Hic­cups in In­te­grat­ing Spot & Fu­tures Com­mod­ity Mar­kets

Na­tional Agri­cul­tural Mar­ket pro­vides scope to have a spot price de­ter­mined elec­tron­i­cally just like a stock price

The Economic Times - - Finance & Commodities -

set­tle­ment. In case of stock mar­kets this hap­pens seam­lessly be­cause both mar­kets — cash and deriva­tives — op­er­ate on the same plat­form and fi­nal set­tle­ment price for a share or in­dex is the spot price.

In case of com­modi­ties, it is com­plex as the fu­tures mar­ket de­vel­oped in­de­pen­dent of the spot mar­kets. The rea­son is that whole­sale cash mar­kets or man­dis were in oper­a­tion for years and op­er­ate in the phys­i­cal man­ner which is opaque. Fu­tures are on elec­tronic plat­forms which make the price dis­cov­ery process trans­par­ent. How­ever, there are few spot prices that can be linked di­rectly with Ad­di­tion of 35.65 lakh in­vestor in FY17 so far Source: PTI the fu­tures prices as there are a plethora of va­ri­eties/grades in agri prod­ucts which may not be traded on a daily ba­sis in the phys­i­cal mar­ket. While there could be over 60 va­ri­eties of cot­ton, the fu­tures ex­change deals with prob­a­bly not more than two. Spot prices are pro­cured through a process of polling of mar­ket par­tic­i­pants that are cleansed and used as bench­marks. This is be­cause ar­rivals come at har­vest time at the pri­mary stage of sale and could be any­time dur­ing the year when there is a sec­ondary sale. The polled spot price is fi­nally used for set­tling the con­tract as the fu­tures price should con­verge with the spot price. While this sounds good, it has been found that the level of ac­cu­racy is low since the price is a polled one and can be in­flu­enced by par­tic­i­pants.

The con­cept of Na­tional Agri­cul­tural Mar­ket (NAM) pro­vides scope to have a spot price of say mus­tard de­ter­mined elec­tron­i­cally just like a stock price which can be jux­ta­posed with the NCDEX fu­tures con­tract of mus­tard with the same ba­sis cen­tre. This will make it eas­ier to match the two and the price dis­cov­ery process be­comes ro­bust. The Bud­get talks of bring­ing about such a link where there is seam­less re­la­tion­ship be­tween the two seg­ments.

The NAM will the­o­ret­i­cally link all the 7,500 odd man­dis and the prices for all prod­ucts. Fu­tures prices would then give an op­tion of de­cid­ing the tim­ing of sale.

But as this task is hu­mon­gous, the ex­ist­ing com­mod­ity ex­changes should be given ac­cess to run man­dis which are the ‘ba­sis cen­ters’ for their con­tracts with govern­ment sup­port so that the two mar­kets get in­te­grated.

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