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SEBI tweaks norms for Commodity Exchange
Why is it in the news?
- The capital market regulator SEBI has tweaked the disclosure norms for Commodity derivatives exchanges.
- Such exchanges will now have to disclose the quantum of trading done by farmers and other commodity market participants like millers and wholesalers on the exchange platform.
More in the news
- SEBI has directed commodity bourses to disclose the open interest and turnover of various categories of participants like farmers and farmers producer organisations (FPOs).
- Value chain participants include processors, commercial users like dal and flour millers, importers, exporters, physical market traders etc.
- Currently, commodity derivatives exchanges disseminate turnover data for only two broad categories of participants- clients and proprietary.
- Incidentally, the SEBI move assumes significance also because a large section of market players believe that the commodity market turnover is largely dominated by speculators and other participants that are not genuinely connected with the commodity segment.
About Derivatives
- A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index).
- Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes and stocks.
- Generally belonging to the realm of advanced or technical investing, derivatives are used for speculating and hedging purposes. Speculators seek to profit from changing prices in the underlying asset, index or security.
Example :
- Commodity derivatives are used by farmers and millers to provide a degree of "insurance." The farmer enters the contract to lock in an acceptable price for the commodity, and the miller enters the contract to lock in a guaranteed supply of the commodity.
- Although both the farmer and the miller have reduced risk by hedging, both remain exposed to the risks that prices will change.
- While the farmer is assured of a specified price for the commodity, prices could rise (due to, for instance, a shortage because of weather-related events) and the farmer will end up losing any additional income that could have been earned.
- Likewise, prices for the commodity could drop, and the miller will have to pay more for the commodity than he otherwise would have.
Source
The Hindu