Sebi plans to amend Securities Act to enable stock bourse convergence

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The Securities and Exchange Board of India (Sebi) has decided to amend the current provisions in the securities Act to enable the convergence of stock and commodity exchanges. The move would legally pave way for equity exchanges to deal in commodity derivatives trading and commodity bourses to launch trading in the equity and currency segments.

Sebi’s board at its meeting on December 28, 2017 had given green signal for a universal exchange. The market regulator is working on the legal aspects to implement this by October. Existing equity and commodity bourses such as the National Stock Exchange (NSE), the BSE, the Multi-Commodity Exchange, and the National Commodity and Derivatives Exchange (NCDEX) have all shown an interest towards venturing into new segments.

“In light of the proposal to enable all the recognised stock exchanges to deal with all the segments of the securities market, all such provisions in the Securities Contracts (Regulation) Act (SCRA), Stock Exchanges and Clearing Corporation Regulations (SECC), along with the separate definition of commodity derivatives exchanges would be required to be deleted/amended,” Sebi had said.

At present, all existing commodity exchanges are deemed to be recognised stock exchanges under the SCRA Act. However, the Act has put specific conditions that such deemed bourses shall not deal with any other segment, except for dealing with commodity derivatives till they are specifically permitted by Sebi. Necessary provisions were inserted in SECC rules to enshrine that commodity derivatives exchanges shall assist, regulate or control the business of buying, selling or dealing in commodity derivatives and options in securities with prior approval of the board, Sebi said.

For this, Sebi has proposed to delete the separate definition of regional and national commodity derivatives exchange from SECC regulations. It said, “Every recognised exchange shall constitute independent oversight committee of the governing board to the extent applicable. The committees will be chaired by a public interest director to address conflict of interest with respect to member regulations, listing functions, trading, surveillance and product design.” On the provisions of settling the trades, Sebi said every recognised clearing corporation should ensure guarantee for settlement of trades, including good delivery.

Sebi also asked the commodity exchanges to set up their clearing corporation in the stipulated timeline. So far, commodity exchanges were clearing their trades themselves. “The timeline for commodity derivatives exchanges for clearing through a separate clearing corporation has been stipulated as within three years from merger by September 28,” the market watchdog said.

The said amendments would be effective from October. According to Sebi, it had deliberated the matter with all stakeholders. However, the commodity exchanges are of opinion that there is lack of level-playing field between the two and hence, all products under single exchange entity should be allowed after two-three years. On the other hand, equity exchanges said they were ready for the convergence as already two years had passed since merger of the erstwhile commodity regulator Forward Markets Commission and Sebi.

“After a detailed deliberation, it is proposed that amendment to enable convergence may be made effective from October 1, after completion of the merger. When clearing corporation is to be in place for commodity exchanges according to the timeline prescribed,” it noted.

 
Explaining the entire integration process, Sebi said during the initial phase, the focus was more on understanding and strengthening the existing micro-structure of the commodity derivatives markets. And therefore, two markets — commodity derivatives and rest of the securities markets — were kept segregated initially.

Sebi is of view that time should be given to the commodity exchanges to come on a par with equity exchanges with respect to regulatory norms such as net worth requirement, shareholdings, clearing corporations, among others.

Citing the Finance Minister Arun Jaitley’s announcement in Budget 2018 on the integration of commodity and securities derivative markets, Sebi said the integration would be achieved in two phases. The regulator said it had taken all the necessary steps to enable the first phase by integrating broking activities in both the segment.