Commodity Exchanges in India

1
Commodity Exchanges in India

• Shubhashis Gangopadhyay
• December 19, 2005
• Presentation at ISB, Hyderabad

2
Early History

• Forward trading in commodities
• (Arthashastra)
• Bombay Cotton Trade Association set up a futures
  market in 1875
• Other products followed
• Banned during WWII

3
More Recent History

• Forward Controls (Regulation) Act, 1952
• Act applicable to all trades where delivery was
  after more than 11 days
• Forward Markets Commission
• Regulatory body
• All futures trade banned in 1966
• Was reintroduced in certain commodities in 1980

4
The Present

• Kabra Committee 1993
• Reintroduce futures banned in 1966
• NAP 2000 --- removal of price controls
• Department of Consumer Affairs set up in 1995
• Promotes futures trading by reforming existing
  exchanges

5
The Market

• Commodity futures market has the potential to be
  a USD 600 billion market
• Currently, INR 1 trillion (USD 22 billion)
• 25 exchanges 4 national level exchanges
• Many exchanges specialized in particular
  commodities
• MCX metals and crude oil
• NCDEX guar
• NMCE jute, pepper, coffee

6
Some Future Issues

• Growth of national exchanges
• Viability of regional exchanges (?)
• Standardization of products --- quality
• Grey market
• Self-regulating to professionally managed
  for-profit exchanges
• Convergence --- can commodity derivatives be
  traded in stock exchanges?
• SEBI like regulatory body

7
Actions Pending

• Commodity options
• Cash settlement
• Amendment of the FC(R)A
• Stamp duty and octroi
• Warehouse receipts made tradable

8
Environment

• FMC to be an independent regulator
• Issue of convergence --- who trades which
  derivatives?
• Exchange staff and exchange promoters, who in
  turn are the dominant traders in the underlying
  physical markets

9
The Focus

• Why do we need this market?
• Price stability --- liquidity and volume
• Integrated agricultural market
• Example of stock market
• Risk trading by the small farmer

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