The Hindu Business Line : More power to regulation

Thankfully, the commodity futures market regulator has begun to crack the whip. Suspension of four traders and warnings to three others for persistent violation of trading norms (breaching open interest positions) by the Forward Markets Commission (FMC) should serve as a warning to all market participants not to take the regulatory regime lightly. The FMC's tightening of screws in recent months (hiking margins, cutting open interest and so on) has helped bring about some sobriety to the market that has been expanding at an uncomfortably scorching pace.

Ironically, it was the volatile price movement of a number of essential food products and the inflationary conditions in the physical market the last several months that turned the regulatory glare on to the derivatives market. Clearly, what the commodity futures market needs today is not greater liberalisation, but stricter regulation, for the market is running the risk of getting discredited. The FMC should not only regulate, but should also be seen to be doing so. To that extent, the suspension is a welcome step. But a couple of questions arise. Should it have taken as many as 10 months for the regulator to penalise persistently erring market participants? If the FMC had the knowledge of infraction, why was the response slow? Another point is the role of the commodity futures exchanges themselves. Is it not their duty to identify and expose misdemeanour promptly? After all, commodity futures exchanges are supposed to be Self-Regulatory Organisations with inbuilt systems to identify and, if possible, prevent breach of rules. These are serious issues that cannot be glossed over as `teething troubles' of an evolving market. Players have to be put through a learning process to behave responsibly.

There is a strong case for regulation of brokerages, right from the time a membership application is made. It is unclear how the regulators and the exchanges will ensure that suspended members do not trade. Taking membership in more than one name is reportedly beginning to happen, and may become the norm over time. Stricter screening of applicants is required. A painful aspect of the fast expanding commodity futures trading is that many players are beginning to abandon their traditional role as physical goods traders and turning to derivatives or paper trading that is sans the hassles of handling physical goods. How physical trading in commodities will be impacted by large-scale migration of players to the derivatives segment remains to be seen. There is too much hype about financial returns and other benefits of the trading system, and too little genuine education about the risks associated with the futures market. It is time for a holistic approach to address the issues of the commodity markets, both physical and derivatives.

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