Commodity futures at crossroads as government seen changing tack

Sharad Mistry

Mumbai, July 15: Traders in commodity futures market once again find themselves at the cross- roads as they feel the government is changing tack and rules of the game. What is more, the commodity futures markets regulator Forward Markets Commission (FMC) too seems to be relatively unconcerned of the “unhealthy” practices going on at the various comexes, especially and recently at the National Board of Trade (NBoT), Indore.

While the deliberations at the recently concluded meet of president of commodity exchanges in New Delhi have hardly been made public, the FMC and the other officials of the ministry of consumer affairs were said to be of the opinion that any commodity exchange should be given the permission to trade in any commodity without any restrictions.

“Following the stringent rules is hardly of any concern, and the fittest and with maximum volumes will survive”, said informed sources. “This shows that the government and its officials are not clear of what they want to do in the commodity futures markets, especially after the near-total absence of the proposed National Commodity Exchange”.

While the FMC said the NCE proposal is still under consideration, sources say it has died prematurely.

According to commodity traders here the government now seems to be desperately wanting large volumes on the comexes to grant permission for trading in futures in more or new commodities.

Earlier, before giving such permission, the government had asked the prospective comex candidates to set up clearing house (to guarantee each trades on the exchange), to install online/electronic trading and levy stiff upfront margins before granting permission to trade in commodity futures.

The recent example is that of the Rajkot Seeds, Oil and Bullion Merchants’ Association which on Friday was granted permission to trade in futures of eight commodities. These are groundnut seeds, its oil and deoiled cakes; cottonseed, its oil and deoiled cake; palmolien and cotton.

While formally the government has asked the exchange authorities to comply with FMC conditions within six months of receiving the permission, industry sources here say that the government’s main concern is lack of volumes on the existing comexes. That the volumes are low on the comexes because of these stringent requirements is a different story.

What is more disturbing is that the closing of deals at prices unrelated to market prices to safeguard interests of powerful persons on comexes — a practice that was followed frequently by stock-brokers on the stock exchanges — has lately emerged on commodity exchanges.

Last Friday, the board of National Board of Trade (formerly Sopa Board of Trade) dealing in soya futures, announced closing of all deals in August 2001 contracts at Rs 305, against the market price of around Rs 340.

Informed traders here say, the reason NBoT chose to settle trades lower, is that the exchange’s president “was on the wrong side of the market. His losses combined with trades in Malaysia, Chicago and Indore come to a stupendous figure (unconfirmed Rs 450 crore). FMC cannot sleep over this kind of operation”.

The permission to Bombay Commodity Exchange Ltd was granted on the condition that it will have: 1) computerised trading 2) set up independent clearing corporation 3) levy up-front margining system.
“It seems, no other commodity exchange has been forced to act on any of these above given conditions, while granting permission to trade in commodity futures”, said a BCE source.

“Further, Rajkot has received the permission to trade in all competitive commodities without any infrastructural facilities. The question remains is whether the government measures success of comex in terms of volumes or technology?” the source asked.

It is no secret that commodity futures at both Ahmedabad and Rajkot commodity exchanges are way away from normally accepted trade principles. “If we at the BCE are allowed to trade in the fashion it takes place in Rajkot or Ahmedabad or Indore, we could also be successful in showing large volumes. But is this what the government wants the comexes to resort to?”