HUGE POTENTIAL FOR FURTHER GROWTH OF FUTURES MARKET; A DEVELOPED MARKET WILL BENEFIT THE ECONOMY
PAUL JOSEPH| PRINCIPAL ADVISER, MCX STOCK EXCHANGE A strong regulatory framework is needed
THE FUTURES MARKETS HELP FARMERS IN taking correct decisions in regard to the crops to be sown and sale of the crops. The farmers can also bargain for more remunerative prices for their produce based on their knowledge of futures prices. Another benefit of the futures market is that it allows farmers, other producers, processors, merchandisers, exporters and others to hedge the price risks at a small cost. Futures markets enable a person who desires less risk (the hedger) to shift risk to another person (the speculator), who is willing to accept the risk in exchange for an expected profit. Futures markets also enable hedgers with opposite positions in the market to trade with each other. Similarly, speculators with opposing views regarding price movement in the future also trade with each other in the futures market. By performing the functions of price discovery and price risk management in an efficient and orderly manner, futures markets contribute to the growth of the economy.
Under the Constitution of India, "stock exchanges and futures
markets" were placed in the Union List. Recognising the need for a proper regulatory framework for futures trading in commodities at the national level, the Forward Contracts (Regulation) Act, 1952 was enacted. This Act also provided for the establishment of the Forward Markets Commission (FMC) as the Regulator of the commodities futures market. FMC was established in Mumbai in 1953.
Commodity futures markets revived from a state of stagnation thanks to the policy action based on the reports of the Khusro Committee (1980) and the Kabra Committee (1994). The government allowed futures trading in all commodities in 2003 and recognised three nationallevel commodity exchanges: NMCE, MCX and NCDEX. After the commencement of trading in these national-level exchanges and as a consequence of the developmental programmes and policies of the government and FMC, the futures market has grown substantially during the past five years. The potential for further growth of the futures market is huge. In this context, it is imperative that FMC is strengthened and made autonomous on the pattern of SEBI. Simultaneously, reforms in the physical markets are urgently required for creating a single national-level market.
The commencement of trading in currency derivatives during the last year in three nationallevel stock exchanges is a significant step in the direction of further development of futures market. The approval given by the regulators for trading in currency derivatives is a recognition of the benefits flowing from such
trading to commerce and industry, which are exposed to foreign exchange risks, in particular and the economy in general.
The efficacy of the futures markets to deliver benefits to the economy can be enhanced through a strong regulatory framework, widespread dissemination of futures and spot prices all over the country and education, training and awareness programmes for the various stakeholders, particularly the farmers.
(The author belonged to the Indian Economic Service and recently retired as Principal Adviser, Planning Commission. Views are personal)
THE FUTURES MARKETS HELP FARMERS IN taking correct decisions in regard to the crops to be sown and sale of the crops. The farmers can also bargain for more remunerative prices for their produce based on their knowledge of futures prices. Another benefit of the futures market is that it allows farmers, other producers, processors, merchandisers, exporters and others to hedge the price risks at a small cost. Futures markets enable a person who desires less risk (the hedger) to shift risk to another person (the speculator), who is willing to accept the risk in exchange for an expected profit. Futures markets also enable hedgers with opposite positions in the market to trade with each other. Similarly, speculators with opposing views regarding price movement in the future also trade with each other in the futures market. By performing the functions of price discovery and price risk management in an efficient and orderly manner, futures markets contribute to the growth of the economy.
Under the Constitution of India, "stock exchanges and futures
markets" were placed in the Union List. Recognising the need for a proper regulatory framework for futures trading in commodities at the national level, the Forward Contracts (Regulation) Act, 1952 was enacted. This Act also provided for the establishment of the Forward Markets Commission (FMC) as the Regulator of the commodities futures market. FMC was established in Mumbai in 1953.
Commodity futures markets revived from a state of stagnation thanks to the policy action based on the reports of the Khusro Committee (1980) and the Kabra Committee (1994). The government allowed futures trading in all commodities in 2003 and recognised three nationallevel commodity exchanges: NMCE, MCX and NCDEX. After the commencement of trading in these national-level exchanges and as a consequence of the developmental programmes and policies of the government and FMC, the futures market has grown substantially during the past five years. The potential for further growth of the futures market is huge. In this context, it is imperative that FMC is strengthened and made autonomous on the pattern of SEBI. Simultaneously, reforms in the physical markets are urgently required for creating a single national-level market.
The commencement of trading in currency derivatives during the last year in three nationallevel stock exchanges is a significant step in the direction of further development of futures market. The approval given by the regulators for trading in currency derivatives is a recognition of the benefits flowing from such
trading to commerce and industry, which are exposed to foreign exchange risks, in particular and the economy in general.
