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7/29/2019 History of Commodity Futures in India
1/24
Chapter 4
History of CommodityFutures in India
&its Regulations
Overview, Functionality and Governance in
Commodities Exchanges
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EVOLUTION OF COMMODITY MARKETS
Evolution of futures trading
Futures in rice in 17th century Japan.Rice tickets and standardised rules fortrading.
Organized trading in commodities evolvedduring mid-19th century in Chicago. CBOT,established in 1848, introduced the firsttraded derivatives contract in agri.commodities.
Evolution of various exchanges across theworld
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Global Historical Perspective
Forward markets - in London towards the end
of 17th Century
US, Canada, Japan and Egypt - 18th Century.
CBOT 1848; standardised futures contractsintroduced in 1865
New York Cotton Exchange started in 1870
Chicago Mercantile Exchange was set up in1898
Legalized options trading started in 1934 inthe United States
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The Indian Story
Started as early as 1875 BombayCotton Trade Association
Fears of unhealthy speculation
Commodity options trading and cashsettlement of commodity futures bannedin 1952
Further blow in 1960s
Initiative for agricultural liberalizationdawn of a new era for commodities
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THE INDIAN STORY.
In the 1960s & 1970s the GOI suspendedfutures trading in several commodities (cotton,jute, oilseeds etc)
Khusro committee appointed by the GOIrecommended the reintroduction of futurestrading in commodities in 1980s
Recent history: Suspension/ban on futurestrading in Rice, Wheat, Urad & Tur
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Indian Market
A trip down the memory lane
1875 Bombay Cotton Trade Association
1900 Gujarat Vapari Mandali (now BCE)1919 Calcutta Hessian Exchange
1920 Futures trading in Gold in B.B.A until mid-1950s
1921 East India Cotton Association
1927 East India Jute trade Association
1957 IPSTA Spices
1966 Complete ban
1980 Khusro Committee- Cotton, Jute, Potatoes
1994 K.N Kabra Committee 1994
2000 National Agriculture Policy
2002-03 3 National Level Multi Commodity Exchange
over 100 Commodities allowed for futures trading
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Regulation is a Maze of Legalities
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Three Tiers of Regulations
Forward Markets CommissionFC(R) Act 1952
FCRR 1954
Ministry of Consumer Affairs, Food and Public Distribution
Multi Commodity Exchange of India Limited
Regulations
Bye-Laws and Business rules
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Indian Derivatives Sector OverviewLeading to Government Initiatives to Develop Exchanges
Ministry of Consumer Affairs
FMC
(Forward Markets Commission)
Commodity Exchanges
National
Exchanges (2)
Regional
Exchanges
MCX NCDEX NMCE NBOT
20 Other
Regional
Exchanges
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Forward Contracts Regulation Act, 1952
Empowers Govt. through FMC for regulationof commodities trading
Prohibits Options trading
Exempts Non transferable Specific DeliveryContracts from regulation
Covers Transferable Specific Deliverycontracts as well as hedge contracts
Empowers Govt. to regulate specificcommodity
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Forward Contracts Regulation Act, 1952..Contd
Grant of recognition to exchange(associations) by Govt.
Not more than 4 members on Governing
bodies of recognized associations(exchanges)
Machinery (regulatory body) FMC
Repeal of any State Act on Commoditiesprevailing (transfer of commodities to
Union List)
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Forward Markets Commission - Functions
Advises Govt. in providing recognition toexchanges
Watchdog of the commodities derivativesmarkets
Supplies reports to Govt. on conditionsprevailing in the commodities markets
Provides recommendations to Govt.
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Forward Markets Commission - Functions
Inspection of accounts of exchanges and itsmembers
Approval / amendment of Bye laws, Rules andregulations, Articles of Association andMemorandum of Association of exchanges
Vital link between commodity exchanges andGovt.
Approval of contracts before launch
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Evolution of Regulation
Shri. A. D. Shroff Committee in 1950
Prof. M. L. Dantwala Committee in 1966
Prof. A. M. Khusro Committee in 1979
Prof. K. N. Kabra Committee in 1993
World Bank Study (in joint associationwith UNCTAD) in 1996
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Shroff Committee (1950)
Draft Bill for Forward Markets Regulation
was made
Inputs received from different commercial
organizationsLed to passage of the Forward Contract
Regulation Act of 1952
Forward Market Commission (FMC) was
established in 1953, dedicated to
regulation of forward markets
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Dantwala Committee (1966)
Review of previous 10 years of FMC
Suggest amendments to FCR(A), 1952
Recommended that FMC be made
autonomous
Futures in export commodities to be allowed
Futures contracts defined
Options trading not recommended
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Khusro Committee (1979)
Review role of FMC and analyze
commodities markets
- Not all commodities were to be allowed for
futures trading
- Laid down the possibilities for specific
commodities such as Sugar and Silver
- Condition for trade: Homogeneity ofcommodity and large supply and demand
- Exporters to be allowed to hedge
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Kabra Committee (1993)
Exchanges to enlist more members and
be demutualised
Ensure Capital adequacy norms
Encourage Computerization
Vigilance Committee and Panel of
surveyors
Arbitrators (dispute settlement
mechanism)
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Kabra Committee (1993)..Contd.
Options and range forwards to be allowed
Recognition to exchanges to be permanent
(or at least for 5 years)
Time limit for ready delivery contracts to bemade 30 days from 11 days
Futures trading to be allowed for more
commoditiesAllow Indian companies to hedge abroad
(accepted)
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World Bank and UNCTAD (Joint Study)
Opening of Agricultural markets would lead to greater
exposure to price volatility
Price Risk Management
Price fluctuations to be sufficiently large (to ensure
price discovery)
Efficient transfer of risk from Hedgers to Speculators
and Arbitragers
Standardization of trading practices
Storage facilities to be enhanced
Encourage participation of large institutional investors
Improve internal management of exchanges
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Amendments to FC(R)A, 1952
Updation of existing definitions & insertion of new definitions
Changes in provisions relating to composition & functioning ofFMC
Enhancement of the powers of FMC
Establishment of Forward Markets Appellate Tribunal along with
provision for designating any of the existing AppellateTribunals under FC(R)A
Corporatisation & demutualisation of regional commodityexchanges & setting up of a separate clearing corporation
Registration of Intermediaries
Enhancement of penal provisions in the FC(R)A
Permitting trading in options in commodities
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Effectiveness of Regulation
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Looking Forward
Currently, Indian commodity exchanges
are not allowed to trade index futures.
The amendments to FCRA would allow
Options to be traded, which wouldprovide depth to the market
Finally, Banks , Mutual Funds & FIIswould be allowed to provide maturity to
the market
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This presentation has been prepared to provide awareness & information
purpose only. While every effort has been made to assure the accuracy of the
information contained herein, any affirmation of fact in this reference material
shall not create an express or implied warranty that any example or description
is correct. This material has been made available on the condition that errors or
omissions shall not be made the basis for any claims, demands or cause ofaction. The information provided, has been taken from sources believed to be
reliable, but is not guaranteed by the MCX as to accuracy or completeness , and
is intended for the purposes of education and information only. The Rules and
Regulations of the Exchange should be consulted as the authoritative source on
all contract specifications and regulations.
Disclaimer