Sebi sets eyes on commodity index derivatives, works on guidelines

Sebi sets eyes on commodity index derivatives, works on guidelines

 

Mumbai, Aug 16: Securities and Exchange Board of India Chairman Ajay Tyagi has said in an annual report “there are plans to consider more commodity options contracts to be launched, besides working on guidelines for index products”. Sebi will have to first finalise guidelines, which, according to sources, will suggest common standards for preparing commodity indices and later there will be regulations regarding trading.
Hence it will be a long wait before trading in index-based derivatives’ much-awaited indices starts.
Experts say preparing indices for commodities is most complex, unlike equities. In equities most of the volumes come from index derivatives and index options. Sources said the guidelines would include how to consider the weight of the components of the index and some technical parameters on index preparation.
Commodity contracts, instead of commodities, which are the underlying, will be components of the index. Second, it will be a future price index and not a spot price index. Futures prices will be considered in the index because in several international commodities traded on commodity exchanges, an efficient spot market is not developed.
Both the MCX and NCDEX, two leading commodity exchanges, have different indices for various segments like metals and agri commodities, and the composite. However, they should meet the Sebi index norms and standards whenever finalised. Usually International Organisation of Securities Commission (IOSCO) index standards have to be complied with.
In equities, the market cap of the company and its floating market cap are important criteria for deciding the weight of the firms in the index. However, there is no such data for commodities. For example, the market cap or size of the market of wheat can be only notional. There are several varieties and different prices based on the quality for all varieties. They change with changes in crop size. Final crop estimates come late.
The MCX launched indices, including the composite index prepared by Thomson Reuters a year ago. They are for base metals, bullion, single commodity indices for gold, copper and crude oil and the composite index. The composite index is for all actively traded commodities and the methodology has two criteria, which are physical market size and liquidity in the respective contract on the exchange. In a composite index, caps have to be set for physical market size and liquidity.