Earlier, the secretary had flagged off the mock-trading in cotton futures around mid-October 1998 and encouraged participants to take advantage of the facilities set up at the exchange.

The government is keen to start futures trading in commodities which exhibit volatile patterns in prices. Cotton, being a seasonal crop, suffers from glut and shortage situations and resultant price fluctuation. This makes cotton-related businesses risky.

To allow price risk management, the government granted permission to the East India Cotton Association (EICA) to conduct futures trading in cotton. The cotton futures prices, which will be established by the open outcry system among the participants reflecting the latest information about supply and demand, can be benchmark for the spot/ready market.

The possiblity to hedge price riskthrough the futures contract will allow farmers to plan cultivation of cotton. It can also help kapas processors, textile manufacturers, exporters and other market functionaries to manage price risk associated with their purchases and inventories of cotton and cotton based products. It can be used by cotton yarn and textiles manufacturers to have an efficient capital management. The need to maintain large inventory of cotton to safeguard against the price fluctuations can be greatly minimised.

The contract would be only for 26 mm staple length with a tenderable range of 24 to 29 mm with maximum permissible fluctuation of Rs 150 per quintal during any trading day. There would be clearing house entitled members (CHEMs) which would include institutional members, clearing members, composite trading members and clearing-cum-trading members. Other members would include trading members, brokers, registered non-members and memebers not registered.

There will be two types of margins. Ordinary margin will bepayable by CHEM when the open position exceeds the prescribed free limit. Special margin will be payable when the price rises above or falls below the benchmark price by more than specific levels.

For the begining, the clearing house for futures trading will be managed by the Clearing House Committee.