Evolution of Futures Trading In India
Even though the first modern futures market was established in 1875 for cotton contracts by the Bombay Cotton Trade Association; just a decade after CBOT traded its first future. But later in 1940s, trading in forward and futures contracts as well as options, were either outlawed or made impossible though price controls. Hence during World War II futures trading was prohibited to contain runaway speculation and illegal hoarding. This continued till 1952, when the Government passed the Forwards Contracts Regulation Act, which to this date controls all transferable forward contracts and futures. In 1966 futures trade was altogether banned to give effective powers of governmental price control. A few select commodities saw a reintroduction of futures in 1980 following the khusro committee report. All that began to change with liberalization of the India economy in the early 1990’s. In 1993 the Kabra committee was appointed to look into forward markets. The committee recommended in 1994 that all futures banned in 1966 be reintroduced as well as many others would also be added. But then also, till April 2003 futures trading were allowed only in a limited number of commodities. However, within next year things have been hotting up with the launch of major commodity futures exchanges.
Commodity Futures Exchange In India
In spite of the critical importance of agriculture in India, till recently there was no large nation-wide commodity market. Commodity trading has traditionally been dispersed and fragmented across the country with regional commodity markets and local mandis accounting for all trading, with the regional markets, working pretty much in isolation from one another.
The reasons for this were:
Physical warehousing and transportation problems, and
Information problems
This hindered the development of a national market. As a result, agricultural prices varied greatly across the country with some parts of the nation burdened with excess supply of the same produce that was in severe need in some other parts. Thus, the distributional benefits of a market system remained untapped because of such fragmented trading in agricultural produce. Further this fragmentation paved the way for acute food grain shortages and poverty among the growers of the same crops to exist simultaneously.
Economic Benefits of Commodity Exchanges
1. Greater price discovery enabling more efficient pricing in underlying spot market.
2. Risk transfer between various heterogeneous market participants
3. Greater transparency & better price dissemination on a nationwide scale
4. Better production planning, rationalization of transaction costs & better margins for producers.
5. Better supply chain management in commodities with elimination of inefficient intermediation.
Forward Markets Commission (FMC)
It is headquartered at Mumbai, is a regulatory authority which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952.
" The Act provides that the Commission shall consist of not less than two but not exceeding four members appointed by the Central Government out of them being nominated by the Central Government to be the Chairman thereof. Currently Commission comprises four members among whom Shri S. Sundareshan, IAS, is the Chairman and Dr. Kewal Ram, IES, Dr. (Smt) Jayashree Gupta, CSS, and Shri Rajeev kumar Agarwal, IRS, are the Members of the Commission."
The functions of the Forward Markets Commission are as follows:
(a) To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952.
(b) To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act.
(c) To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods;
(d) To make recommendations generally with a view to improving the organization and working of forward markets;
(e) To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary.
Participants In Futures Market
1. Farmers/Producers
2. Merchandisers/Traders
3. Importers & Exporters
4. Consumers/Industry
5. Commodity Financers
6. Agriculture Credit Providing Agencies
7. Corporate having Price Risk Exposure in Commodities
Benefits of Futures Trading:
1. Price discovery for commodity players
A farmer can plan his crop by looking at pieces prevailing in the futures market.
2. Hedging against price risk
Farmers can sell in futures to ensure remunerative prices
A manufacturing firm can buy in futures to hedge against volatile raw material costs
An exporter can commit to a price to his foreign clients
A stockists/supplier can hedge his carrying risk to ensure smooth prices of the seasonal commodities round the year.
3. Easy availability of finance
Based on hedged positions commodity market players (farmers, processors, manufacturers, exporters) may get easy financing from the banks
4. Risk Management
Growers-short hedge on upcoming produce
Traders-short hedge on stored quantity
Manufacturers-long hedge on input cost, short hedge on finished products
Any price risk that is not managed is a cost; any cost is a direct dent on profitability
5. Price Discovery
Futures prices can be used as indicative prices for negotiating the export prices and also upcountry sales.
