Commodity players worried over delays in futures market reforms

Commodity players worried over delays in futures market reforms

A delay in a legal amendment giving more teeth to the commodities regulator and quickening growth of a nascent Indian commodity futures market could stop many from entering the market, analysts and market players said.

The Forward Contracts (Regulation) Amendment (FCRA) Bill, 2006, which was scheduled to be deliberated on in the monsoon session of Parliament, was delayed and is now likely to be taken up in the winter session, said a senior official in the food and consumer affairs ministry.

The Bill is the second major reforms proposal for commodity futures market after futures trading was launched in 2003.

Similarly, a committee, set up under the chairmanship of Planning Commission member Abhijit Sen to study the impact of futures trading on retail agriculture prices, has not submitted its report and is seeking an extension after its term expired on 2 May.

“This is not a good sign," said Avinash Raheja, senior vice-president, Mumbai-based Commtrendz Risk Management Services Pvt. Ltd. “India’s fast economic growth can’t do without a developed commodity market for long."

India does not allow trading in commodity options and non-deliverables and has banned some grain futures early 2007. The FCRA Bill and Abhijit Sen report would address these issues.

“This delay will stop many participants from entering the market," said V. Shanmugam, chief economist, Multi-Commodity Exchange of India Ltd, a commodity futures exchange.

“Many traders and farmers would have entered the market if there had been ‘options´ trading available," said Madan Sabnavis, chief economist, National Commodity & Derivatives Exchange Ltd.

The FCRA Bill has provisions for allowing options trading in commodities that would reduce the risk for the players and encourage more participation, said analysts. Options offer buyers the right, but not the obligation, to buy or sell a contract at an agreed-upon price during a certain period of time or on a specific date.

“Many commodities are non-deliverable but have greater role in bringing economic stability than the deliverables, said Shanmugam. “For example, a rain index is a great tool to manage risk, both for farmers and the agriculture-based industry."

A sugar cane farmer can decide on sowing, tracking the rain index, while the sugar maker could decide on procurement, added Shanmugam. Oilseeds, grain and shipping indices will help the industry and traders to hedge against risk, said analysts.

“Indian commodity exchanges have started well, but myopic policy decisions will hurt," Raheja said. “The delay might hurt our industrial growth."