Although the country is yet to formulate regulations on operation of commodities derivative market, a total of six companies are currently dealing with contracts from base and precious metals to crude oil and agri products such as corn, cotton, soybean and wheat. [break]
But due to lack of regulations and regulatory body, most of these companies are operating haphazardly without adequate capital, reserves to ensure timely payment and electronic system to match orders, says the report titled ´Commodities Derivative Market´s Concept, Present Situation, International Regulatory Practice and Nepali Context´.
Worse, many activities of these exchanges go against the principles espoused by International Organization of Securities Commission -- the global body of securities regulatory agencies considered international standard setter for securities markets.
“To regulate the sector, a directorate should be immediately established under Sebon,” says the report. “The directorate should have 30 to 35 staff and at least five departments, namely, regulation and monitoring, supervision, research and development, data analysis, and public awareness.”
The country saw its first commodities exchange in January 2007 with the establishment of Commodities and Metal Exchange Nepal. In August 2007, another commodities exchange, Mercantile Exchange Limited Nepal, was established. Since then, four more exchanges have been established in the country, while over 50 firms have submitted applications to open commodities derivate exchanges.
It is said an investment of around Rs 250 million have gone into these exchanges. These exchanges, that have employed 1,500 youths, generated a net profit of Rs 6.4 million in 2010/11 as against net loss of Rs 9.06 million recorded in 2009/10.
“Although transactions of these exchanges are growing, now many are using these platforms to promote country´s traditional agricultural products and establish international prices of these goods,” the report says. “Instead they are more focused on transaction of global commodities.”
In this regard, companies that are willing to trade up to three local agriculture products or three traditional agricultural products or up to three commodities from both groups should be allowed to establish commodities derivative exchange with a paid-up capital of Rs 100 million, the report says.
“Likewise, companies that trade up to three agricultural products and another three commercial commodities, should be allowed to open exchange with a paid-up capital of Rs 250 million, while those that want to trade up to 15 commodities under five different categories, including the category of local agricultural products, should be allowed to open the exchange with Rs 500 million,” the report says.
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