FMC mulls measures to boost volumes

Stagnant volumes in commodity futures may get some support if the Forward Market Commission's (FMC) proposal to permit state agencies such as Nafed and CCI, among others, to become market-makers materialises.

The commodities market regulator is considering an active role for state agencies in the futures trade to bring in more liquidity into the market. The FMC is also mulling standardisation of contracts and fungibility of stocks in the exchanges' warehouses.

"Commodity futures will be more liquid if state agencies start market-making on the exchanges," said FMC Chairman B C Khatua.

Market-makers provide two-way quotes, both buy and sell, and bring about liquidity into the market. Currently, volumes in commodity futures are shrinking as many contracts turn illiquid.

Volumes in commodity futures of the three main exchanges have fallen in the first six months of the current financial year (from April till date) by 18.35 per cent. In the previous financial year (2006-07), they rose by around 70 per cent. A decline in the exchanges' turnover is alarming and measures are afoot to infuse liquidity by attract hedgers to the market.

If the state agencies start market-making, liquidity will improve. They can hedge the risks in the physical market by buying and selling in the futures market.

According to an executive of a national exchange, Nafed has done some black peppers deals, while APMarkfed was active in turmeric and maize. Hafed (Haryana marketing federation) buys commodities from farmers to sell them in the open market. It also hedges against risks on futures exchanges, makes higher profit and shares it with farmers.

MPfed (Madhya Pradesh) is active in chana and Rajfed (Rajashan) is a significant player in oilseeds. However, their activities on the exchanges have not been consistent.

The FMC is considering liberal position limits for hedgers and has recently come out with norms for cooperatives. A federation of cooperatives is a single entity, but as they represent a number of units, the FMC has liberalised position limits and other norms for them.