The Forward Markets Commission (FMC) says it will not allow permission for new contracts without a satisfactory linkage with the spot market.
On the sidelines of a seminar here, FMC chairman B C Khatua said, “Settlement of a futures contract will be impossible without its linkage with the spot market. Hence, granting permission to such a contract will not be possible until the commodity markets regulator is satisfied with the contract’s co-relation with the spot market.”
The FMC is eagerly awaiting the amendments to the The Forward Contracts (Regulation) Act to come through, for getting a free hand to regulate the commodities futures market efficiently.
This stand of FMC would affect the Indiabulls-MMTC promoted Indian Commodity Exchange (ICEX), which has been trying to launch iron ore contracts for several months. “We have asked ICEX to prove its linkage with the spot market locally or internationally for final regulatory approval to the iron ore contract. It depends upon the exchange, how soon they establish the spot market correlation and satisfy FMC to commence futures trading in this contract,” said Khatua.
ICEX is in the process of a tie-up with a global iron ore price setter to link the futures market price for settlement. According to market sources, ICEX is in preliminary discussion with Metal Bulletin, the London-based leading trade publication, to help establish a linkage between the spot price published in the bi-weekly edition with official price to be traded on ICEX. So far, the ore price quoted by Metal Bulletin is taken as the benchmark by the global trade fraternity but hasn’t been officially linked with any futures prices for settling the contract. No official contract is executed at this price.
The proposed tie-up is also likely to include daily price pooling to prove price differences between spot and futures markets. Currently, iron ore futures contracts are traded actively on the Singapore Mercantile Exchange. Iron ore is mainly traded in the domestic spot market on mutual understanding.
The FMC has so far granted permission to 110 commodities that can be traded on a derivatives exchange platform. Regional and national commodity exchanges are allowed to launch futures trading in these contracts for participants to hedge their risk. Of these, hardly 35-40 commodities are reasonably liquid on all commodity exchanges put together. Notably, contracts of hardly a dozen commodities generate a little over 6per cent of volume and turnover on exchange platform.
New commodity exchanges, including those recently established and in the process of obtaining licences, have tried to launch contracts not listed by the regulator. Without specifying the names of commodities that are not listed and exchanges willing to introduce these, Khatua said, “There could be several others in the fray.”
