Rajesh Bhayani: Commodity futures market to enter new orbit of growth

The passing of the FCRA bill in the Parliament remains the only challenge

Five years ago the government was preparing to introduce a bill to amend the Forward Contracts (Regulation) Act to give autonomous status to the commodity market regulator the Forward Markets Commission (FMC). However, since then things turned volatile as two parliamentary standing committees and an expert committee headed by Abhijit Sen, member of Planning Commission, gave their reports approving the bill and an ordinance was also issued to implement the changes but the bill didn’t go through in the Parliament.

Once again the Union Cabinet has cleared the bill but it may not be an easy task to get it cleared in the Parliament if one goes by past experience. Assuming that the bill does get passed in the Parliament this time, one can easily say that commodity futures market is set to enter a new growth orbit.

There are reasons for that.

For the last four years, the market is growing at 40 per cent a year and annual volumes are at Rs 140 trillion. There are five active exchanges (MCX,NCDEX, NMCE, ACE and ICEX) and another one (UCX) is set to start trading by Diwali.

FMC will now get powers to permit derivatives trading in indices and options of commodities and index futures just like in the F&O segment in stock exchanges. This will bring more depth and volumes to the market.

Index based derivatives will attract even investors who are restricted so far in gold and silver futures. While exchanges have floated indices for metals, agri-commodities, energy and broad indices, FMC’s priority will be to have common methods to prepare such indices. It is likely that index-based derivatives and options could be introduced in the first phase. These will result in huge increase in volumes. In equity markets too, derivatives form 90 per cent of total volumes. Options are the cheapest instrument to hedge commodities.

FMC is already planning to regulate the trade and intermediaries including members whom it cannot regulate directly as of now. After getting adequate power and autonomy, it can formulate its own regulations, which have to be approved by the ministry of consumer affairs at present. Even the intermediaries are regulated through exchanges.

With all the regulations in place and new trading instruments allowed, the entry of banks and domestic financial institutions will be the logical next step. FMC and ministry of consumer affairs have already asked the RBI to allow banks to trade on commodities exchanges. With FMC was not having autonomy and powers, it may happen. FMC will also be expanded with more members and employees.

Another priority for FMC will be to have online real time surveillance system similar to what Sebi has. This will help FMC to identify market manipulators on a real time basis. All indications suggest that while domestic institutions like mutual funds can start trading in commodities subject to permission by Sebi, or they may have separate subsidiaries for commodity trading, but foreign investors entering in commodity futures is not anywhere on the horizon.