The working group on risk management in
Commodity futures trading
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| 7.4. Commodity futures trading: Commodity futures trading is regulated under the provisions of the Forward Contracts (Regulation) Act, 1952 (FCR Act. Forward Markets Commission (FMC) is the Market regulator setup under the Act in 1953. At present, there are 103 commodities notified for commodity futures trading. Trading is conducted through 24 recognized Exchanges including three National Multi-Commodity Exchanges viz. National Commodity Derivatives Exchange Ltd. (NCDEX), Mumbai Multi Commodity Exchange of India Ltd.(MCX), Mumbai and National Multi-Commodity Exchange of India Ltd.(NMCE), Ahmedabad, are de-mutualised and corporatised from the beginning with professional management and are networked for nationwide online trading. There are three tiers of regulation of commodities forward trading in India viz. the Central Government, FMC and the Recognized Commodity Exchanges Associations. The Central Government broadly determines the policy as to commodities and the territory, in which futures / forward trading is to be permitted, and the recognition of Exchange / Association through whom such trading is to be permitted. FMC acts as the regulator, to ensure totally transparent and unbiased trading. Speculation is essential in the commodity futures market for various reasons. However, excessive speculation would distort the functioning of the futures market and would result in manipulation of prices. With the liberalization of commodity futures market w.e.f April 2003, trade value increased from Rs lakh crores into Rs. 5.75 lakh crores in 2004-05, and to Rs. 21.34 lakh crores in 05-06. This is a 16.5 fold increase in trade within 3 years, depicting immense business opportunities for various stakeholders. In the current financial year, the value of trade had reached Rs lakh crores till 31.8. Futures contracts are expected to perform two important functions - price discovery and price risk management fora given commodity. Futures trading enables various persons such as producers, processors, exporters to hedge risks arising out of price fluctuations. Futures markets also help farmers, in taking pre sowing and post harvest decisions. Futures trading, also renders services to farmers. Hedging facilities enable those farmers who grow commodities in very large quantities, to hold onto their crops or stocks, spread out the sales of such stocks over a period and thus, get better average prices. A futures market provides price indication to the farmers in advance, before the sowing and marketing season. This may enable them to undertake proper crop planning, apart from spreading out sales over a period of time. Smaller farmers do not directly participate in the futures market. However, they can also benefit through better price realization on the basis of future prices, for their produce. Futures trading also brings about an element of stability, in seasonal price fluctuations. Commodities futures markets are still at a nascent stage in India, and the FMC, therefore, has been playing both a regulatory and a developmental role. The Forward Contracts (Regulation) Amendment Bill, 2006, which was introduced in Lok Sabha on st March, proposes to make provisions for allowing trading in options in goods or commodity derivatives and to make FMC, an autonomous and more effective Regulator. Download 0.68 Mb. Share with your friends:
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