Sebi to Keep Close Tabs on Price Cartels in Commexes

Also wants to do risk profiling of brokers and their large clients

Price cartels, which enjoyed a more or less free run in the commodity futures market till recently, will soon be on watch.

The Securities and Exchange Board of India (Sebi), which only a month ago undertook regulation of the decade-old commodity futures market, will modify its state-of-the-art integrated market surveillance system (IMSS) used in the equity market, to track unusual price spikes and trading patterns in farm futures on bourses like NCDEX and MCX.

“We will modify our IMSS software used for tracking prices, volumes and trading patterns on the equity market to detect instances of manipulation in the commodity futures market,“ a Sebi official told ET.

“Our idea is to keep a tab on unusual spikes in volumes and futures prices on commodity exchanges and co-relate them with the spot market price and activity that suggest manipulation. Sebi also wants to do a risk profiling of brokers in the commodity markets and their large clients through the system.“

A commodity futures market allows a client to buy or sell a commodity at a predetermined price for delivery on a future date. Incidents of manipulation and attempted cartelisation have surfaced in the past years especially in narrow farm futures like castor, pepper, jeera, mentha, guar and coriander. With the exception of mentha most of these commodities are traded on the country's premier farm bourse NCDEX. The country's largest bourse MCX primarily offers futures trades in gold, silver, crude, copper, where cornering is difficult, and a few thinly traded agri commod ities like mentha and cardamom.

NCDEX at the instance of erstwhile commodity market regulator Forward Markets Commission (FMC), which was merged with Sebi effective September-end, undertook a slew of measures since 2012 to tackle cartelisation and price manipulation.

For one, it raised the threat of delivery on those jacking up prices artificially by staggering delivery of commodities across 10-15 days from a day before contract expiry. It also increased margins for trading to deter manipulators who work on borrowed finance. However, Sebi intends to be pre-emptive instead of being reactive as its predecessor, which was stymied by lack of manpower and funds to effectively regulate the market.

“FMC relied on twice-a-day feeds from exchanges in a set format to track price movements, etc. Voluminous data had to be sifted before action could be taken,“ said PH Ravikumar, non-executive chairman, SKS Microfinance, and former MD of NCDEX. “Under Sebi, courtesy of re al time data, action will be rapid and pre-emptive, not reactive.“

NCDEX blames cartelisation on “fragmented spot markets“ and “information asymmetry“ between producers and their well-organised traders. A former FMC chairman agreed, saying Sebi's biggest challenge lay in effective integration of spot and futures market data to check cartels.

“Sebi can act effectively in equities where it controls both the spot and futures segments, but commodities spot markets are fragmented and price differences the rule not the exception,“ he added. “This will be a challenge for Sebi.“ Terming market abuse and manipulation the “exception“, an NCDEX spokesperson said, “To maintain market integrity , the exchange does not hesitate to take immediate action within its powers to deter market malpractices, if any, and initiate suitable penal action against such participants.

The exchange feels empowered with the taking over of the regulatory function of the commodity market by the Sebi.

The Economic Times, New Delhi, 3rd Nov. 2015

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