history of commodity futures in india

7/29/2019 History of Commodity Futures in India

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Chapter 4

History of CommodityFutures in India

&its Regulations

Overview, Functionality and Governance in

Commodities Exchanges


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EVOLUTION OF COMMODITY MARKETS

Evolution of futures trading

Futures in rice in 17th century Japan.Rice tickets and standardised rules fortrading.

Organized trading in commodities evolvedduring mid-19th century in Chicago. CBOT,established in 1848, introduced the firsttraded derivatives contract in agri.commodities.

Evolution of various exchanges across theworld


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Global Historical Perspective

Forward markets - in London towards the end

of 17th Century

US, Canada, Japan and Egypt - 18th Century.

CBOT 1848; standardised futures contractsintroduced in 1865

New York Cotton Exchange started in 1870

Chicago Mercantile Exchange was set up in1898

Legalized options trading started in 1934 inthe United States


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The Indian Story

Started as early as 1875 BombayCotton Trade Association

Fears of unhealthy speculation

Commodity options trading and cashsettlement of commodity futures bannedin 1952

Further blow in 1960s

Initiative for agricultural liberalizationdawn of a new era for commodities


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THE INDIAN STORY.

In the 1960s & 1970s the GOI suspendedfutures trading in several commodities (cotton,jute, oilseeds etc)

Khusro committee appointed by the GOIrecommended the reintroduction of futurestrading in commodities in 1980s

Recent history: Suspension/ban on futurestrading in Rice, Wheat, Urad & Tur


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Indian Market

A trip down the memory lane

1875 Bombay Cotton Trade Association

1900 Gujarat Vapari Mandali (now BCE)1919 Calcutta Hessian Exchange

1920 Futures trading in Gold in B.B.A until mid-1950s

1921 East India Cotton Association

1927 East India Jute trade Association

1957 IPSTA Spices

1966 Complete ban

1980 Khusro Committee- Cotton, Jute, Potatoes

1994 K.N Kabra Committee 1994

2000 National Agriculture Policy

2002-03 3 National Level Multi Commodity Exchange

over 100 Commodities allowed for futures trading


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Regulation is a Maze of Legalities


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Three Tiers of Regulations

Forward Markets CommissionFC(R) Act 1952

FCRR 1954

Ministry of Consumer Affairs, Food and Public Distribution

Multi Commodity Exchange of India Limited

Regulations

Bye-Laws and Business rules


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Indian Derivatives Sector OverviewLeading to Government Initiatives to Develop Exchanges

Ministry of Consumer Affairs

FMC

(Forward Markets Commission)

Commodity Exchanges

National

Exchanges (2)

Regional

Exchanges

MCX NCDEX NMCE NBOT

20 Other

Regional

Exchanges


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Forward Contracts Regulation Act, 1952

Empowers Govt. through FMC for regulationof commodities trading

Prohibits Options trading

Exempts Non transferable Specific DeliveryContracts from regulation

Covers Transferable Specific Deliverycontracts as well as hedge contracts

Empowers Govt. to regulate specificcommodity


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Forward Contracts Regulation Act, 1952..Contd

Grant of recognition to exchange(associations) by Govt.

Not more than 4 members on Governing

bodies of recognized associations(exchanges)

Machinery (regulatory body) FMC

Repeal of any State Act on Commoditiesprevailing (transfer of commodities to

Union List)


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Forward Markets Commission - Functions

Advises Govt. in providing recognition toexchanges

Watchdog of the commodities derivativesmarkets

Supplies reports to Govt. on conditionsprevailing in the commodities markets

Provides recommendations to Govt.


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Forward Markets Commission - Functions

Inspection of accounts of exchanges and itsmembers

Approval / amendment of Bye laws, Rules andregulations, Articles of Association andMemorandum of Association of exchanges

Vital link between commodity exchanges andGovt.

Approval of contracts before launch


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Evolution of Regulation

Shri. A. D. Shroff Committee in 1950

Prof. M. L. Dantwala Committee in 1966

Prof. A. M. Khusro Committee in 1979

Prof. K. N. Kabra Committee in 1993

World Bank Study (in joint associationwith UNCTAD) in 1996


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Shroff Committee (1950)

Draft Bill for Forward Markets Regulation

was made

Inputs received from different commercial

organizationsLed to passage of the Forward Contract

Regulation Act of 1952

Forward Market Commission (FMC) was

established in 1953, dedicated to

regulation of forward markets


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Dantwala Committee (1966)

Review of previous 10 years of FMC

Suggest amendments to FCR(A), 1952

Recommended that FMC be made

autonomous

Futures in export commodities to be allowed

Futures contracts defined

Options trading not recommended


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Khusro Committee (1979)

Review role of FMC and analyze

commodities markets

- Not all commodities were to be allowed for

futures trading

- Laid down the possibilities for specific

commodities such as Sugar and Silver

- Condition for trade: Homogeneity ofcommodity and large supply and demand

- Exporters to be allowed to hedge


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Kabra Committee (1993)

Exchanges to enlist more members and

be demutualised

Ensure Capital adequacy norms

Encourage Computerization

Vigilance Committee and Panel of

surveyors

Arbitrators (dispute settlement

mechanism)


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Kabra Committee (1993)..Contd.

Options and range forwards to be allowed

Recognition to exchanges to be permanent

(or at least for 5 years)

Time limit for ready delivery contracts to bemade 30 days from 11 days

Futures trading to be allowed for more

commoditiesAllow Indian companies to hedge abroad

(accepted)


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World Bank and UNCTAD (Joint Study)

Opening of Agricultural markets would lead to greater

exposure to price volatility

Price Risk Management

Price fluctuations to be sufficiently large (to ensure

price discovery)

Efficient transfer of risk from Hedgers to Speculators

and Arbitragers

Standardization of trading practices

Storage facilities to be enhanced

Encourage participation of large institutional investors

Improve internal management of exchanges


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Amendments to FC(R)A, 1952

Updation of existing definitions & insertion of new definitions

Changes in provisions relating to composition & functioning ofFMC

Enhancement of the powers of FMC

Establishment of Forward Markets Appellate Tribunal along with

provision for designating any of the existing AppellateTribunals under FC(R)A

Corporatisation & demutualisation of regional commodityexchanges & setting up of a separate clearing corporation

Registration of Intermediaries

Enhancement of penal provisions in the FC(R)A

Permitting trading in options in commodities


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Effectiveness of Regulation


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Looking Forward

Currently, Indian commodity exchanges

are not allowed to trade index futures.

The amendments to FCRA would allow

Options to be traded, which wouldprovide depth to the market

Finally, Banks , Mutual Funds & FIIswould be allowed to provide maturity to

the market


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This presentation has been prepared to provide awareness & information

purpose only. While every effort has been made to assure the accuracy of the

information contained herein, any affirmation of fact in this reference material

shall not create an express or implied warranty that any example or description

is correct. This material has been made available on the condition that errors or

omissions shall not be made the basis for any claims, demands or cause ofaction. The information provided, has been taken from sources believed to be

reliable, but is not guaranteed by the MCX as to accuracy or completeness , and

is intended for the purposes of education and information only. The Rules and

Regulations of the Exchange should be consulted as the authoritative source on

all contract specifications and regulations.

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