Kochi: Even as a fourth commodities exchange, promoted by Indiabulls Financial Services Ltd and state-owned trading firm MMTC Ltd, is likely to start operations by end of May, B.C. Khatua, chairman of commodities market regulator Forward Markets Commission, sees greater scope for expansion and place for newer entities.
The market has seen 4,000% growth over the past five years, he said in an interview over the phone from Mumbai, adding that if the new government amends the Forward Contracts (Regulation) Act, it will give additional powers to the commission to add to market relevance and manage risk. Edited excerpts:
Need-based: FMC chairman B.C. Khatua says margins and position limits are necessary to curb excessive volatility in the market. Ashesh Shah / Mint
With an ongoing ban on commodities such as rice and wheat and the world in the grip of a financial turmoil, has the performance of the commodity futures market in the last fiscal been satisfying?
The total value of trade during 2008-09 touched Rs52.49 trillion. This constituted a growth of 29% over the previous fiscal as compared to 10.58% growth in 2007-08. Considering the fact that the commodity futures market straddles both the real and the financial sectors and that both these sectors have been deeply impacted by the current economic turmoil, we are satisfied with the commodity futures market in India.
There has been a rise in trade volumes, but not in farm commodities, where there has been a reversal. How do you view this?
Yes, there has been a drop in the total value of agri-commodities traded on the futures platform. The total value of agri-commodities traded in 2008-09 was Rs6.27 trillion against Rs9.41 trillion the previous year. The suspension in trading of four major commodities—chana (chickpea), rubber, potato and soya oil—for the most part of the year had an impact. The total trade for these was only Rs0.88 trillion compared to Rs3.45 trillion the previous year. Softening of prices in the later part of the year also played a part.
The commission is undertaking measures to increase participation in agri-futures, including broad-basing agri-contracts, hedger-friendly policies, increasing access to accredited warehouses of the exchanges, disseminating prices and creating awareness about agri-commodity futures trading, especially (to) farmers.
There is a general complaint that there is little depth in agri-futures trade with several constraints such as higher margins and lower position limits. How do you propose to settle this?
Margins and position limits are imposed from time to time in keeping with the needs of the prevailing situation.
These are necessary to curb excessive volatility in the commodity futures market and to serve as a deterrent to cornering of the market by vested interests.
When exchanges take steps to increase volumes by reducing turnover fees during late hours, the FMC has stepped in. But if the lower fee benefits the participant and does not hurt the trade, can’t the FMC move be seen as infringement? (The National Commodities and Derivatives Exchange Ltd took the matter to the Supreme Court last week.)
FMC has never denied that lower transaction charges will benefit participants. It has made its stand amply clear when it opposed the imposition of the commodity transaction tax and its resultant impact on the cost of doing business on the exchange platform.
However, FMC believes that at this stage of development of the commodity futures market, differential transaction charges based on timing or commodity is not in the long-term interest of the participants and the financial health of the service providers. In any case, reducing the fees in the evening hours does not benefit trading in agri-commodities, which closes at 5pm.
Given that regional exchanges, which pioneered the futures trade, are now doing very little, how do you see the scope for more national players? Already, Indiabulls Financial Services and MMTC have proposed a fourth exchange and the Kotak group is looking at a stake in the Ahmedabad commodity exchange. What is the status of their applications?
Regional exchanges are niche players... They have immense domain knowledge. They are in the process of reworking their business models to make them more relevant.
This period of adjustment may not be confused with the scope or performance of the market as a whole, which has grown 4,000% in the past five years.
This has been achieved with minimal innovations—in terms of product diversification (options, index trading, weather derivatives, etc.), restricted players (no participation by banks and financial institutions) and entry barriers to mutual funds and foreign institutional investors—due to delays in the amendment of the Forward Contracts (Regulation) Act, 1952.
With these developments, the market will increase manifold.
Permission has been given to IndiaBulls-MMTC combine for setting up a national exchange and the Ahmedabad Commodity Exchange proposal is being examined.