| |
 |
|
|
|
|
|
| |
CFMC
should take up effective developmental role
Madhoo Pavaskar
The restructuring of the present Forward Markets Commission
(FMC) into the Commodity Futures Markets Commission (CFMC) under
a new statute called the Commodity Futures Market (Development)
Act, as proposed in the earlier two articles (see The Financial
Express, December 15 and 22, 2001), is no doubt a necessary
condition for the development of the commodity futures markets
in the country. But that is not just sufficient. Much more needs
to be done, if CFMC were to play an effective developmental
role rather than a mere regulatory one as at present.
Not that regulation of commodity exchanges is not necessary.
Far from it. Regulation is essential to prevent manipulations
and defaults by unscrupulous operators, as also to ensure free,
fair and orderly trading in both commodity futures and options.
Regulation is also imperative for smooth clearing and settlement
of contracts and proper deliveries against those remaining outstanding
on their maturity.
Rules also must be framed under the new Act for the transparent
manner of execution of the customers’ orders, the use of customer
funds and the segregation of such funds and their accounts.
The CFMC should also be empowered to call for and inspect the
books and records of the trading members and brokers for compliance
of the rules and regulations. These powers, however, may be
invoked only after a futures market in a commodity becomes quite
active and the trading volumes in it tend to be substantial
in relation to the production and stocks. Till then, the Commission
may depend on the self-regulation by the commodity exchange
concerned.
In any case, excessive regulation needs to be avoided, if commodity
futures markets were to perform their basic economic functions
of price risk management and price discovery. It should be recognised
that aggressive and over regulation often becomes an instrument
of oppression and suppression of free and fair futures markets,
impairing thereby their relation with the physical markets and
affecting adversely their economic utility for hedging and reference
pricing. Paradoxical though it may seem, such type of regulation
actually encourages manipulation and not infrequently results
in defaults to the detriment of genuine market functionaries.
The new Act should therefore specifically emphasise on the developmental
role of the Commodity Futures Markets Commission. True, it is
easy to resort to regulatory actions, but difficult to undertake
the vital developmental tasks. Nevertheless, a beginning needs
to be made to ‘develop’ the languishing commodity futures markets
in the country to assist the major physical market functionaries
in their efforts to risk management and price discovery so that
they can reduce their marketing costs and compete effectively
in both the domestic and international markets against the overseas
competitors in the post-WTO environment.
It follows that the preamble and the statement of objectives
of the new Commodity Futures Market (Development) Act must stress
on the development role of the CFMC. The developmental powers
and functions of the Commission should essentially emanate from
the new Act and its objectives. For the CFMC to function effectively
as a developmental organisation, the Act should delineate elaborately
the powers and duties of the Commission, which shall, inter
alia, include:-
(1) to grant recognition to the trade bodies and associations
for organising futures/options trading in commodities after
assessing their need for risk management, or to withdraw the
recognition of any association in futures/options trading in
it fails to perform the desired economic functions of price
discovery and risk management.
(2) to monitor and regulate the commodity futures/options markets
to ensure their proper functioning to the benefit of the diverse
physical market functionaries;
(3) to take appropriate steps to raise the trading volumes and
open positions in the commodity futures/options markets with
a view to improving their economic utility;
(4) to collect and disseminate data and information on trading
and prices in the physical and futures/options markets in different
commodities, as also on the pattern of their supply, demand
and stocks and the factors affecting such supply, demand and
physical market and futures prices;
(5) to undertake and sponsor on a continuous basis market surveys
and research on the working of commodity futures/options markets
with a view to assessing their economic efficiency for risk
management and price discovery and improving their utility to
the different market functionaries.
(6) to undertake educational and training programmes on a regular
basis in commodity futures and option trading and their derivatives
for the trade and non-trade related interests, either independently
or in co-operation with the Federation of Indian Commodity Exchanges
and academic institutions.
(7) to study the impact of regulatory measures (like special
margins, limits on trading and price fluctuations, etc.) on
the economic utility and efficiency of futures and options,
and the relationship between the prices in the physical and
futures markets as well as on their levels;
(8) to submit periodical reports to the Union Government on
the working of the recognised futures markets and trading in
them, with special emphasis on the economic gains obtained from
them.
(9) to exercise powers vested in the Commission under the Act
and to carry out any other developmental activity as required
in furtherance of the objectives of the Act.
Incidentally, to further the developmental objectives, the Act
should attempt to define the term ‘futures contract’ (which
is, no doubt, a difficult task, since the definition needs to
be flexible enough to cover the derivatives of futures contract).
The Rules framed under the Act should also specifically provide
for exemption of hedge positions in futures and options from
the regulatory special margin and limits on trading and open
positions, if prescribed by the Commission.
For that purpose, the long and short hedge positions of diverse
trade and industry interests such as farmers and their co-operatives,
merchants and stockists, processors and manufacturers, etc.
should be clearly defined. Such hedge positions should also
include “anticipatory hedge positions” of different market functionaries.
The anticipatory hedge positions should cover the anticipatory
requirements of purchases and sales of physical commodities
for specified periods (depending on the production patterns
and/or the prevailing market practices) for the different market
functionaries. These definitions would to an extent help the
CFMC in achieving its developmental objectives.
Of course, the Union Government should provide the CFMC with
adequate and competent manpower and financial resources to enable
it to perform its developmental functions.
(The author is an independent consulting economist)
|
| |
|
|
| |
| |
|
|
|
|
|
|
|
