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Exit Policy for Commodity Derivatives Exchanges

Finsec Law Advisors

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Post the merger of SEBI and the Forward Markets Commission (“FMC”), SEBI has been working towardsintegrating commodities markets and its participants under various SEBI regulations. Pursuant to the merger, SEBI notified 12 commodity derivatives exchanges as recognised exchanges out of which 6 are national commodity derivatives exchanges and the rest are regional commodity derivatives exchanges. However, most of these exchanges have suspended their trading operations due to low trading volumeand market conditions. In order to provide a framework for the exit of nonoperational commodity derivatives exchanges, SEBI recently issued a circular, dated January 11, 2016, prescribing an exit policy.

According to the circular, a commodity derivatives exchange will be liable to exit if there has been no trading operation for more than 12 months. Further, national commodity derivatives exchanges which do not have a turnover of at least Rs. 1000 crore per annum and regional commodity derivatives exchanges which do not have at least 5% of the nation-wide market share, for 2 consecutive years, shall be liable to exit. Exiting commodity derivatives exchanges would have to seek prior approval from SEBI before alienatingtheir assets.

Further, on obtaining the approval to exit, sufficient funds have to be set aside by the exchange for settlement of any claims, arbitration awards and other contingent liabilities. Also, the de-recognised exchange would be required to contribute a portion of its assets, as decided by SEBI, towards the SEBI Investor Protection and Education Fund for investor protection, and in order to cover any future liabilities.Additionally the circular states that the commodity derivatives exchanges which have suspended trading operation can resume their trading operations by seeking prior approval from SEBI. These exchanges willhave to ensure that adequate and effective trading systems, clearing and settlement systems, monitoring and surveillance mechanisms and risk management systems are put in place, in addition to complying with all other regulatory requirements stipulated by SEBI from time to time.

At present, 6 out of the 12 SEBI recognised commodity derivatives exchanges have suspended their trading operations for various reasons. This move streamlines the exit procedure and paves the way for defunct commodities exchanges to apply for voluntary exit from business.