Speculation, though an integral part of commodity derivative trading, needs to be kept within limits and increasing participation of hedgers would automatically ensure that, said Forward Markets Commission Chairman Mr Ramesh Abhishek.

When the proportion of hedgers in a contract increases sharp speculative swings can be kept within limits.

“We have asked exchanges to promote hedging tools available with them to bring in more hedgers on as participants,” MrAbhishek told The Hindu Business Line.

Some exchanges have been conducting awareness programmes for bringing in more hedgers as participants.

“We have also askedexchanges to introduce products and contracts that will suit the requirements of different types of hedgers,” he said.

Speculation is an intrinsic part of futures. It is key for bringing in liquidity.

“The important thing is that speculation should be kept within reasonable limits to serve the economic purpose,” Mr Abhishek said. Also, pure speculation is not beneficial to the contract.

Despite regulatory tools such as position limits, daily price limits and margins there are instances when speculative activity tends to go out of hand.

Potential hedgers could be processors of the underlying commodity or exporters and importers.

FMC has been conducting several awareness programmes about commodity derivatives trading. “We conduct 900 awareness programmes in a year to make people aware about this market,” he said.

Mr Abhishek said a media campaign done recently aims to explode certain misconceptions about commodity derivatives trading. The campaign while allaying fears that futures lead to rise in prices advised caution against dabba trading, or illegal trading done outside an exchange system.

FMC, in that context, took up training of police officers in Madhya Pradesh, Chhattisgarh, Tamil Nadu and Delhi.

“We are going to do this police training in other states as well,” he said adding that a lot of people fall victim to dabba trading.

Trading with caution is absolutely essential in commodity futures, he pointed out. “We have advised investors not to invest in this market unless they have knowledge of the underlying commodity and not to listen to allurements and tips of people,” he said.

FMC, which is the watchdog for 5 national multi-commodity and 16 regional exchanges, has been conducting regular audits to ensure compliance.

Regional exchanges have been assailed by low volumes and low revenue, he said.

FMC has plans to help these regional or single commodity exchanges with setting up online trading facility under the 12th five year plan. “But the challenge to ensure volumes and these exchanges will have to work that out,” Mr Abhishek said.

According to him, as the commodity futures market in India is still in a growth phase it would be difficult to determine what would be the right number of exchanges that need to function.

“Different exchanges have liquidity andvolumes in differentcommodities. There are a lot ofcommodities and there are a large number of participants. The market is still developing. Therefore, it is early to give a final judgement on what the correct number is,” he said.

The government has given an in principle approval to United Commodity Exchange and National Board of Trade for national commodity futures operations. (End)

(This article was published on December 21, 2011)
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