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IT IS PERHAPS a sign of the times that the Government is inclined to permit stock brokers to enter the business of commodity futures. And why not? Integration of various markets is a global phenomenon. World over, forex, money, bond, stock and commodity markets are closely related. Funds, especially hedge funds, operate across markets and are known to switch among the markets chasing best returns. The movement is easy as the markets are sufficiently transparent while regulators, with reasonable knowledge of the markets and products, strain to preserve their integrity. Indeed, creating a `super regulator' for these seemingly disparate markets is now a reality in countries such as the UK.

It is only in India that markets are fragmented. With entry points being built into cloistered commodity markets — resulting from removal of internal and external trade restrictions — the risk perception of players has become enhanced. The importance of commodity markets and the need for developing a futures market to sustain the pace and momentum of economic growth has now come to be realised. Introduction of futures trading as a tool for price risk management and price discovery is now an integral part of the economic policy prescription. Indeed, the synergy between equity and commodity markets can be beneficially exploited to provide impetus to the latter to generate high trading volumes and liquidity. Commodity futures trading is at a nascent stage of development, having remained discouraged/banned for over four decades. It can now benefit with the participation of players from the mature equity market, in terms not only of knowledge and expertise in securities intermediation, but also from the financial capabilities of intermediates and their understanding of clearing and settlement systems. Interestingly, several listed stocks are leading producers/users of commodities: be it steel, aluminium, tea, cotton or vegetable oil. Trends in stock prices are impacted by trends in commodity prices even as players in the stock market keep an eye on the commodity market dynamics.

While migration of players from equity to the commodity market may create a win-win situation for markets and players, policy-makers need to exercise caution. There is the risk of exploitation of the grey area in the regulatory overlap — between the Securities and Exchange Board of India under the Ministry of Finance for the equity market, and the Forward Markets Commission (FMC) under the Food and Consumer Affairs Ministry for commodity futures. The move to make the Finance Ministry the administrative ministry for the FMC, therefore, makes sense. The attractiveness of entering the commodity market could wane if creation of two different entities to operate in the two markets is insisted upon. By putting in place checks and balances, commercial banks can find significant lending opportunities; now banks cannot fund commodity traders. Last, but not the least, as the commodity futures market is nothing but an extension of the physical market, steps to strengthen the latter are necessary. Significant training and awareness of commodity markets is essential for stock-brokers to succeed.

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