Futures In Commodities Need Easy Norms

Comment on Booe's plans on futures trading in RBD palmolein.

India is the largest importer of RBD palmolein in the world. At present, futures trading in RBD palmolein is not conducted anywhere. We position our exchange as the first one in the world to provide futures trading in RBD palmolein. Future prices of RBD palmolein quoted in our exchange are expected to be recognised as the benchmark. Booe launched futures trading in RBD palmolein, groundnut oil expeller and refined sunflower oil on August 18.

What is the response towards futures trading in RBD palmolein?

All leading importers of RBD palmolein like Liberty Oil, IVP and Andagro have shown interest in futures trading in RBD palmolein, and some of them have started trading also. We believe in a month's time edible oil importers would be trading heavily on our exchange.

 

Importers are the major beneficiaries of futures trading in palmolein.

At present, the market is observing volatility in prices because of changes in the duty structure, crash in overseas prices etc. In this process, a number of importers have lost heavily. They enter into import contracts and by the time shipment arrives, prices again touch another bottom, leading to heavy losses. Now, they would hedge in futures and avoid such abnormal losses.

When do you plan to launch futures trading in other 16 new commodities?

We are in the process of finalising business rules and contract specifications for trading in oils like cottonseed, rice bran, safflower, sesame, their oilseeds and oil cakes. It takes a lot of time to interact with importers, exporters, brokers, extractors etc.

When is on-line trading in forward contracts expected to begin at Booe?

We have already shortlisted the software vendors for on-line trading. As per estimates received from software vendors, they would implement an on-line trading system within four-five months. We expect it to be operational by December 2000.

How has been the response to the government's decision to allow foreign players to participate in futures trading of castor?

Till date we have not received any applications from foreign players. We had recently organised a seminar in collaboration with COMMEX, Malyasia. We are receiving lot of enquiry from traders in that country in respect to futures trading in RBD palmolein because there they do not have the facility to hedge in the commodity.

What steps should the government take to improve futures trading in commodities?

The government should try to remove regulatory bottlenecks, which are creating impediments in the development of futures trading in commodities. There are excessive control over commodity exchanges, while the stamp duty on futures contract is high. Non-adjustment of losses against profits and the restriction on banks from participating in futures trading as institutional members are also some of the hurdles.

Besides, recognition to exchanges should be given on a permanent basis and blanket clearance for different contracts should be allowed in advance so that there is no uncertainty in the market about futures trading. Political support is also required for the implementation of warehouse receipt system.

The Forwards Market Commission (FMC) is planning to set up a National Commodity Exchange (NCE) to compete with other commodity exchanges. How do you react to this development?

This issue should be seen from the point of view of optimal utilisation of existing resources and cost effectiveness of the proposed model. Booe as well as other exchanges are in the process of implementing electronic systems. So by setting up another electronic exchange, the government is not creating anything new. Instead of investing funds to set up NCE, a national chain of standardised and networked warehouses should come up so that warehouse receipt system can be introduced in commodity futures trading.

The need for National Stock Exchange was felt by the government in capital markets because at that point of time the Bombay Stock Exchange was reluctant to implement screen-based trading. The situation is different in the case of commodity exchanges because these bourses are moving on their own towards electronic trading.

Setting up of a well-managed warehousing network would contribute more towards the development of commodity futures, rather than replicating existing exchanges in the form of NCE.

Before setting up NCE, studies should be conducted on the viability of all other exchanges. There is need for a public debate on this issue and then only a final decision should be taken by the government.

We strongly feel that at this stage it is not wise to set up NCE.

Commodity future exchanges failed to perform because the government banned futures trading for around 30 years. Following this, operators shifted to other business and now there is a generation gap too.

There is a need to give two-three years time to existing exchanges to make the market vibrant again and to bring it on the right track. At the same time, the government should launch awareness programmes for the public, students at colleges and management schools.

Does Booe has the requisite infrastructure to support a national multi-commodities structure?

Yes, we have a large membership base (570 members) and have support from institutions such as Bank of Baroda and Union Bank. We have an independent clearing corporation which guarantees performance of all contracts and have s settlement guarantee fund. We are tying up with a software partner for on-line trading. The bourse has signed a memorandum of understanding with the Solvent Extractors Association which is the largest association of solvent extractors in the country.

What was the cause for the delay in the commencement of futures trading in RBD palmolein?

There were doubts regarding the success of futures trading in a commodity which is not produced in India and its ability to prop imports. Eventually, we have sailed through.

What are the main features of the recently launched portal of Booe?

The website is called www.booe.org. The unique selling propositions of the site are on-line dissemination of prices of future contracts directly captured from the trading hall. Besides, the portal would soon be graduating to provide all relevant information about the commodities market of the country.