The introduction of derivatives, in the Indian markets, really dates back towards 1980s when select Indian entities hedged their rupee-dollar risk via cross-currency swaps. Indian stock markets were, in the early 1990s playing in what was called as jhota-phatak, which nothing but trading in straddles or simply put buying and selling option volatilities.

In 1999, RBI introduced derivatives in the local currency Interest Rate markets, which have not really developed, but with the gradual acceptance of the ALM guidelines by banks, they should be an instrumental product in hedging their balance sheet liabilities.

The millenium didn't stop the momentum and the much awaited index futures were introduced by the Bombay Stock Exchange & the National Stock Exchange. And now, both these exchanges have also evinced interest in the speedy implementation of options on index futures.

So, we have seen the development of derivatives markets in the Indian scenario. But isn't something really missing. I mean, India, is an agrarian economy, and almost a third of our GDP is contributed by agriculture. No fret, commodity derivatives are coming.

Forward Markets Commission (FMC ) had last month submitted to the government its proposal for setting up the consortium-led National Commodity Exchange (NCE). The proposed NCE would be supported by cash flush corporates and state-owned financial institutions, a strength which the smaller regional commodity exchanges do not have.

This proposal will now pave the way for nation-wide trading in futures of all commodities permitted and to be permitted in the future from one platform. The proposed NCE is expected to be operational by the first quarter of 2001 and give the much-required confidence to the institutional players in the commodity markets, including foreign commodity funds, corporates and banks engaged in financing commodity futures.

The consortium members for the proposed National Commodity Exchange (NCE) are National Stock Exchange (NSE), ICICI, Mahindra & Mahindra and the Punjab State Warehousing Corporation. To introduce commodity hedges and not mentioning gold would be unfair to the idea of introducing commodities hedging.

Of late, the BBA has been talking of promoting gold futures and the RBI and the FMC are scheduled to meet early next month to formally discuss the possibility of permitting gold futures. Gold futures were banned under the Forward Contracts (Regulations) Act 1952.

However, the same has been amended to allow the Indian banks dealing in gold and having gold deposit and lending scheme, to hedge their gold exposures by trading in local forwards. So there is some confusion doing the rounds as regards the gold derivatives are concerned.

NCE, has been talking of setting up commodities exchange, and looking at the partners who have joined hands, it clearly looks that they would be strong contenders in the race - NSE has the time tested systems required for paperless trading in commodities and commodity derivatives; ICICI has the financial muscle and also the required expertise in risk management systems; M&M and PSWC would be the other strong partners and provide the logistics support to trading.

If NCE is to become a leading commodity exchange, it cannot ignore gold. Their competition could be Bombay Bullion Association (BBA), which is talking like just another local commodity exchange. They have neither developed gold cash markets nor are they in a real position to as most of the cash markets have shifted out of Mumbai (and looking at the state's financial situation, I don't think they are in a mood to think logic and reduce the sales tax on bullion trade, something which has killed the financial capital's bullion trade).

Besides, most of the BBA members are more active in local stock markets than the bullion markets. FMC will be the overall regulating agency (so it seems like) akin to what Sebi is to stock markets, but since bullion is involved RBI would not like it's exclusion as gold is an important monetary asset in the Indian economy. But what are we talking of in terms of gold derivatives?India, the largest gold consumer in the globe, does not even have an active cash trading market and about 15-20% of its annual demands are satisfied by the illegal channel, even though it is freely allowed to be imported at a nominal import duty.

There is no standardization of the gold and the ultimate consumers of the yellow metal yet, on a large scale, get cheated on their purchases. Unless a very active cash trading markets develop, for which these standards and gold being an exchange traded product, are a necessity.

And once it becomes exchange traded, gold would be in the domain of large institutional players along with speculators and retailers. At present, we only have the trade in a handful of local traders who, if they start applying mark-to-market norms to their balance sheet (which they would have to if this becomes exchange traded), may not know how to manage their on-balance sheet risks. And introducing futures in gold is really an interest rate trading, which banks and institutions are experts in. So why is BBA bent on breaking their own trading community.

The present members may become something akin to what stockbrokers are, which would require high degree of professionalism like having a well trained sales staff, systems, adequate research, etc. Zaveri Bazaar..are we ready for this?

The author is a Fund Manager. The opinions expressed, do not, in anyway, reflect the corporation's views, and are solely that of the author. This is not intended as an offer or solicitation to buy or sell, or methods to trade.