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Commodity futures has a bright future

New Delhi, Nov. 4: The government is planning to introduce futures trading in all commodities instead of the selected few now allowed. An inter-ministerial group on internal trade has identified a number of priority issues to set the ball rolling.

To facilitate futures trading, the group feels there is a need to simplify the delivery system and trading procedures by introducing a timeframe obligation, encouraging private storage and supervising trade.

“We feel a futures market enables a producer as well as a market participant to remain flexible and unaffected in market price volatility,” a senior government official told The Telegraph.

The group also said there should be an effective regulation and monitoring of comexes (exchanges dealing in commodities), promotional and development activities for members of these exchanges. The group has also recommended a further clarification of the legal implications on hedging which is undertaken by traders to reduce the price volatility-induced risks in the open market.

At present, foodstuff, cotton and woollen textiles, raw cotton, either ginned or un-ginned and cotton seed, raw jute, jute textiles and yarn wholly made from cotton are under the Essential Commodities Act (ECA). The section 3 of ECA empowers the government to control production, supply, distribution, trade and commerce of these commodities.

Official sources said the move now is to allow futures trading in wheat and rice also.

Futures trading, banned in India till as recently as 1998, is regulated by the Forward Markets Commission (FMC) under the Forward Contracts (Regulation) Act, 1952 along the same lines of the Securities and Exchange Board of India (Sebi) which regulates the capital market.

FMC is part of the ministry of consumer affairs and public distribution whereas futures are exchange-traded contracts, having certain standard specifications, to enable a buyer or seller to buy or sell a specific quantity of commodity in a designated future month at a price agreed earlier between the two parties.

The group also sought to lift the current ban on futures trading in wheat and rice but was forced to reconsider it since the government feels it is “too soon” and that these two are basic commodities of livelihood included under the Essential Commodities Act (ECA).

The committee also suggested that private storage of commodities should be encouraged since “the existing policy of pan-seasonal pricing under the Public Distribution System a disincentive for futures.”

It says the storage job which is currently carried out by the state-run Food Corporation of India does not facilitate futures market since the futures market produces its own kind of smoothing between the present and the future.

Explaining the significance, it said that if the future price is high and the present price is low, an arbitrager will buy today and sell in the future and that the converse also holds true.

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