The Hindu Business Line : Unleash the regulator

Is the euphoria over commodity futures trading waning? The declining trading volumes on commodity derivatives should make policymakers, regulators, and exchanges sit up and ponder. Despite frenetic promotional activity, volumes have not only been erratic since the beginning of the year but actually declined in absolute terms in the January-October period. Major commodities that lost out on volumes include those in which the country faces serious shortage. In many cases, prices have risen disproportionately higher than the actual shortage may warrant. This is primarily because too much speculative money has been allowed to chase limited supplies.

The so-called price discovery, especially for farmers, has been illusory and of no real benefit. The capacity of the farmers to respond adequately to price signals is extremely limited. Obviously, a lot more attention must go to strengthening the `real economy' — the production base — than on trade facilitation. Huge losses incurred by unwary market participants, systemic problems including poor produce quality and delayed deliveries, market concentration, suspect quality of settlement prices, and lack of genuine education for market participants about risks associated with this market are perhaps the reasons for the waning confidence of the participants and the declining trading volumes on the bourses. No wonder, hedgers — those with genuine underlying exposure — are keeping off, allowing speculators a free run.

Tightened regulatory oversight — higher margins, cut in Open Interest position, stiff penalties for infraction of prescribed regulations — has also shrunk volumes; but no one needs to shed any tears over the decline on that account. The `less regulatory' and `more promotional' role of the commodity futures market regulator — Forward Markets Commission (FMC) — is hopefully coming to an end, thanks mainly to the `political risk' that has come to be associated with this market in recent months. Even as volumes are restricted to a handful of commodities, numerous illiquid contracts are languishing on the trading platform. It is unclear if adequate research and stakeholder consultation were carried out before grant of permission. Brokerages have been mushrooming; there is dire need to verify their credentials and bring them within the regulatory ambit. In the marketplace, talks of `circular trading' are heard in hushed tones.

It is time the watchdog started to really regulate the market that has the potential to vault to extraordinary heights of trading even from the current handsome level of Rs 15,000 crore a day. To be fair, the FMC functions under many constraints, including inadequate human resources. The sooner the proposed amendments to the Forward Contracts (Regulation) Act are passed, the better it would be for the market. It would help the regulator unleash its power that the market urgently needs for orderly growth. Else, both the government and the market run the risk of getting discredited.

More Stories on : Editorial | Commodity Exchanges

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Unleash the regulator

Making the gift regime fool-proof

How UK collected tax on Indian salary

Appeal as a bar against `reopening'

Proliferation of appeal cases

Finance and Commerce Pool — An old-is-gold idea

Forex reserves jump by $5.9 b in November

`US-India taking a wise approach to bilateral trade engagement'