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Agri-Biz & Commodities - Commodity Exchanges
`Ban on advisory services in derivatives to curb volatility'

Our Bureau

Agri products may be out of mutual funds' purview


Action on cards
Forward Markets Commission to announce guidelines for portfolio management service.
Trading in non-active commodities likely to be reviewed in June 2007.

Kochi, Dec. 8

To maintain the integrity of the commodities derivatives market, the Forward Markets Commission has prescribed certain "position limits" to member-brokers and clients, which they are duty-bound to maintain. Once deliberate violation of these position limits were detected by over hundred times, the FMC, which regulates the commodities futures exchanges and spot markets in the country, was forced to intervene and suspend some of these errant members, Mr S. Sundareshan, Chairman of the Forward Markets Commission, said.

India is still a predominantly an agricultural country and rural India is extremely price sensitive to several agricultural products.

Addressing a press conference in Kochi, he said the country was still not mature enough to fully liberate derivatives trading in several agricultural products. In order to prevent heightened speculation and price volatility in some of the basic agricultural commodities, the FMC had banned advisory services in commodities futures trading.

Commodity MFs

"Some of these agricultural products will in all probability be out of the purview of commodity mutual funds, when they are permitted to trade in commodity futures," Mr Sundareshan said. In all likelihood, commodity mutual funds are likely to be permitted to trade in bullion, crude and metals, to start with.

Distinguishing between advisory services and advice, he asked the market to wait until the commission announces the guidelines for portfolio management services in commodities derivatives before entering into the avenue in a big way.

The proposal to bring commodity mutual funds, FIIs and banks into the ambit of commodity derivatives trading is awaiting an administrative decision from the Government. Once this decision is forthcoming, it is expected to provide substantial depth to the commodity futures markets.

The volumes at the three national commodity exchanges and 21 regional exchanges have been growing stridently ever since trading commenced. From Rs 5.71 lakh crore during the first full year of operation, 2004-05, it grew to Rs 21 lakh crore in 2005-06. Continuing its strident growth path, the volumes have already crossed Rs 24 lakh crore during the first seven months of 2006-07.

With over 90 registered commodities traded today, the number of commodities traded at the bourses has also been growing consistently. When the presence of a few non-active commodities was pointed out to him, Mr Sundareshan said though presence of non-active commodities might brook no harm, their performance would be reviewed till June 2007, before a final decision on removing them is taken.

It is not necessary for farmers to take active part in futures trading in order to reap its benefits, he pointed out. The farmer can be guided by the futures prices and some were found to withhold stocks, extend cultivation and change their cropping pattern, taking a cue from these price trends.

He cited the instance of wheat, where a 35 per cent increase in acreage has been reported due to the current price and future price trends.

Similarly, the acreage under pulses has also been guided by the derivatives prices. Regarding the presence of benami trading, he said it was a formidable task, and the commission was keeping a daily real-time monitoring of the volumes and transactions across all exchanges in the country.

Mr Sundareshan and Mr Rajeev Agarwal, Member, FMC were in Kochi to attend a conference of the members of National Commodity Exchanges in the Southern Zone that was hosted by FMC. In his inaugural address, Mr Sundareshan said he wished to understand the experiences of members since this experience sharing would promote healthy growth of the markets and will also help the regulator in regulating the market.

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