Regulatory initiatives on the commodity futures markets (NCFM) are silently but surely improving their economic relevance. The regulator appears to be focusing on taking these markets closer to the actual users/hedgers. While these measures are no less than the ones in securities markets, some are more sophisticated.
There are five NCFMs already and are offering similar trading opportunities. In order to get the best deal, an informed investor would like to trade with brokers who have membership with all or most of the exchanges. To help investors access all exchanges through a single broker conveniently without procedural hassles, guidelines for “common client registration” were issued recently. Along with this, norms for KYC, risk disclosure, rights and obligations of members have been standardised.
Alongside the NCFMs have emerged a new set of exchanges called ‘national spot exchanges’. In order to see that the clients are not exploited by clubbing trades/margins, etc between futures exchanges and ‘spot exchanges’, by brokers who have both memberships, they are required to keep the client accounts segregated between the trades on futures exchanges and ‘spot exchanges’.
In order to prevent unauthorised trades, all NCFMs have been directed to send SMS/emails on trades done on the client code directly. This is a very sophisticated use of technology in the service of investors. It is now mandatory that members settle the running accounts of the clients at least once a quarter, a measure to bring in transparency in dealings between members and clients.
Commodity futures markets were perceived to be under-regulated and some unscrupulous participants were using it for tax evasion by booking fictitious trades. Regulations on client code registration requirement and restrictions on ‘client code modification’ introduced recently prevent such misuse.
Futures markets are perceived to be causing price rise, though empirical research does not find evidence for that. Nevertheless, to nip any suspicion, regulator has taken measures to ensure that no single member/ client by himself or acting in concert is able to adversely influence the price by issuing guidelines for clubbing open positions and prescribing a single position limit for the whole market. However, position limits for actual users/ hedgers, if specifically registered so, are at a higher limit.
Threat of delivery is a good ‘speed breaker’ on speculators from hijacking the market into artificial levels. There is a clear policy support to improve delivery potential in terms of making all agricultural commodities ‘compulsory delivery contracts’ and introduction of staggered delivery system.
Regulatory framework for commodity futures today has laid out a sound platform which can be used by all stake holders – producers/farmers and actual users/traders. The latest development is that FMC is seeking market feedback on usefulness of contract design in the futures markets. The stake holders have to sit up, look at the changes and take an initiative to participate in the market and benefit.
On the user side, a lot more is to be done. A policy push requiring big size actual users who could hedge price on futures market to mandatorily hedge at least a part on Indian markets. The Reserve Bank of India (RBI) may permit banks which actively lend for post-harvest funding requirements against commodity collaterals to directly hedge for price risk on commodity markets.
These regulatory initiatives will enable the NCFMs to help ‘commercialisation’ of Indian agriculture, and in creating efficient linkages between agricultural marketing, lending and price risk management. Law makers, instead of doubting the usefulness of these markets, should empower the regulator to ensure that these markets to discharge their expected economic function by passing the amendment bill to the FCR Act.
The author is director, Ace Derivatives and Commodity Ltd