 "No proposal to delist any commodity from futures: Ramesh Abhishek")
Amid the talk of a merger between the Securities and Exchange Board of India (Sebi) and the Forwards Markets Commission (FMC) gaining traction in the past few weeks, FMC Chairman Ramesh Abhishek tells Rajesh Bhayani a few issues have to first be addressed. Edited excerpts:
There is fear that futures trading in essential commodities might be discontinued.
There is no proposal to delist futures trading in any commodity. In fact, the integration of futures markets with spot markets is much better today, owing to a number of measures taken by FMC in the last two years. These include better-designed contracts to suit the requirements of physical market participants, incentives for hedgers, a staggered delivery system and a robust monitoring and surveillance system. Consequently, price discovery has improved. Volatility has declined due to the fact that the supply of agricultural produce is better spread through the year.
Does the market need more awareness among companies and participants such as banks to help hedge risks, as is the case with currency?
The commission has been carrying out awareness programmes among potential hedgers for many years. But the response is tepid. If physical market participants are not hedging their price risks, they are, in effect, speculating. We have requested the department of financial services in the ministry of finance to ensure banks insist borrowers hedge commodity price risks. This will bring more physical market participants to the commodity futures platform. We have also requested Sebi to ask listed companies to disclose their commodity price risk (if any) and the steps they have taken to mitigate that risk in their annual reports. These measures could, in a big way, bring hedgers to commodities futures.
Talk of a merger of FMC and Sebi have started gaining traction.
Last year, the Financial Sector Legislative Reforms Commission had examined all the issues related to the financial sector and given a detailed report. It requires serious consideration. There are several common points between securities and commodities markets---similar exchanges, many common members, similar clientele and near-similar risk-management practices. But the underlying products are completely different. In physical commodity markets, issues such as warehousing, warehouse receipt financing and transparent price discovery mechanisms are very critical. While taking a decision on this matter, all these issues have to be considered.
There have been discussions on having a common national commodities market. Is that possible?
There has to be a national market for commodities, which will ensure there is no restriction on the movement of commodities inside a state or between states. Once a uniform Goods and Services Tax is in place, tax issues, essential to create a national commodities market, will also be addressed. Another issue is of that of Agriculture Produce Market Committees (APMCs). We believe these should act as service providers; these shouldn’t be abolished. Anyone who buys or sells commodities in an APMC should pay fees, but there should not be any mandi fees or charges for buying or selling outside the APMC. Anyone who wants to set up a commodity market outside APMCs should be allowed to do so, without any restriction. These will help develop the agri commodities market.
Do you think the national market or spot markets should be regulated?
Before that, one has to identify the likely risks and consumer-protection issues that have to be addressed through regulation, as well as the relevant activities that have to be regulated. Only after identifying the need for regulation can the issue be addressed. In any case, since intra-state trade is mostly in the state domain, it might be difficult to enact a central law for this.
What new products could be brought to the futures platform?
We are considering introducing delivery-based forward contracts in exchanges. To encourage delivery-based transactions on exchanges, the commission has taken several proactive measures to lower transaction costs and improve the quality of warehousing. We are further looking into strengthening such measures.
There is fear that futures trading in essential commodities might be discontinued.
There is no proposal to delist futures trading in any commodity. In fact, the integration of futures markets with spot markets is much better today, owing to a number of measures taken by FMC in the last two years. These include better-designed contracts to suit the requirements of physical market participants, incentives for hedgers, a staggered delivery system and a robust monitoring and surveillance system. Consequently, price discovery has improved. Volatility has declined due to the fact that the supply of agricultural produce is better spread through the year.
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We are conscious that close and real-time monitoring and surveillance is required to ensure unscrupulous persons are not allowed to operate and there is no excessive speculation. This is even more important against the backdrop of the possibility of a sub-normal monsoon, as likely shortages in the physical market could lead to misuse of the futures market for price distortions.
Does the market need more awareness among companies and participants such as banks to help hedge risks, as is the case with currency?
The commission has been carrying out awareness programmes among potential hedgers for many years. But the response is tepid. If physical market participants are not hedging their price risks, they are, in effect, speculating. We have requested the department of financial services in the ministry of finance to ensure banks insist borrowers hedge commodity price risks. This will bring more physical market participants to the commodity futures platform. We have also requested Sebi to ask listed companies to disclose their commodity price risk (if any) and the steps they have taken to mitigate that risk in their annual reports. These measures could, in a big way, bring hedgers to commodities futures.
Talk of a merger of FMC and Sebi have started gaining traction.
Last year, the Financial Sector Legislative Reforms Commission had examined all the issues related to the financial sector and given a detailed report. It requires serious consideration. There are several common points between securities and commodities markets---similar exchanges, many common members, similar clientele and near-similar risk-management practices. But the underlying products are completely different. In physical commodity markets, issues such as warehousing, warehouse receipt financing and transparent price discovery mechanisms are very critical. While taking a decision on this matter, all these issues have to be considered.
There have been discussions on having a common national commodities market. Is that possible?
There has to be a national market for commodities, which will ensure there is no restriction on the movement of commodities inside a state or between states. Once a uniform Goods and Services Tax is in place, tax issues, essential to create a national commodities market, will also be addressed. Another issue is of that of Agriculture Produce Market Committees (APMCs). We believe these should act as service providers; these shouldn’t be abolished. Anyone who buys or sells commodities in an APMC should pay fees, but there should not be any mandi fees or charges for buying or selling outside the APMC. Anyone who wants to set up a commodity market outside APMCs should be allowed to do so, without any restriction. These will help develop the agri commodities market.
Do you think the national market or spot markets should be regulated?
Before that, one has to identify the likely risks and consumer-protection issues that have to be addressed through regulation, as well as the relevant activities that have to be regulated. Only after identifying the need for regulation can the issue be addressed. In any case, since intra-state trade is mostly in the state domain, it might be difficult to enact a central law for this.
What new products could be brought to the futures platform?
We are considering introducing delivery-based forward contracts in exchanges. To encourage delivery-based transactions on exchanges, the commission has taken several proactive measures to lower transaction costs and improve the quality of warehousing. We are further looking into strengthening such measures.