SEBI re-considers liquidity enhancement scheme for commodities market

The Securities and Exchanges Board of India (SEBI) may re-consider the liquidity enhancement scheme (LES) framework for the commodities segment.

The regulator-appointed secondary market advisory committee discussed this issue at-length on January 21.

LES is a tool to enhance liquidity (in a commodity if it doesn’t exist) and create a market. In the non-liquid segment, the exchange executes market making via some selected brokers who provide both buy and sell rates.

New commodity exchanges — National Stock Exchange and BSE – may not be comfortable in the current LES framework. They have sought changes in the scheme for creating liquidity in their product segment.

In the equity segment, there is no such restriction on launching the scheme. If BSE wants to create a vibrant derivative segment, then it can start LES after regulatory approval, despite NSE already having a vibrant derivative market.

A source told Moneycontrol, “In the current framework, LES can only be started until main exchanges have not started the scheme for a particular product segment. For instance, if a gold product has liquidity in the Multi Commodity Exchange, then no other exchange can start LES for the gold segment. This creates hurdles for new exchanges to create volume on their exchange. Secondly, this framework is not successful for old exchanges. MCX had started LES in the gold option segment, but it was not that successful as was expected.”

Another source told Moneycontrol: “Recently, SEBI discussed the issue at-length in its Secondary Market Advisory Committee meeting.  The current mechanism was also discussed earlier with all exchanges before finalising LES for the commodity segment.”

LES in commodity derivative contracts was allowed by SEBI in March 2018.

The regulator allowed first-time LES in the commodity segment. A source said, “There is a difference of opinion in new commodity and old commodity exchanges. Old exchanges including MCX or National Commodity and Derivative Exchange (NCDEX) feel that if new exchanges also launch similar products within the same segment, then there is no market development or these new exchanges share the same pie. However, new exchanges feel that if they want to create liquidity in their segment, it required some incentive tool to create a market initially.”

A commodity market expert said the government has allowed around 90 commodities for trading and presently only two dozen commodities trade on exchanges. “However, new exchanges are also looking to launch a product, which has already sufficient liquidity on a particular exchange.”