The efficacy of the futures markets to deliver benefits to the economy can be enhanced through a strong regulatory framework, widespread dissemination of futures and spot prices all over the country and education, training and awareness programmes for the various stakeholders, particularly the farmers.
(The author belonged to the Indian Economic Service and recently retired as Principal Adviser, Planning Commission. Views are personal)
HIRANYAVA BHADRA| DIRECTOR, KPMG Efficiency of spot markets is critical
INDIA, AMONG THE TOP FIVE PRODUCERS of most of the agricultural commodities and a leading consumer of bullion and energy products, would immensely benefit from a robust commodity futures market. While the commodity derivatives markets have been in existence in the country for a while now, the gradual withdrawal of prohibition on futures trading since 2003 has paved way for the development of new exchanges and adoption of modern technologies and international practices. The agricultural commodities dominated the futures trading market in the initial years, bullion and metals have overtaken in terms of volumes post 2006-07. Future may bring to focus energy and electricitysector-oriented products.
This period also witnessed the de-listing of a few agriculture commodities following a popular sentiment - like in many developed markets - that excessive participation of speculators and traders in the futures trading markets was causing unjustified price increases in some of the essential commodities. Studies remain inconclusive on the co-relation between the introduction of futures market and the price rise. However, most have recognised a few potential risks and shortcomings that the futures market, especially for agricultural commodities, poses in the Indian context.
The efficiency of the underlying spot markets is critical to efficient functioning of futures market. At present, many agriculture spot markets in India are fragmented with poor warehousing and connectivity infrastructure, leading to lesser transparency and hence inefficient price discovery and risk sharing mechanisms. The onset of electronic exchanges and initiatives in the areas of warehouse receipts and commodity finance are steps in the right direction. Implementation of the Model APMC Act and the Warehousing Act needs to be expedited in co-ordination with multiple stakeholders.
Limited direct participation by farmers in the future markets has resulted in the potential benefits being restricted to traders, large corporates and speculators. Attention would need to be given to complex contract designs, lack of access to price information, restricted credit access, etc. that have limited farmers' participation.
Studies have shown that the disconnect between the contract designs and needs of physical commodity holders has resulted in significant basis risk. This can become a limiting factor for market participants seeking to manage risks through futures market. This may have resulted in market being skewed towards speculative trading and greater disconnect between the futures price and the underlying commodities' demand-supply dynamics. Better contract designs, greater efforts to ensure communication of prices to farmers, enabling framework for direct farmer participation through aggregating bodies/ cooperatives and bank support for commodity financing would be critical for greater efficiencies.
The efficiency of futures market for a commodity which operates under highly regulated/controlled scenario is also questionable.
INDIA, AMONG THE TOP FIVE PRODUCERS of most of the agricultural commodities and a leading consumer of bullion and energy products, would immensely benefit from a robust commodity futures market. While the commodity derivatives markets have been in existence in the country for a while now, the gradual withdrawal of prohibition on futures trading since 2003 has paved way for the development of new exchanges and adoption of modern technologies and international practices. The agricultural commodities dominated the futures trading market in the initial years, bullion and metals have overtaken in terms of volumes post 2006-07. Future may bring to focus energy and electricitysector-oriented products.
This period also witnessed the de-listing of a few agriculture commodities following a popular sentiment - like in many developed markets - that excessive participation of speculators and traders in the futures trading markets was causing unjustified price increases in some of the essential commodities. Studies remain inconclusive on the co-relation between the introduction of futures market and the price rise. However, most have recognised a few potential risks and shortcomings that the futures market, especially for agricultural commodities, poses in the Indian context.
The efficiency of the underlying spot markets is critical to efficient functioning of futures market. At present, many agriculture spot markets in India are fragmented with poor warehousing and connectivity infrastructure, leading to lesser transparency and hence inefficient price discovery and risk sharing mechanisms. The onset of electronic exchanges and initiatives in the areas of warehouse receipts and commodity finance are steps in the right direction. Implementation of the Model APMC Act and the Warehousing Act needs to be expedited in co-ordination with multiple stakeholders.
Limited direct participation by farmers in the future markets has resulted in the potential benefits being restricted to traders, large corporates and speculators. Attention would need to be given to complex contract designs, lack of access to price information, restricted credit access, etc. that have limited farmers' participation.
Studies have shown that the disconnect between the contract designs and needs of physical commodity holders has resulted in significant basis risk. This can become a limiting factor for market participants seeking to manage risks through futures market. This may have resulted in market being skewed towards speculative trading and greater disconnect between the futures price and the underlying commodities' demand-supply dynamics. Better contract designs, greater efforts to ensure communication of prices to farmers, enabling framework for direct farmer participation through aggregating bodies/ cooperatives and bank support for commodity financing would be critical for greater efficiencies.
The efficiency of futures market for a commodity which operates under highly regulated/controlled scenario is also questionable.
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