The Hindu Business Line : CFTC move to improve convergence of agri spot, futures prices

In the US, the commodity futures market has been going through turmoil of sorts, what with allegations of rampant speculation and lack of strict regulatory oversight. Following a roundtable held in Washington DC on April 22 where several stakeholders made presentations, the Commodity Futures Trading Commission (CFTC) on June 3 announced several policy measures to address the concerns about the agricultural futures markets.

One of the major issues has been the lack of convergence of cash and futures prices which made genuine price discovery difficult. The CFTC has now asked stakeholder to develop proposals for improving the convergence of spot and futures prices. Importantly, the CFTC has asked the Agricultural Advisory Committee (comprising national farm organisations, major commodity groups, agribusiness enterprises and financial institutions) to collect further industry inputs regarding the role and size of agricultural swaps and the practices of exchanges on determining margins, daily price limits and methodologies of setting settlement prices.

An agricultural swap is an instrument designed to reduce commodity price risk by substituting a floating price for a fixed price for a specified commodity. Agricultural lenders are being consulted in order to understand financing and credit issues faced by market participants arising from high margins in the futures market when commodity prices rise.

The role of CFTC and its oversight capabilities are under examination. There is a felt need for tightening the regulatory oversight. Several measures are under contemplation. An important belief gaining ground is the role of index traders and swap dealers in the futures market. In order to improve the oversight of the futures market and bring greater transparancy and scrutiny to the types of traders in marketplace, the CFTC is seeking to obtain more detailed information from index traders and swap dealers, and review whether classification of these types of traders can be improved for regulatory and reporting purposes. Due to current unprecedented market conditions and concerns expressed by market participants at the CFTC’s agriculture roundtable, the CFTC’s Division of Enforcement has been conducting an ongoing investigation of the February/March 2008 price run-up in the cotton futures markets.

However, the specifics of the ongoing investigation remain confidential, the International Cotton Advisory Committee said in a press note. There are lessons for India in these ongoing efforts in the US to clean up the futures trading system and impose stricter regulatory norms in order to ensure the market is not hijacked by speculative interests at the cost of genuine hedgers.

Indian commodity exchanges are supposed to be self-regulatory organisations (SROs); but in effect, they are far being SROs. Ineffective regulatory oversight means the exchanges and market participants act in a manner not advancing the market integrity.

A thorough review of the entire gamut of futures trading is called for.

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CFTC move to improve convergence of agri spot, futures prices