In order to curb free flow of contracts on exchange platform, the Forward Markets Commission (FMC) is planning to frame criteria for agri commodities for determining their launch on futures exchange.
Confirming the development, the FMC chairman Ramesh Abhishek, said, “Criteria are being worked out which would determine whether commodities are fit for trading on futures exchanges or not.”
According to informed sources, the FMC would categorize all commodities currently being produced, consumed and traded in India. Beginning from the top, the proposed four categories would begin with the most popular – soya, bullion, base metals, steel and energy; and end with the least popular - region specific agri commodities including isabgul, funnel seed etc. The remaining two categories would entail highly turbulent like guar and smoothly traded ones including coffee, rubber etc.
With primary focus on narrow commodities in short supply or uncertainty about their crop size season wise due to vagaries of nature, the criteria are expected to restrict launch of unpopular commodities. Also, commodity traders would be more focused on popular commodities which they know better in order to reduce chances for incurring losses.
Currently, exchanges do research and extensive due diligence on their own before submitting a contract’s launch proposal to the FMC. There are no defined criteria as on today.
In absence of proper defined criteria, commodity exchanges launch a contract based on their own market analysis which most of time becomes unfavourable. Consequently, over two third of contracts launched on futures exchange turns illiquid after initial success. Also a number of contracts remain untraded for months and suddenly, attracts huge participation towards the end of financial year. But, once criteria are defined, chances of contracts turning illiquid would be limited.
The criteria, however, would be put forth before the proposed sub-committee after its appointment which would later be forwarded to FMC for consideration. The FMC after due consideration would seek views from its parent ministry to make it effective.
According to member of the 40-member Advisory Committee, the proposed criteria would not allow region specific agri commodities even if they have wide consumer reach.
Often it is seen that commodity brokers claim to have incurred losses in absence of authentic information about a commodity.
Faced with massive asymmetric losses incurred by genuine traders due to non-availability of authentic crop data, FMC has urged the parent ministry to appoint a nodal agency similar to the one like United States Department of Agriculture (USDA) for pooling and disseminating data of agri commodities.
“We have sent our recommendation to the Ministry. We are awaiting response,” said Abhishek.
The recommendation assumes significance as a select class of traders with authentic information on crop takes their position well in advance, others with limited or little knowledge in the same commodity often follow others. By the time, the followers take position the early birds or trend setters take advantage and exit the active space.
Consequently, the followers end with a massive loss on their position while the early traders catch the big fish. Hence, it is important to have a uniform and unbiased agency which can pool data from reliable sources and disseminate the same to all classes of traders at one go, said Abhishek.
The world eagerly awaits data from USDA as the same determines the market movement in the US. The data also sets the trend for the upcoming season of all given commodities.
In India, however, there are a lot of agencies currently pooling and disseminating data on private basis either for their clients or for their members and traders. But, two agencies differ for all figures on the same crop which questions reliability of the source.