Even though the first modern futures market was established in 1875 for cotton contracts by the Bombay Cotton Trade Association; just a decade after CBOT traded its first future. But later in 1940s, trading in forward and futures contracts as well as options, were either outlawed or made impossible though price controls. Hence during World War II futures trading was prohibited to contain runaway speculation and illegal hoarding. This continued till 1952, when the Government passed the Forwards Contracts Regulation Act, which to this date controls all transferable forward contracts and futures. In 1966 futures trade was altogether banned to give effective powers of governmental price control. A few select commodities saw a reintroduction of futures in 1980 following the khusro committee report. All that began to change with liberalization of the India economy in the early 1990’s. In 1993 the Kabra committee was appointed to look into forward markets. The committee recommended in 1994 that all futures banned in 1966 be reintroduced as well as many others would also be added. But then also, till April 2003 futures trading were allowed only in a limited number of commodities. However, within next year things have been hotting up with the launch of major commodity futures exchanges.
Commodity Futures Exchange In India
In spite of the critical importance of agriculture in India, till recently there was no large nation-wide commodity market. Commodity trading has traditionally been dispersed and fragmented across the country with regional commodity markets and local mandis accounting for all trading, with the regional markets, working pretty much in isolation from one another.
The reasons for this were:
Physical warehousing and transportation problems, and
Information problems
This hindered the development of a national market. As a result, agricultural prices varied greatly across the country with some parts of the nation burdened with excess supply of the same produce that was in severe need in some other parts. Thus, the distributional benefits of a market system remained untapped because of such fragmented trading in agricultural produce. Further this fragmentation paved the way for acute food grain shortages and poverty among the growers of the same crops to exist simultaneously.
Economic Benefits of Commodity Exchanges
1. Greater price discovery enabling more efficient pricing in underlying spot market.
2. Risk transfer between various heterogeneous market participants
3. Greater transparency & better price dissemination on a nationwide scale
4. Better production planning, rationalization of transaction costs & better margins for producers.
5. Better supply chain management in commodities with elimination of inefficient intermediation.
Forward Markets Commission (FMC)
It is headquartered at Mumbai, is a regulatory authority which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952.
" The Act provides that the Commission shall consist of not less than two but not exceeding four members appointed by the Central Government out of them being nominated by the Central Government to be the Chairman thereof. Currently Commission comprises four members among whom Shri S. Sundareshan, IAS, is the Chairman and Dr. Kewal Ram, IES, Dr. (Smt) Jayashree Gupta, CSS, and Shri Rajeev kumar Agarwal, IRS, are the Members of the Commission."
The functions of the Forward Markets Commission are as follows:
(a) To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952.
(b) To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act.
(c) To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods;
(d) To make recommendations generally with a view to improving the organization and working of forward markets;
(e) To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary.
Participants In Futures Market
1. Farmers/Producers
2. Merchandisers/Traders
3. Importers & Exporters
4. Consumers/Industry
5. Commodity Financers
6. Agriculture Credit Providing Agencies
7. Corporate having Price Risk Exposure in Commodities
Benefits of Futures Trading:
1. Price discovery for commodity players
A farmer can plan his crop by looking at pieces prevailing in the futures market.
2. Hedging against price risk
Farmers can sell in futures to ensure remunerative prices
A manufacturing firm can buy in futures to hedge against volatile raw material costs
An exporter can commit to a price to his foreign clients
A stockists/supplier can hedge his carrying risk to ensure smooth prices of the seasonal commodities round the year.
3. Easy availability of finance
Based on hedged positions commodity market players (farmers, processors, manufacturers, exporters) may get easy financing from the banks
4. Risk Management
Growers-short hedge on upcoming produce
Traders-short hedge on stored quantity
Manufacturers-long hedge on input cost, short hedge on finished products
Any price risk that is not managed is a cost; any cost is a direct dent on profitability
5. Price Discovery
Futures prices can be used as indicative prices for negotiating the export prices and also upcountry sales.