|Suspending the future|
|Friday, 23 March 2012 00:00|
FMC needs to do more than suspending guar trading
When the prices of something, in this case guargum futures on the NCDEX, go up 120% in a month, 700% over the last four months, 875% over 12 months and 1,300% in the last 18 months, it’s time to sit up and figure out what’s going on. More so when the increased prices are accompanied by sharply falling trading volumes and open interest levels, suggesting there was something more than just normal market forces at play. Not surprisingly, industry chamber Assocham has been writing on this to commodity exchanges regulator Forward Markets Commission (FMC) for many months now. FMC, on its part, has taken some action, the latest being the suspension of trading in guar for April to July contracts late Wednesday night—only squaring off of existing contracts is to be allowed.
This should cool down the market—spot prices have fallen 25% overnight—and bring tremendous relief to those using guar for their produce, and especially farmers who, given the huge hike in futures prices, would have had to buy seeds at much higher values. But a lot more needs to be done by both the FMC as well as commodity exchanges like NCDEX. In January, apart from revising trading limits, FMC had imposed special margin and for a brief while, even suspended taking of fresh positions, quite like what was done on Wednesday. Once the suspension was revoked, however, things went back to normal, with the 4% upper price filter being hit for 15 days between February 11 and March 15 as traders managed to keep pushing prices up.
Not only does FMC/NCDEX need to examine whether trading limits are being breached and whether there are related party transactions, it needs to probe the source of funds to ensure seemingly unrelated trading firms aren’t being funded from the same sources. The futures market is vital not only for those looking to hedge their purchases/sales, but allows farmers to get vital market signals—allowing ‘options’ would make the participation more meaningful. But if the guar kind of trading is allowed to carry on unchecked, the action will just move from one commodity to the other, as has happened over the past few months. That could then result in further restrictions, even a ban, on commodity futures, an outcome no one wants.