After four years of steep growth, the commodity futures business is in a consolidation mode. The year 2008 has seen some exchanges diversifying from agriculture commodities to metals and energy products to generate business due to the prevailing political sentiment against trading in agri-commodities. The tide is however turning now in favour of futures. B C Khatua, chairman of the Forward Market Commission (FMC) tells Rajesh Bhayani that his priorities include bringing back wheat, rice and pulses for trading on the futures exchange.
Do you agree with the general observation that 2008 was a year of setbacks for the FMC?
It was certainly a year where there were a lot of challenges. We started the year with a lot of hope as the ordinance amending the Forward Contract Regulation (FCR) Act was promulgated in January. But things started turning bad after that. In May, we had to suspend four more commodities from trading as the inflation pressure mounted. Things are settling down now.
The market also learnt to live with what has been happening. These setbacks have been a learning process for all. Players have realised that the absence of a futures market actually hurts the farming community as there is no other mechanism that can give price trend signals.
For example, futures trading have resumed in rubber and this has helped farmers to stop selling despite a campaign by vested interests that prices would fall. This is because futures prices are high and farmers have a definite price signal going forward. However, the absence of futures in potato forced farmers into resorting to distress sale.
Those opposing futures trade have also realised that the futures market is important and actually helps farmers.
What is the FMC’s agenda for 2009?
Our first priority is to resume futures trading in four commodities — wheat, rice, tur and urad. Since these contracts were de-listed, it can be started after a fresh notification. The second is to intensify an awareness campaign.
This is being done through meeting and educating potential players in commodity futures and providing information on prices in futures at various public places.
This project is already on and all three mainline exchanges are sharing the cost with FMC and providing quotes on their exchanges and on ticker boards placed at APMCs, bank branches etc. As part of our training initiative, IIM-Ahmadabad is sending a few students to FMC for training. Some educational institutions have also introduced commodity futures in their curriculum.
Finally, we will be focusing on improving contracts and liquidity.
When do you think futures would start in wheat and pulses?
We hope it would be sooner than expected. We will have to issue a fresh notification. If the government clears the proposal, we will issue the notification and after that the exchanges will have to take clearance from us for launching futures contracts.
Do you think FMC is suffering because of lack of powers?
Over the last five years, commodity futures trade has grown several times. It is unwise to have a regulator without powers monitoring a rapidly expanding market. The bill to amend FCR Act was introduced earlier in Parliament earlier, but could not be passed. The amendments were for strengthening the FMC by providing it with autonomy. Not having such autonomy is not desirable for the market. Further expansion of the market hinges on strengthening the regulator.
Which are the developments that are waiting to happen?
For example, the market needs more participants and the Reserve Bank of India and the finance ministry have indicated that participation of financial institutions and banks in commodity futures will be considered only after FMC is strengthened. We are ready with many regulations that can be introduced once we get the required autonomy.
Without autonomy, we are not able to hire talent despite sanctions and support services. New instruments like options and index futures also cannot be introduced unless the FCRA amendment Bill is passed. While index future is much more complex for commodities, option trading is an effective tool for hedging. The government should prioritise these issues.
Commodity future exchanges have ventured into setting up warehouses and spot exchanges. Since the businesses are inter-linked, isn’t regulation them a problem?
The issue of co-ordination needs to be addressed. There is a synergy for exchanges to be present in all these areas. In India, historically, spot commodity markets were a state subject and futures were regulated by the Center.
Parliament has passed the Warehousing Bill, though it is yet to be enacted as an Act. Commodity exchanges are using warehouses for storing goods standardized as per their contracts to be delivered when deals are settled on the exchange.
Warehouses will also be used by spot exchanges and if goods are standardized and stored, then receipts issued by warehouses for goods stored with them (in demat form) can also be traded on the exchange. Since all these activities are linked, there is a possibility of a conflict of interest if the regulators are separate for different activities.
Conflict may arise if the standard for the same group of commodities are different for trading on spot exchange and futures exchange. If spot, futures exchanges and warehouses are regulated by a single regulator, there is convergence. We have written to the government to consider a single regulator for all these activities.
