On what requires to be done at FMC

Total overhaul and restructuring of the FMC machinery is the first step that the government must consider if it is really serious of kicking off futures market in thecountry. IAS officials will not be much interested in the affairs of the FMC any better, primarily because they know that their time at FMC is only for three years, thereafter they will either be transferred or seek placements in greener pastures. This is not to blame anyone, but it is only too natural for any government official.

Non-government officials, and experts in the subject, must be inducted in the commission. If this is not done, the FMC will become like the Securities and Exchange Board of India, which instead of developing the capital market, has almost killed the primary and capital markets with excessive regulation and a total lack of expertise on the subject.

On activity within the government and the Forward Market Commission to educate officials on futures market

There is simply no activity on this front to educate concerned officials on the complex aspects of futures market and its importance. Both the Unctad and the World Bank reports have made vital recommendations that it isnecessary to educate not just the trade but even government officials. Even education of non-trade related interests, like the banks, is necessary. But there seems to be simply no activity on this front from the concerned quarters.

On what ails the commodity exchanges currently

Three main things. One, requirement of high levels of margins, two, total lack of speculation, and finally funds crunch.

The high margins impair the relationship between the spot and futures markets, which in turn impairs the utility of the futures market. Also, with high margin requirements, traders are forced to shift their positions to spot, which results in hoarding of stocks.

If there is no parallel price movement in cash/spot market with that of the futures market it will adversely affect hedging efficiencies of traders. This raises the basic risk in the futures market, which in turn increases the cost of marketing and trading in futures market further.

Excess regulations reduce liquidity in the futures marketwhich makes the market too narrow for operators.

On the quantum of funds needed to upgrade domestic commodities exchanges

If the government desires to have commodity exchanges on international lines, the requirement of funds will be very large. Most of the commodity exchanges were thriving at one time, but they are now poor because of the blanket ban on commodity futures in the country since the 1960s.

But if the government is waiting for the exchanges to have sufficient funds to reintroduce futures trading, it is putting the cart before the horse. Once futures trading is introduced, the exchanges can start getting income by levies, margins, membership fees, security deposits and the like. All this will take time, but no reason for delay in reviving futures trading.The Bangalore Stock Exchange provides a good example for meeting the funds crunch problem. This is because, the stock traders are relatively well equipped in handling futures markets. Members of the commodity exchanges should think ofjoining hands with existing stock exchanges to overcome the funds crunch. They can then even think of developing a national commodity exchange and funds will not be a problem at all.

On whether commodity exchanges should join with the National Stock Exchange

This could be a better alternative for commodity exchanges to meet the acute funds crunch they face. The commodity exchanges can provide technical expertise, while the NSE can meet the financial requirements. The NSE already has an institution to which even the financial institutions may be willing to lend funds to big brokers of commodity exchange. Currently, even if they so desire, the commodity traders may not get the requisite funds. If they join hands with recognised exchange, the traders can then operate in a big way for, their finances are taken care of.

Also, the question of attracting speculation from outside too will not be a problem. Sooner or later, commodity exchanges will have to have big brokers if they are to operate in aglobalised economy. And big brokers will not be interested in operating on the exchanges which are too small, are unable to guarantee performances of their contracts. They will be interested on exchanges which have credibility. This is one main reason why the international pepper exchange in Kochi has not picked up.

The existing commodity exchanges, despite their inherent problems, may not like this idea of joining hands with NSE, for it may disturb their ego. They fear of losing their importance. But they (the commodity exchanges) will have to do something fast in the interest of the trade and the economy as a whole. Individual interests will have to give way to national interests.

On possible loss/drawback to the economy for delays in introducing futures trading

It is difficult to quantify the loss. However, it is the economy that has to bear excessive costs. This is because the traders -- both in domestic or international trade -- who bear the price risks, put a premium on such act of bearingthe price risk more so in absence of any other modalities to cover their risks.

In agro produce, for example, traders will pay slightly less to the farmers than what the latter would have otherwise got, and charge higher from the consumers than what otherwise he would have had to pay. In absence of futures trading, there is no way for deciding on equilibrium price or what is called price discovery which normally is based on demand and supply conditions in the market.

There is no basis for spot market price fixation, nor does it have any bearing of international trends. Also, these prices have more of a speculative element, hardly known to anyone. These are therefore the costs that the economy has to bear in absence of futures trading.