The Government is considering constituting an advisory committee to provide an institutional mechanism to consult all the stakeholders regarding the regulation of commodity futures market. It will bring about much needed changes in the working of these markets by bringing down excessive speculation, improving hedging and better aligning with the physical market. This was stated by Prof. K.V. Thomas, Minister of Consumer Affairs, Food & Public Distribution at the seminar on “Indian Commodity Markets and FCRA Amendment Bill, 2010 organized by the Federation of Indian Chambers of Commerce and Industry (FICCI) here today.
Stressing on reforms in the working of commodity market, Prof Thomas said that the there is understandable excitement regarding the significant growth of commodity market in India, but it cannot be denied that there are also apprehensions among some quarters whether the market is truly achieving its objective of price discovery and price risk management and helping farmers and hedgers. “We need to take a balanced view and address the apprehensions as well as the challenges before us to enable the market to live up to the expectations of farmers and hedgers,” he said. It is well known that hedgers transfer their risk in this market which is assumed by the speculators who bring in the liquidity and that greater participation and volumes lead to a more efficient price discovery, thereby reducing the possibility of price manipulation. An analysis of the trade volumes on futures market indicates that in case of some commodities, the volumes are much higher than the open interest, thereby indicating that the extent of hedging is much less than the speculative volumes generated. It is also seen that in respect of a number of commodities, the volume of participants is not very significant. It is a matter of concern for us, as this will result in poor quality of price discovery in such contracts, Prof Thomas observed.
Prof Thomas said that number of studies and reports do indicate that futures trading in commodities cannot be said to be responsible for price rise. It is, however, possible that if futures-market is not aligned properly with the physical market, price discovery in the futures platform may become distorted which may be misused by vested interests. Such a situation can only be avoided when hedgers and potential hedgers are encouraged to participate in this market in large number.
Elaborating the steps taken by the FMC recently, the Minister said that the Forward Markets Commission (FMC) has been taking a number of initiatives to address the above challenges. There is need to create awareness among the hedgers and industry associations about these critical issues – it is here industrial bodies such as FICCI should play their important role in creating such awareness. The FMC has also started a comprehensive exercise for alignment of futures market with the physical market. A staggered delivery system has been introduced in a number of agricultural commodities. This has already resulted in significant reduction in excessive speculation in the near month and in reduced price volatility in these commodities. The FMC is also reviewing all the futures contracts traded in the market to examine if those are suited to the needs of the physical market participants.
The Minister said that one of the primary objectives of Commodity Markets is to help farmers to get best possible price for their produce. The farmers, especially small and marginal, are not able to participate in the market directly. They do so through aggregators. Therefore, the FMC has asked the exchanges to promote aggregators on a pilot basis in the agricultural commodities so that the market benefits the farmers much more. The Price Dissemination Project of the Commission is being implemented across the country with 1400 ticker boards already have been installed and 7500 proposed to be installed. The price signals coming from futures market also help farmers to take important sowing and marketing decisions. Farmers would be benefited far more by introduction of options which would be possible after the amendment of the FCR Act, he added.
Underlining the need of strong investor protection measures, Prof Thomas said that Introduction of investor protection measures will instill a sense of confidence in the retail clients encouraging them to participate in large number. Investor Protection Fund has been set up in each exchange with over Rs. 65 crores and a trust is being set up to operate the fund. There is also a need to undertake a major media campaign in collaboration with the Exchanges to increase investor education in all the States on a sustained basis, he added.
The minister said that the need for strengthening regulatory mechanism through Amendment of FCR Act has been discussed over the years and it is certainly necessary to strengthen this mechanism. He said that the proposed amendment of FCRA would enable the FMC to play a more effective role in regulation of these markets
Stressing on reforms in the working of commodity market, Prof Thomas said that the there is understandable excitement regarding the significant growth of commodity market in India, but it cannot be denied that there are also apprehensions among some quarters whether the market is truly achieving its objective of price discovery and price risk management and helping farmers and hedgers. “We need to take a balanced view and address the apprehensions as well as the challenges before us to enable the market to live up to the expectations of farmers and hedgers,” he said. It is well known that hedgers transfer their risk in this market which is assumed by the speculators who bring in the liquidity and that greater participation and volumes lead to a more efficient price discovery, thereby reducing the possibility of price manipulation. An analysis of the trade volumes on futures market indicates that in case of some commodities, the volumes are much higher than the open interest, thereby indicating that the extent of hedging is much less than the speculative volumes generated. It is also seen that in respect of a number of commodities, the volume of participants is not very significant. It is a matter of concern for us, as this will result in poor quality of price discovery in such contracts, Prof Thomas observed.
Prof Thomas said that number of studies and reports do indicate that futures trading in commodities cannot be said to be responsible for price rise. It is, however, possible that if futures-market is not aligned properly with the physical market, price discovery in the futures platform may become distorted which may be misused by vested interests. Such a situation can only be avoided when hedgers and potential hedgers are encouraged to participate in this market in large number.
Elaborating the steps taken by the FMC recently, the Minister said that the Forward Markets Commission (FMC) has been taking a number of initiatives to address the above challenges. There is need to create awareness among the hedgers and industry associations about these critical issues – it is here industrial bodies such as FICCI should play their important role in creating such awareness. The FMC has also started a comprehensive exercise for alignment of futures market with the physical market. A staggered delivery system has been introduced in a number of agricultural commodities. This has already resulted in significant reduction in excessive speculation in the near month and in reduced price volatility in these commodities. The FMC is also reviewing all the futures contracts traded in the market to examine if those are suited to the needs of the physical market participants.
The Minister said that one of the primary objectives of Commodity Markets is to help farmers to get best possible price for their produce. The farmers, especially small and marginal, are not able to participate in the market directly. They do so through aggregators. Therefore, the FMC has asked the exchanges to promote aggregators on a pilot basis in the agricultural commodities so that the market benefits the farmers much more. The Price Dissemination Project of the Commission is being implemented across the country with 1400 ticker boards already have been installed and 7500 proposed to be installed. The price signals coming from futures market also help farmers to take important sowing and marketing decisions. Farmers would be benefited far more by introduction of options which would be possible after the amendment of the FCR Act, he added.
Underlining the need of strong investor protection measures, Prof Thomas said that Introduction of investor protection measures will instill a sense of confidence in the retail clients encouraging them to participate in large number. Investor Protection Fund has been set up in each exchange with over Rs. 65 crores and a trust is being set up to operate the fund. There is also a need to undertake a major media campaign in collaboration with the Exchanges to increase investor education in all the States on a sustained basis, he added.
The minister said that the need for strengthening regulatory mechanism through Amendment of FCR Act has been discussed over the years and it is certainly necessary to strengthen this mechanism. He said that the proposed amendment of FCRA would enable the FMC to play a more effective role in regulation of these markets