Financial Daily from THE HINDU group of publications
Thursday, Aug 28, 2003
Financial Daily from THE HINDU group of publications Thursday, Aug 28, 2003 |
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Agri-Biz & Commodities
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Commodity Exchanges Industry status mooted for commodity futures Our Bureau
Mumbai , Aug. 27 THE Reserve Bank of India (RBI) has suggested granting of industry status to commodity futures to enable participants gain improved access to institutional funds for their working capital requirements. "Participation in commodity futures market needs to be enlarged by including mutual funds, financial institutions and FIIs under appropriate regulatory supervision," the RBI said in its annual report, which was released on Wednesday. According to the report, commodity futures hedge the risks faced by farmers and agricultural trade functionaries from seasonal and cyclical fluctuations in the prices of agricultural commodities. Futures markets perform the two cardinal functions of price discovery and price risk management, facilitating rational production and distribution decisions, apart from acting as a price barometer. The RBI has pointed out that internationally, futures trading is allowed in a range of commodities and even in a number of non-commodities such as weather indices and pollution permits. In some major derivative exchanges like the Chicago Board of Trade and the London Inter-Bank Financial Futures Exchange, there is a convergence of futures markets with freedom to trade in all types of derivatives. Some of the best practices followed internationally include daily clearing, margining, creation of trade guarantee fund and transparency in trade and management practices to ensure market integrity. In India, the first ever organised futures market evolved with the setting up of the Bombay Cotton Trade Association Ltd in 1875. Subsequently, in December 1952, the Forward Contract Regulation Act (FCRA) was enacted to provide an institutional framework for the evolution of futures market. At present, there are 22 exchanges in the country and all commodities have been permitted to be traded in futures. The RBI feels that Indian commodity futures markets was still at a "nascent stage", being largely dispersed and fragmented with small turnover and catering to separate trading communities in different regions. Apart from physical and infrastructure constraints such as limited online trading, online surveillance and monitoring, the non-availability of a foolproof legal system of contracts relating to the warehouse receipt system was impeding the development of futures markets in India. Furthermore, the hawala markets, which have been operating since decades, trade 20 to 30 times the volume of official future exchanges. The RBI pointed out that efforts were being made to bring informal forward trading into the ambit of the Forward Markets Commission to ensure their orderly integration with the formal marketing structure. Efforts were also been made by the Government and Forward Markets Commission to improve the infrastructure and trade practices in commodity exchanges.
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