According to an order by the Forward Markets Commission (FMC), to check speculation, trading in December 1998, February 1999 and April 1999 deliveries would be subject to a three-stage regulatory measure.

First, trading 135 per cent above or 65 per cent below the benchmark price will be prohibited. The benchmark price is arrived at by calculating the average of the opening, highest, lowest and closing prices of the contracts traded on the first five days.

Second, the limit on open positions for each category of members is fixed and if exceeds up to a specified additional limit, the member will have to pay ordinary margins on such additional positions at specified rates.

Third, the members will pay margins at specific rates when prices rise above the benchmark price up to 35 per cent above which trading would be suspended as mentioned earlier.

"The restrictions on contracts tradingmay be too many" feels N Ramachandran of Foretell Capital Trust - consultant for cotton futures trading. There is no historical data available to fall back on to decide on actual corrective measures and it is better to start somewhere - even if it seems a little too cautious at the outset, observe and modify the limits, margins and the rates, adds Ramachandran. It is also quite possible that the contracts may turn into a knot and could break.

Consider a situation like this. If the benchmark price is fixed at Rs 5,000, the trading has to be within the range of Rs 3,250 (65 per cent of Rs 5,000) and Rs 6,750 (135 per cent of Rs 5,000) lest it gets suspended. Suppose by the time of delivery, the spot price scales up to Rs 7,500 or so. Why would a seller give delivery at a price below Rs 6,750 and in case the price drops to Rs 2,500, why would a buyer take a delivery at a price above Rs 3,250?"The deals would be settled in the end around the delivery period since mostly these contracts would not be fordelivery," says an EICA spokesperson.During mock trading last week, some 50-100 contracts were traded at around Rs 5,050 to Rs 5,150 per quintal. However, only a dozen odd applications for clearing house entitled memberships were received by the Eastern Indian Cotton Association (EICA, which expects some 30-40 applications by the time futures trading actually resumes this month-end.

This indicates that most of the 400 existing EICA members may opt for a member not registered (MNR) category as they do not have to pay either the deposit or registration fees. However, MNRs can participate in futures trading through members of the clearing house registered in other categories and have paid deposits ranging from Rs 1 lakh to Rs 30 lakh.

In other words, at this stage most EICA members would not risk investing Rs 1 lakh to Rs 30 lakh in deposits but would rather tag along with the other registered members who will take them as their clients. This means that the registered member will have to bear the risk inthe event of a client's default.Observers opine that it would be difficult to predict how successful futures trading in cotton would actually be. An EICA spokesperson commented that problems would surface only after trading begins and only then would be possible to take corrective measures.