Aggregator's participation in trading uncertain

The participation of aggregators (those who hedge on behalf of a group of farmers) is uncertain now as the National Commodity & Derivatives Exchange (NCDEX) has sought government guarantee that there will be “no suspension of commodities futures under aggregation”.

Concerned with the huge decline in the exchange’s volume and complete absence of retail farmers from the trading system, the NCDEX had proposed the appointment of a trade facilitator - an aggregator - to bring individual farmers into direct hedging.

Despite the farmers’ substantial growth in income, the futures market has so far failed to serve individual farmers adequately, which it was originally meant to do. Intermediation (agents who buy grains from farmers to sell in organised mandis or mills) continues and technology has not yet reached the medium-size farmers.

The government’s banning of futures in many commodities has now posed a problem.

“Who will suffer the loss if in the process of aggregation, futures are banned in a commodity after taking position,” asked Unupom Kausik, Chief Business Officer of the NCDEX, which had mooted the proposal. The exchange is thus unlikely to handle aggregation but could encourage any institution interested in doing so. An aggregator can decide the buying and selling price of a commodity, which the exchange cannot do as a trade facilitator.

The NCDEX had handled aggregation of wheat successfully in 2006.

The bourse held talks with about half a dozen organisations, all of which sought guarantee for the continuation of futures trading in the commodities chosen for aggregation.

FMC for NGOs as aggregators
Meanwhile, the Forward Markets Commission, the commodity markets regulator, is hoping to appoint non-governmental organisations (NGOs) as aggregators to hedge trading risk on behalf of individual farmers on the domestic exchanges.

The FMC has set four main criteria for an NGO or an institution to become an aggregator — credibility, professional expertise, full financial risk-taking capability and adequate hedging experience. Most importantly, banks and other financial institutions can be credit facilitators to the farmers.

“We have identified credible NGOs with sound financial strength, which have been serving people for several years. The Commission would not allow any fly-by-night institution to play on commodity exchanges for farmers and run away with their hard earned money,” said B C Khatua, chairman, FMC.

“We also do not want any institution to take a decision on behalf of the farmers without their consent,” he added.

Earlier, the FMC preferred to rope in government organisations such as State Trading Corporation (STC) with a credible track record for trading in commodities. However, neither the NCDEX nor the FMC is currently in talks with any such organisations, Khatua clarified.The FMC is now in the process of resolving logistical and operational issues and also in the process of setting up guidelines for aggregation.

Anil Ambani-led Reliance and Kotak groups may soon get the regulatory clearance for their proposed commodity bourses. The FMC is looking to finalise guidelines to prevent conflict of interest in ownership of exchanges by October-end. This is applicable in the case of an exchange promoter having businesses such as broking and trading apart from running the bourse.