Do we need a fourth comex?

MARKET WATCH

Recently, MMTC and Indiabulls Financial Services had applied to the Forward Markets Commission (FMC) for setting up a commodity futures exchange.

The commodity market regulator is now examining the proposal. Yashvant Bhave, secretary, ministry of consumer affairs, said the government would decide on the application after FMC gives its views.

The proposal is sensitive as it raises some fundamental issues regarding demutualisation. More significant is the question whether there is a need for a new exchange. Three multi commodity exchanges "" MCX, NCDEX and NMCE "" are at present active and have completed almost three years.

The current year has not been good for them as volumes have shown a negative growth. This is because sequential reforms related to commodity futures have not taken place. On the contrary, early this year, the government delisted futures contracts of wheat, rice and two pulses.

Moreover, the hands of the commodity market regulator has been tied because of a indecisive political environment. The amendment of the Forward Contract Regulation Act is expected to provide more powers and autonomy for FMC.

To popularise hedging, allowing options trading is crucial. This is now awaiting the amendment of the act. Rather than giving the go ahead for a fourth exchange, this should top the government's priority list.

The attempt by some of the regional single commodity exchanges to form a fourth exchange have also not succeeded. The fate of many regional commodity exchanges is, meanwhile, hanging in balance.

Creating a conducive environment for them is more important than increasing competition by hurriedly approving the proposal for the MMTC-Indiabulls combine.

Volumes in existing exchanges have fallen, making it difficult for many members to sustain their businesses. The participation of banks, FDI guidelines, etc, are other issues that require the urgent attention of the government.

Other fundamental issues relate to whether a broker "" Indiabulls "" can be allowed to form an exchange? Corporates directly trading in commodities should not be allowed to run a exchange as it would be a violation of the basic principles of demutualisation.

Ownership, trading rights and interest should be kept separate and must not converge. MMTC has been a big importer of commodities. It also hedges on exchanges. And hence should not run the exchange itself.

When queried, FMC Chairman B C Khatua said, "We are examining the application for the fourth exchange from the perspective of need and whether a broker or a market player can be allowed to form an exchange or not." FMC is expected to complete the review in a few weeks.

If the volumes do not go up, the market will get fragmented as more members rush for the same pie. While the history of stock markets is more than a century old in the country, there are only two exchanges till now.

The process of delivery in agricultural commodities is still fraught with difficulties. In the current year, futures trading was banned in four commodities, and with edible oil prices going up, chances are that edible oil futures may also be banned by the government.

On the political front, many political parties are still not convinced whether the commodity futures market will help the farmers. Dr Abhijeet Sen Committee is also yet to submit its report.

The future of commodity exchanges and the long-term government policy will very much depend on this report. The linkages between the physical market and the futures market are yet to be strengthened.

Given these circumstances, the regulator should concentrate more on sorting out such basic issues faced by commodity markets, rather than allowing new national level exchanges to be set up.

New exchanges will not be able to solve the existing problems. Instead they will magnify the same. It is the time for consolidation and not aggressive expansion.