Miss­ing Pieces in Com­mod­ity Mar­kets

The Economic Times - - Breaking Ideas -

Fi­nance min­is­ter Arun Jait­ley’s Bud­get 2017 speech did men­tion that the com­modi­ties mar­kets re­quire re­forms for the ben­e­fit of farm­ers. He also called for an op­er­a­tional and le­gal frame­work to in­te­grate spot and de­riv­a­tives mar­kets for com­mod­ity trad­ing, which is un­ex­cep­tion­able. The cap­i­tal mar­kets reg­u­la­tor, Sebi, faces le­gal dif­fi­cul­ties in al­low­ing op­tions trad­ing in com­modi­ties, and has re­port­edly de­cided to fo­cus, for now, on at­tract­ing more in­sti­tu­tional play­ers to the com­mod­ity fu­tures mar­ket. But such seg­mented ap­proach in mar­ket de­sign will not do.

The point is to have a so­phis­ti­cated and well-de­vel­oped fi­nan­cial sys­tem to bet­ter man­age myr­iad risks across cur­ren­cies, se­cu­ri­ties and de­riv­a­tive con­tracts. Op­tions — which give the buyer the right but not the obli­ga­tion to buy (or sell) a cer­tain as­set — in com­modi­ties would lead to much-needed flex­i­bil­ity in the fu­tures mar­ket. Yet, we lack a firm le­gal frame­work for com­mod­ity op­tions. The For­ward Con­tracts (Reg­u­la­tion) Act (FCRA), 1952, does have pro­vi­sions that give rise to a mea­sure of un­cer­tainty in fu­tures trad­ing. While the FCRA is un­der the Union List, trades on the un­der­ly­ing com­modi­ties fall un­der the State List for agri­cul­tural com­modi­ties. There are var­i­ous other stand­alone laws, such as the Ware­hous­ing Act, 2007, or the Food Safety Act, 2006, or the APMC Act that pro­duce an in­co­her­ent ecosys­tem for com­mod­ity de­riv­a­tives. The re­ported Sebi game plan is to let pri­vate eq­uity funds and ven­ture funds into com­mod­ity fu­tures, to be fol­lowed by mu­tual funds. And, in the next phase, in­sur­ers and other fi­nan­cial in­sti­tu­tions would gain en­try. But ar­ti­fi­cially com­part­men­talised, iso­lated fi­nan­cial mar­kets would be wholly sub­op­ti­mal and avoid­able. Bet­ter mar­ket de­sign, please.

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