The year 2007 was disappointing for commodity futures and the new year may be worse if the government doesn't pull up its socks in time. |
Falling volumes, absence of any initiatives to develop the market and a lack of clarity on many policy related issues have dampened the enthusiasm of players, intermediaries and even exchanges. |
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One of the important decisions being awaited include giving more powers to the Forward Markets Commission, or FMC, the market regulator. |
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The parliamentary committee has recommended more powers to FMC, over those originally suggested by the government. The bill to amend the Forward Contract Regulation Act is pending and needs to be reintroduced in the parliament with changes incorporating the parliamentary committee's recommendations. |
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"Since the market has already grown, giving more powers to the regulator wouldn't hurt anyone's interest. This should be done with a sense of urgency," said FMC Chairman B C Khatua. |
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The bill includes provisions for index futures and options trading, among others, which are important tools for hedging. The commodity futures market will not grow until hedgers take active part. Equity derivatives index futures alone generate more volumes than spot and all stock futures put together. |
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"Liquidity is important for hedging and overall growth of the market. More players, like banks and funds, should be allowed and options trading should be permitted as soon as possible," said Sudip Bandopadhyay, director and CEO, Reliance Money. |
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The market is also awaiting the Abhijit Sen committee report. The committee was set up in March to recommend measures to increase participation of farmers in commodity futures and to study whether commodity futures result in price rises. The report was due in May but is pending submission. |
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However, if one expects the report to convince the government to allow futures in commodities that were banned a year ago, they would be in for some disappointment. |
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The committee is not going to recommend on the issue but discuss infrastructure related issues like popularising the use of warehouses and setting up spot exchanges, both of which are time consuming as the warehouse regulator is yet to be set up and state governments are not wholeheartedly supporting spot exchanges. However, they are important for farmer participation in hedging. |
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Many members of exchanges are anticipating the participation of banks and mutual in commodity futures. Since these players have not been allowed so far, new instruments, like options, index futures, have not been introduced. |
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Many brokerage houses are deserting commodity futures due to the same issues. Some of them have closed the commodity desk, discontinued research and many of them are facing a staff exodus as people are migrating to equity broking. |
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Despite more than a year of indecisiveness, foreign investment guidelines for commodity exchanges are yet to reach the Cabinet. However, MCX and NCDEX, the principal exchanges, are selling stakes to foreign investors, though the foreign direct investment (FDI) guidelines are still to be announced by the government. |
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More than foreign institutional investors, investment from exchanges abroad will be crucial as they can bring new technologies, risk management systems and more business opportunities. Clear FDI guidelines can make this possible. |
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A lack of interest on the part of the government and diminishing fortunes have strengthened the opposition to commodity futures from affected and vested interest groups. |
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If the government wants to revive the market's fortunes, it will have to quickly implement the above mentioned measures. |
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WHAT COMEXES NEED FOR A TURNAROUND |
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Participations of MFs and banks Resumption of futures in delisted commodities Submission of Sen panel report Clear guidelines for foreign investment More powers to FMC Introduction of options and index futures Full- fledged commissioning of national spot exchanges Setting up of warehouse regulator with autonomy |
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