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Everyone related to the field of Nepalese Capital Market is well enlightened funds. But SEBON must impose investment capital on derivatives trading
that we are in the very first step towards the development of Nepalese otherwise mutual funds will invest huge chunks of their pooled money in
Commodity Market. No doubt, all the stakeholders of the market are putting commodity trading which increases the percentage of their risk and coupled
their efforts to build good governance. But they are limiting it to the subject with providing the opportunities too. Likewise, they must allow banks to
of capital, tax, apprehension on price source, trading software, margin, hedge their currency and other risk through commodity trading. Instead of
infrastructure and educational requirements. The major stakeholders like doing trading on international platforms, regulators of banks must motivate
commodity exchange, clearing house, brokers must keep their eye open to them to trade on local platforms. For that, commodity market regulators
the information needs of the traders and must inform to them in a way it is must think of incorporating a strong regulators framework to precede the
not misleading. opening of Nepalese commodity derivatives market. Nepalese commodity
Apart from these requirements, the market regulation act must take a serious market ecosystem must conduct activities to promote the interest of the
consideration towards the issues like trading mechanism. Regulation must hedgers i.e. gold dealers/ jewelry makers, manufacturers of copper products,
clearly address the subject of financial crime and money laundering issue. exporters of wool related products, exporters of cardamom, ginger etc.
The EPL price (i.e. External Price Link) must be clearly visible while acting Therefore, limiting the broadening area of the derivatives market is not
through the market making module. Market making module is one of the acceptable on any ground.
scientific models to match all the client’s position which helps to provide
the huge liquidity in the market. Regulators must motivate all the exchanges This new business model
to opt for the trading mechanism through this MM module. The market which was incorporated by
price carries the EPL price along with the spread from the local MMs, MEX Nepal in 2013 provides
thereby the market price factors the local market demand and supply too. the possibility of client-to-
This new business model which was incorporated by MEX Nepal in 2013
provides the possibility of client-to-client matching, market maker-to-client client matching, market
matching, market maker-to-market maker matching and market maker-to- maker-to-client matching,
clearinghouse matching which helps to rule out the probability of trading market maker-to-market
defaults. For derivative markets, price discovery is generated through two maker matching and market
different types of market system. A quote-driven market is that form of maker-to-clearinghouse
market where prices are determined by the designated market maker on matching which helps to rule
dealers, so this is also called price-driven market. At the same time, the out the probability of trading
order-driven market is one market that buy and sell orders are placed in the
trading system result in the best bid and lower offer price. So this principal defaults.
must be adopted by all the exchanges to their different types of commodity.
For international commodities, we must adopt the price driven EPL market Neerab Pudasaini
through respective MMs and for pure local commodities including potato, (Mr. Pudasaini had completed MBA in HR from IAU. He is currently working
cardamom and ginger, we must select the order-driven market through MMs. in the capacity of Director of Business at Himalayan Clearing Corporation
The derivative market must assure the zero counterparty risk. So to minimize Pvt. Ltd., a Clearing Member affiliated with Mercantile Exchange Nepal
the risk of clearinghouse and MMs, there must be a fair practice of collecting Limited. He is a regular writer on subjects related to social issues,
the various margins like initial margin, variation margin, intra-day margin, management, economy & capital market including Nepalese Commodity
maintenance margin etc. At the same time, such margins must be calculated Derivatives Market. He can be reached at directorbiz@hclearcorp.com)
by the standard margin calculation system like Standard Portfolio Analysis
of Risk (SPAN). SPAN is a computer system devised by Chicago Mercantile
Exchange. In Nepal, MEX Nepal is calculating its initial margin in line with
SPAN system. Likewise, the process of MTM (Mark-to-Market) must be
standard and its time must be fixed for all the existing exchanges.
The supreme body of regulators must be ready to address the grievances
of all the stakeholders including traders. They must play a vital role in
eradicating the prevailing manipulations or speculative abuses. For this,
they must audit the software system of all the trading system. As well as
they must show the dynamic role. They must be ready to amend the trading
system in a timely manner which helps to provide the expansion of trading
in other numerous areas of derivatives like option, stock option, NEPSE
future contracts, swap etc. Therefore, regulators must not only be concerned
with the subjects of issuing licenses or collecting revenue. They must shed a
light on the core factors like clearing and pricing mechanism, warehousing,
margin system, hedging, local products trading and other various benefits
which can help to boost the economics activities through derivatives trading.
Subjects of limiting a broader area, like derivatives must not be trapped
in consideration of the limited knowledge of the concerned authorities.
Therefore, it must be open in all areas of the capital market. The concerned
authorities must allow commodity derivative trading to all the Nepalese
banks, mutual funds, manufacturing institutions too i.e. those who are keen
to hedge their risks. Regulators must allow the portfolio horizons of mutual

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