Commodity markets regulator Forward Markets Commission banned futures trading in guarseed and guar gum on Wednesday. The contribution of both these contracts to the daily turnover of the National Commodities and Derivatives Exchange (NCDEX) has come down from 25-30 per cent to 10-15 per cent in the last two months.
Levy of high margin has hit trading interest in guar contracts. However, the exchange has maintained its daily turnover of Rs 6,000 to Rs 7,000 crore due to renewed interest in other commodities and rising prices. Though the exchange maintains that the suspension of guar contracts cannot be termed as a ban, the trading community begs to differ. They contend that the regulator has not given a definitive date by when it will be re-launched.
Mr R. Ramaseshan, Managing Director of NCDEX, spoke to Business Line on various issues plaguing futures trading. Excerpts from the interview:
Is the ban on guar futures justified?
The recent regulatory action to close out the contracts in guarseed and guar gum does not amount to a ban. Only the current season contracts have been closed out due to physical market conditions. It is clear that the intention is to launch the contracts for the next season.
With the imposition of high margin on the long side, strict regulatory measures, reduction in position limits, suspension of August and September 2012 expiry futures contracts, trading volumes and open interest in the futures contracts traded on the exchange dropped substantially.
With the reported shortage of guarseed arrivals/availability in the physical markets, mandi prices continued to rise further without showing any signs of softening. Futures contracts were seen merely following the spot prices. In these circumstances, it was felt that consequentially the trading in futures contracts was not serving the desired purpose of price discovery and it was, therefore, decided to close out the running contracts in guarseed and guar gum.
Are we back to the ban syndrome?
No. I do not think so.
There was a demand in the Rajya Sabha to ban futures trading in commodities. What is your view?
We do not think that banning futures trading in commodities is a correct step. It is necessary to view the rise in prices in commodities along with the underlying demand supply scenario, physical market functioning and prices and more particularly in respect of guarseed and guar gum, demand for exports and international prices of the commodity, it being primarily a export-oriented industrial product. Agricultural commodities being sensitive in nature, we may see such demands now and then. However, the impression about futures trading and inflation has undergone a sea change now, especially with several reports pointing out clearly to the fact that futures trading by itself does not lead to inflation.
The price behaviour of commodities which were delisted/banned earlier, clearly show that even after the delisting/ban, prices have gone up. We see several policy makers coming around to the idea that futures trading is required for transparent price discovery and risk management, and also should be used as a tool for planning policy initiatives.
Do you think putting a price cap on guar would have helped?
It should be understood that the guarseed and guar gum contracts are ‘compulsory delivery' contracts and are, therefore, anchored to the underlying physical market. Prices are determined by forces of demand and supply, including production, import/export, substitution effect, international prices if available, etc. Futures market has to be seen in conjunction with the spot market. A cap on futures prices of guarseed and guar gum would not have served any purpose. This is evident by the fact that the physical market prices have remained at high levels despite the restrictions on futures trading and close out of the running contracts.
A few traders ask if the rising price in guar is a crime? If the FMC is going to ban all volatile commodities, what is the need for an exchange, they wonder. What is your comment?
The FMC has not fixed a price band. Trading in physical market is still going on at whatever prices the spot market determines.
After waiting for seven years, is it time to deepen commodity markets by allowing institutions such as banks and FIIS?
We believe that this is the right time to allow banks and domestic institutional investors to trade in agriculture futures as this will contribute significantly to widening and deepening the market besides ensuring entry of more number of professional players.