a history now.

Last month, with effect from 27th June, 2017 Ministry of Finance had brought Securities Contracts (Regulation) (Amendment) Rules, 2017 and now SEBI has brought SEBI (Stock Brokers and Sub-Brokers) (Amendment) Regulations, 2017 with effect from 13th July, 2017.

This will allow a single entity to act as stock broker/clearing member in commodity derivative markets as well as in the equity markets, without setting up a separate entity. This move will benefit investors, brokers, stock exchanges and SEBI as there are many commonalities between the two markets in terms of trading and settlement mechanism, risk management, redressal of investor grievances.

Author is Partner, Suvan Law Advisors and former Assistant Legal Advisor, SEBI

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