Universal exchanges

Why in news?

SEBI has finalised norms for universal exchanges.

What is difference between equity and commodity trading?

• Equity trade -The market in which shares are issued and traded, mostly through exchanges, this is also known as stock market.
• This gives companies access to capital and investors a slice of ownership in a company with the potential to realize gains based on its future performance.
• The securities traded in the equity market can be either public stocks, which are those listed on the stock exchange, or privately traded stocks.
• Commodity trade - This market is mostly related to food, energy or metals, are an important part of everyday life.
• Commodities traditionally move in opposition to stocks, so they are used as a significant way to diversify a portfolio beyond traditional securities.
• Types of commodities in this market includes Metals like gold, silver, etc., Energy like crude oil, gasoline etc.

What are universal exchanges?

• Usually security exchanges and commodity trading are regulated by separate entities.
• By creating universal exchange SEBI has allowed the same exchange to offer products in the equity, commodity derivatives, and debt and currency segments.
• By this stock exchanges need not to set up different entities to offer commodity trading.
• Detailed guidelines are yet to be issued, but new products will only be introduced with SEBI approval.

What is the significance of this move?

• The NSE and the BSE offer equity and equity derivatives, while the MCX and the NCDEX specialise in commodity derivatives.
• This clearance will enable the BSE and the National Stock Exchange (NSE) to launch commodity derivatives trading.
• It will also enable Multi Commodity Exchange of India (MCX) and the National Commodity and Derivatives Exchange (NCDEX) to move into the equity segments.

What are prospects of Universal exchanges?

• Universal exchanges will enhance competition across all categories, thus creating deeper markets with lower spreads and exchange fees.
• It would offer greater convenience, in that traders will be able to trade all asset categories from a single account.
• It may also lead to consolidation, cross-holding norms will have to be reviewed in case mergers between exchanges appear attractive.
• Long trading hours of NSE and BSE enables traders to respond instantly to events at odd hours.
• Indian exchanges will find it easier to compete with their global counterparts and they can also present in multiple segments.

What are the challenges involved?

• Given the significant differences between commodities and equities risk management across asset classes will be a challenge and it might face implementation challenges.
• Commodity futures can involve physical delivery which require the holder to either produce the commodity or take delivery from the exchange.
• But most Indian commodity futures are cash-settled, with delivery only in gold and silver.
• Commodity exchanges will remain open for very long hours, since many commodities track global prices but stock markets are time bounded.
• If the NSE and the BSE do start offering commodity derivatives segments, they will have to keep those segments open for longer hours which needs regulation.

Source: Business Standard