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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