Comex uncertainties

The Forward Markets Commission (FMC), which is supposed to promote competitive trading on the commodity futures exchanges, has taken the strange step of advising retail investors to stay away from these exchanges. What is surprising also is that this has come at a time when the business of commodity exchange has dipped due to negative policy statements and adverse government actions, such as the ban on futures trading in foodgrains and pulses. As it is, farmers are not yet adequately linked with this mode of trading, and if the FMC's suggestion works and other smaller players also shun this market, there is every danger of the commodity exchanges turning into resource-rich people's casinos. That would make futures trading susceptible to speculative attacks and price manipulation, thereby endangering both price discovery and price risk management.

The thought behind the FMC suggestion seems to be the realisation by the Commission of its own inability to safeguard small investors' interests. This is so largely because the FMC, in its present state, is not adequately empowered to put in place a regulatory framework that is competent enough to check excessive speculation and price manipulation. Of course, such empowerment is sought to be provided to it by amending the Forward Contracts (regulation) Act of 1952. But the framing of the Bill for this purpose has taken inordinately long. The Bill is awaited also because it is expected to provide for the introduction of options trading in commodities, which would be of real benefit to the farmers, besides allowing futures trading in intangibles like a market index and weather. What is also hoped for, even if without much real chance of its realisation, is that the amended statute will open up this sector for direct foreign investment in the commodity exchanges and participation of mutual funds, banks and other financial institutions in commodity futures trading. Though the present government may find it politically inconvenient to go that far, the modified law should have the enabling provisions for the introduction of these measures at a time when the political and economic environment is conducive for their introduction.

However, what is most urgently required is to associate more small players (commodity traders), the farmers (producers of agro-commodities) and the actual end-users with the commodity exchanges. As it is, farmers are unable to participate in this trading because of the large minimum unit of trading (in multiples of 100 quintals or truck-loads), high margins (around 10 per cent, against the global norm of 2 to 3 per cent) and mandatory requirement of D-Mat bank accounts and PAN numbers. While these are issues for policy planners and the regulator to take care of, the commodity exchanges, on their part, should promote the concept of aggregators who can participate in trading on behalf of groups of farmers. Also needed urgently is a lifting of the uncalled-for ban on futures trading in wheat, rice and pulses. This hinges largely on the much-awaited report of the Abhijit Sen committee, which is going into the issue of whether futures trading in these items contributed to their price increase last year. If the Sen panel disfavours futures trading in the major agricultural commodities, including foodgrains, the very purpose of re-introducing commodity futures after a prolonged ban that lasted of over four decades would be defeated.