The Hindu Business Line : Slowdown in commodity derivatives trading

Policymakers have done little to contain speculation. There is nothing to indicate whether a buy/sell trade is a hedge transaction or a speculative transaction.

G. Chandrashekhar

Mumbai, Feb. 28 The chapter on commodity futures market in the Economic Survey 2007-2008 makes an interesting reading. Admittedly, there is considerable slowdown in the growth of turnover on the futures market. The days of exponential growth seem to be over. Could it be a case of speculator fatigue? Clearly, trading volumes on National Commodity and Derivatives Exchange (NCDEX) actually declined sharply in 2007 (Rs 7,74,965 crore) compared with the previous two years. It may be attributed to the delisting of wheat and two pulses a year ago.

‘Not yet public’

Reference to Prof Abhijit Sen Committee which was set up exactly one year ago is conspicuous by its absence. Under political pressure, the Government was forced to announce and set up an expert group to examine the relationship if any between commodity futures trading and inflation. The group was asked to come up with finding within two months. The report is not public as yet.

No answer

Even today, there is no authoritative answer whether futures trading results in price spikes. On the other hand, the policymakers have done little to contain speculation. There is nothing to indicate whether a buy/sell trade is a hedge transaction or a speculative transaction.

In the US, transactions are distinguished as commercial (hedge) and non-commercial (speculative). There is no reason why we should not take a cue from the US commodity market regulator CFTC. The suggestion of recording the transactions as hedge or speculative was given to Forward Markets Commission (FMC) two years ago; and yet, the market is groping for correct information.

Talking about regulation of the futures market, the Survey concedes that the effectiveness of the market depends on the participation of all stakeholders. The Survey goes on to state: At the same time, it is important to ensure that such trading does not become an instrument for pronounced speculation.

Ineffective methods

Traditional methods of identifying and curbing speculative activities may not be as effective any more. The regulator needs to examine newer and more effective ways to bring greater balance between hedgers and speculators and treat the categories differently.

Making out weak case

The survey has also made out a weak case for allowing institutions to participate in the futures market. Where are the guidelines for regulating the aggregators or monitoring their activities? In addition, there is case for removing non-performing commodities from the trading platform.

The growth of turnover of Multi Commodity Exchange of India (MCX) has slowed down to a third from the previous years 200 per cent growth. Much of MCX’s turnover is from gold trading; and the yellow metal has been on a bull run. It is not uncommon that speculators rule the roost in a rising market.

Whether the same level of trading interest will be sustained in the (unlikely) event of a bearish phase for the yellow metal is something for everyone to think about.

Our Chennai Bureau reports: A press release from MCX, quoting the Survey, said during 2007, MCX had become the eighth largest commodity derivatives exchange in the world with 68.9 million contracts traded. The exchange was the was among the three fastest growing commodity derivatives exchanges worldwide and the second largest in gold futures with 25.8 million contracts and the top most with regard to silver futures.

In 2007, MCX’s had domestic market share of 63% in contracts traded, the release said.

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