Tuesday, November 15, 2016

LIBERAL NORMS FOR COMMODITY OPTIONS

It is welcome that the Securities and Exchange Board of India (Sebi) has decided, in principle, to let commodity exchanges introduce trading in options. Such contracts, bought for a price called the premium, give their holders the right to buy or sell a security at a predetermined price. We need both futures and options to better manage supply and demand and attendant commodity prices. Yet, the fact is that a host of rigidities and anomalies constrain and stultify the commodities market here, and keep it functioning below potential. The world over, commodities are recognised as an asset class. Sebi has now given its nod to launch futures contracts in six new items, including diamonds, tea and eggs, bringing the number of such notified items to 91. Yet, futures trading stands curtailed, in terms of who can trade and in what commodities. Futures are banned, for example, in tur and urad dal and rice. Banks and mutual funds cannot trade in commodity derivatives. Regulated warehouses, whose receipts are negotiable instruments, must proliferate. Also, to deepen and widen the market, foreign investors must be allowed in. There's also the need to rationalise trading margins and position limits. Further, there's the need to permit over the-counter contracts (OTC) in commodity derivatives, and also make way for cash settlement of index-like products in the asset class. Besides, we need foolproof transparency when it comes to sharing of information with brokers and traders. The way forward is demutualisation and corporatisation of all recognised commodity associations. A vibrant derivatives market would mean better instruments to manage prices and supplies of both agricultural and other commodities and better distribution of risk across society.

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