Making Indian commodity derivatives markets competitive
India has the scale for a world-class commodity derivatives market, but it needs a regulatory design that delivers both safety and capital-efficient participation
India's commodity derivatives market falls short in providing cost-effective hedging for firms, owing to higher margins compared to global peers. This cost barrier deters large firms from participating and discourages smaller firms from entering the market. The regulator cannot simply lower margins as they are essential for safeguarding market integrity in the event of a counterparty default.
Thus, the challenge lies in striking a balance - margins must be high enough to ensure settlement of open positions, yet not prohibitively expensive for hedgers.
To achieve globally competitive margins while preserving market safety, several policy options can be explored. One approach is for clearing members to make risk-based contributions to the Settlement Guarantee Fund (SGF). This aligns each member's SGF contribution with the risk they pose to the clearing system, broadening the default-resource base.
Another option is allowing clearing corporations to maintain committed lines of credit with banks and financial institutions. This backup facility would bolster the clearing corporation's liquidity during market stress, ensuring they can meet short-term needs.
SEBI may also consider empowering CCPs with contingent assessment powers. Under this arrangement, non-defaulting clearing members could be required to contribute additional funds up to a pre-specified limit during extreme default scenarios. This provides an extra layer of protection beyond the regular SGF.
Lastly, SEBI, in consultation with the Reserve Bank of India (RBI), should examine whether systemically important clearing corporations require limited-purpose liquidity access during extreme stress. While this access is currently unavailable in India, it should be considered as commodity derivatives gain prominence for the real economy.
The solution lies not in choosing between high margins and unsafe markets. By strengthening the SGF and enhancing backup resources, Indian exchanges can charge lower, risk-sensitive margins without compromising settlement safety. This would reduce hedging costs, attract participants, and deepen liquidity. India has the scale to develop a world-class commodity derivatives market; it needs a regulatory framework that guarantees both safety and capital-efficient participation.
Written by urgent.news from Hindu BusinessLine's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
