Commodities futures trading
Sharad Mistry
Securities and commodities trading business in India are currently passing through the most crucial phase of metamorphosis. Introduction of derivatives in these markets, being considered at the highest policy-making levels, is aimed at introducing the missing link between these markets, including debt and bullion.Officials from both finance and food and civil supplies ministry are currently debating the pros and cons of introducing futures in the Indian markets -- index futures in the capital markets and commodities futures in commodities market. Once introduced, these would completely change the existing concept of these markets. Even as SEBI is busy grappling with the recommendations of the LC Gupta committee on derivatives for capital markets -- including MG Damani's dissent note kept under wraps -- the Forward Markets Commission (FMC) is busy preparing new ways to trade commodities. A tough job for both SEBI chairman DR Mehta and FMC chairman Vijay K Aggrawal. There are two questions that need to be
cleared at the earliest before commodity futures are introduced. One, the mode of trading commodity futures -- through open outcry or through automated trading as in the securities market. Two, long-term registration of some of the prominent commodity exchanges. Currently, they are to renew their registration periodically from the FMC. The FMC's meeting (in Mumbai on January 14-15) of representatives of over 60 different commodity exchanges in the country under its domain, is expected to deliberate these and other related issues that hopefully will set the ball rolling to bring in far reaching changes in the domestic commodities trading. As regards the mode of trading, commodity traders feel futures should be traded through age-old tested practice of open out-cry in their trading ring. It is too premature to usher in the costly, rather alien, system of automated trading ring in the air. The FMC and the concerned ministry officials feel otherwise, more so because of having stricter regulations. Internationalexperience, in this regard gives a different picture. One, the Singapore International Monetary Exchange (SIMEX), one of the largest Asian financial futures exchange offering 19 derivative products to trade including financial and commodity futures and options, has found the open outcry system is more suitable. On an average, Simex has a monthly volume of around 1.5 million and average month-end open interest of over $7.5 million. Simex's vice president & head (business development department) Rama Pillai during his recent visit to Mumbai, had maintained that more than 60 per cent of Simex business is through local traders who prefer open outcry system of trading. Automated trading, is relatively less. Two, three of the largest US futures exchanges continue to raise concerns with federal regulators over a proposal to create America's first electronic commodities exchange -- FutureCom -- which will initially trade live cattle futures and options. Three, even a recently published World Bank report on
Indian commodity markets, favours open outcry trading. Says the report: Open outcry is the most efficient system for India even for new contracts. In most instances, the physical facilities already exist alongwith the corresponding concentration of traders and brokers. Moreover the scope of increasing the number of floor brokers remain large. It would be erroneous to select an electronic trading system only because of its high tech image. Therefore, the commodity futures could first be permitted to be traded through open outcry in the exchange's trading rings, before they can switch over to fully automated trading through Internet, involving high cost. Given the Indian experience in handling securities training, it is necessary for regulators that they have a tough hand on regulation while also not killing the trading spirits of the locals who not only prefer open outcry system but also provide the vital volumes on the exchange. At a later date, a hybrid trading system too could be introduced, whereafter
the traders would themselves decide which mode is more suitable. Of course, this means more tighter vigilance for the regulators, which of course, needs to be beefed up before introducing the new trading products in the country.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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