SEBI's "One Commodity One Exchange" Proposal: Enhancing India's Commodity Markets

Introduction

The Securities and Exchange Board of India (SEBI) has presented a consultation paper focused on the proposal to develop the “One Commodity One Exchange” (OCOE) framework. As of April 2025, SEBI has yet to officially notify this framework, and the proposal remains under consultation without any public circulars confirming its adoption.

Objective

The primary goal of this consultation paper is to gather public comments and perspectives regarding the OCOE proposal. This initiative aims to mitigate the fragmentation of liquidity and enable each stock exchange to cultivate a distinct set of unfragmented liquid contracts.

Background

International Practices

Internationally, derivatives contracts for specific commodities are predominantly traded as liquid contracts exclusively on a single commodity exchange. This exclusivity has historically emerged through competition and regulatory encouragement, enhancing the depth and development of commodity derivatives markets in various jurisdictions.

Current Trends

Recent media reports indicate a shift in global price discovery for many commodities, moving from West to East as consumption and production increase in regions such as China. Despite being a major global consumer of various commodities, India has minimal influence over commodity prices. Thus, there is a recognized need for India to develop a strong market presence to better influence global commodity pricing.

Concept Background

Need for Exclusive Commodities

The exploration into an exchange-specific set of commodities aims to reduce liquidity fragmentation and promote unfragmented liquid contracts. This strategic shift would lead to:

1. Enhanced focus on product development and stakeholder engagement, instead of competing for the same products across different exchanges.
2. Prevention of liquidity fragmentation during the early phases of contract implementation.

Current Market Overview

India stands as a significant producer or consumer of several commodities, including:

• Pulses
• Rice
• Spices
• Rubber
• Cotton
• Tea
• Iron Ore
• Steel
• Gold
• Silver
• Diamonds

Currently, the Central Government has identified 104 goods eligible for trading in the commodity derivatives segment, although only around 40 of these goods see significant trading volumes. Various exchanges dominate individual commodities, notably NCDEX in agricultural derivatives and MCX in bullion and metals.

Historical Context

Despite SEBI's push for universal exchanges since 2018, the trading volumes at BSE and NSE remain relatively low compared to NCDEX and MCX. Thus, commodity liquidity frequently remains confined to specific exchanges, leading to diminished opportunities for emerging contracts to establish benchmark pricing.

The Concept of “One Commodity One Exchange”

Objectives of OCOE

SEBI has outlined several objectives for developing the OCOE framework:

1. Facilitate each exchange in curating an exclusive set of unfragmented liquid contracts for specific commodities.
2. Empower each stock exchange to develop comprehensive derivative contracts exclusive to their selected commodity.
3. Ensure the liquidity benefits ultimately extend to all stakeholders and value chain participants involved.
4. Drive robust growth and deepening of the Indian commodity derivatives market.
5. Position India to influence global benchmark pricing for various commodities.

Potential Impact

While multiple exchanges offering competing contracts can foster competition, allowing only one exchange to trade specific commodities could yield more efficient growth and lower costs in the long run.

Pros and Cons of the Concept

Advantages

• The OCOE concept provides stock exchanges ample time and resources to foster liquidity and establish futures prices as reference points both domestically and internationally.
• Dedicated exchanges can hone their focus on developing necessary infrastructure for a mature derivatives market, thus enhancing the overall commodity market's viability.

Disadvantages

• The OCOE framework could impose artificial limitations, raising costs for trading, compliance, and technology due to decreased competition.
• An exchange may fail to meaningfully develop a blocked commodity, resulting in delayed product offerings and potential stagnation of market growth.

Proposal for Exclusivity

The salient features of the proposed OCOE framework include:

1. Exclusivity for “Narrow” agri-commodities as defined by specific criteria (e.g., government interventions, pricing stability criteria).
2. Established protocols for exchanges to block commodities for exclusive trading.
3. Mechanisms for confirming ‘blocking’ and timelines for approvals to enhance regulatory oversight while facilitating growth.

Proposed Process Flow

The steps involved in the process for granting commodity exclusivity cover complex methodologies, ensuring fairness and transparency in the application for exclusivity.

Conclusion

The OCOE framework presents a transformative opportunity for the Indian commodity derivatives market, potentially improving liquidity, investment focus, and benchmarks for pricing. Stakeholder engagement and careful navigation of potential pitfalls will be crucial for achieving the intended outcomes of this regulatory initiative.