Edible oil index futures on cards

Sharad Mistry

Mumbai, Dec 2: Edible oils index (EOI) futures, a new derivatives trading product, said to be taking shape in the world of index futures, may emerge soon on the horizon in India, if the law ministry is convinced of the product.

India’s vegetable oil market is estimated at around Rs 45,000 crore, including annual imports of around Rs 12,000 crore. Even when the Government has permitted trading in futures of various vegetable oils, there is no composite index that would indicate the consistent fluctuations in both their consumption and prices. If the EOI is permitted it would be listed on the commodity exchange/s and help trading in the huge vegoil market.

The Centre is expected to amend necessary laws and rules to make commodity futures secure and allow securities traders to trade in these products which are traded on commodity exchanges. EOI, if permitted, would be available to both the securities and commodity traders.

In its move to lure speculators of the securities market and add volumes on the commodity futures market, the Bombay Commodity Exchange (BCE) now plans to introduce EOI, arguably the world’s first such index for edible oils.

BCE president PM Chheda announced recently that BCE plans to launch the EOI soon for the benefit of cross section of players on the exchanges, including stock and commodity exchanges.

“We have already forwarded our proposal to the Forward Markets Commission (FMC) for its formal approval”, said a top BCE source, adding “FMC is in turn has sought clearance from the law ministry”.
What is more, for larger acceptance of EOI among cross section of players and investors, BCE has even sought feedback on the composition of EOI from Standard & Poors and Crisil. The S&P’s clearance to the National Stock Exchange’s Nifty futures has contributed in its success, the BCE source said.

Currently, amongst various index futures, stock index futures listed and traded on majority of the capital markets, including India, are considered to be the most popular ones. Further, there are utilities index offered by the New York Stock Exchange Utilities Index, and even the Commodities index of The Economist’s commodities index.

Index futures listed on the respective exchanges — stock or commodity — are cash settled products. There is no actual delivery of a good. The only possibility for the trader to settle his/her position is to buy or sell an offsetting position or in cash at expiration of the contract. Almost every month, a new type of contract appears to meet the needs of a continuously growing corporation and institutional market.

According to the BCE proposal for EOI, three edible oil index futures contracts would be offered concurrently to traders.

The composition of EOI would be based on weighted average, where weight will be assigned to different edible oils on the basis of their respective consumption or their share in total edible oil consumption in India.

Accordingly, the BCE’s EOI would have RBD palmolein’s weight of 28 per cent, soyabean oil 17 per cent, mustard oil and groundnut oil 20 per cent each, sunflower seed oil and cottonseed oil eight and seven per cent respectively.

January 1, 2000, considered as the base year and date for the composition of the EOI, would have the notional value of EOI as 1,000. The fluctuations in prices in these oils — to be based on daily Mumbai prices — would reflect the overall demand and price trends in these edible oils.

What is more, delivery mechanism of BCE is not user friendly. So also for other comexes, where edible oils are traded. The warehouse receipts system (WRS), if available, could partly solve the problem. However, even this is not available. Therefore, a delivery contract cannot work successfully in absence of WRS, particularly if the rules allow multiple delivery centres.

Lastly, the sheer ease of settlement of the index futures contracts makes the product attractive among speculators, traders and investors.

This ease has prompted authorities of few comexes to informally allow some 100-150 members the facility of cash settlement of the contracts of oil futures traded on the exchange, even when the byelaws of the exchange do not permit the same.