Commodity exchanges

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The government’s decision to allow MMTC to float a national commodity exchange, as part of a joint venture with Indiabulls, has set in motion a debate on whether the country needs more commodity exchanges. At first view, especially through the prism of competition, the move appears good. But there’s more to it than that. Note that each of the three existing national exchanges—MCX, NCDEX and NMCE—has carved out a niche for itself. MCX has focused on metal/mercantile contracts, for example, while NCDEX has opted to specialise in agri-commodities, and partly as a consequence, the competition among the three on the ground has not been significant. Moreover, considering the extent of reforms that are pending, it is even less obvious that another exchange will actually aid competition and lead to better price discovery. The amendment to the Forward Contracts & Regulation Act (FCRA) that would grant autonomy to the commodities regulator, the Forward Markets Commission (FMC), has been pending for a while. FMC needs to be empowered if it is to monitor more exchanges and regulate the market effectively. Though the volumes in the futures market have grown rapidly over the last three years, it is yet to attain critical mass. This is because the participation is restricted to retail investors and corporates, with banks, mutual funds and FIIs kept out. Allowing more exchanges without broader participation would only result in splitting existing trade volumes among roughly the same set of players, with the pie expanding only slightly. This will not only impact the stability of the exchanges, but more importantly, affect the creation of infrastructure such as warehouses, quality control laboratories and the like. Past observation of operations also suggests that more exchanges do not necessarily mean more competition. There have been instances of the exchanges simply replicating each other’s contracts, rather than offering innovative products to wean away clients.