With the Union Cabinet clearing amendments in the Forward Contract (Regulation) Act, the commodity futures market will deepen, with introduction of options and index futures.
This market has already overtaken the equity derivative market in terms of volume. With these instruments, it can set further growth, as the move will pave way for institutional investors' entry.
With the amendments, the Forward Markets Commission will get an autonomous status at par with the securities market regulator, the Securities and Exchange Board of India (Sebi).
Commodity futures' volumes have crossed Rs 67 lakh crore in 2010 till now and at the current pace, Rs 100 lakh crore may be achieved by the end of the current calendar year.
The FCRA amendments will mean FMC (actually set up as far back as 1953) will be autonomous, with a board of nine members and a chairman.
It will have powers to prepare its own regulations. Many regulations are almost ready, as it was working for years on that.
Once the Bill amending the Act is passed by Parliament, regulatory sources say, 'to achieve better coordination between FMC and Sebi, chairmen of both the organisations will find place on each other's board'.
While financial markets have regulators apart from RBI, with one for the insurance sector and another for pensions, it is only FMC and Sebi that regulate trading platforms or exchanges, requiring coordination.
There will be more clarity on regulating commodity-based exchange traded funds once the amendments are passed.
At present, gold ETFs are permitted and regulated by Sebi but applications for silver and crude oil ETFs are pending, as the underlying assets in their case are commodities, which isn't supposed to come under the direct purview of the Sebi.
The amendments will also pave way for introduction of options trading, index-based trading and trading in freight and weather-related indices like the rainfall index and so on.
Options are a cheaper instrument for hedging the risk in commodities for business, be it a trader or a farmer or user.
Now, can catch-up with China
Lamon Rutten, MD & CEO, Multi-Commodity Exchange, said: "The cabinet nod to the amendments will strengthen India's position on the global commodity map and put it at par with China. Hopefully, India's exchanges can now start catching up with the Chinese markets. It will ensure that India emerges as the price setter from the east."
He further said: "It will permit many new products that will strongly support India's development.
For example, options which allow protection against price risk just by paying an insurance-like premium, and products that can provide protection against risks related to, for example, rainfall or freight costs. We are in complete readiness to start offering these products after necessary approvals."
At present, existing commodity exchanges do prepare various indices but trading in these is not allowed. An FMC official said, "We will now prepare standards for such indices in which trading can be permitted."
Index-based trading will generate huge volumes in the securities market, too.
With teeth comings to the regulator, institutional investors' entry in the commodities market will also be possible and the Commission will consider moving the RBI to allow banks to hedge their risks or their borrowers' risk on the commodities futures exchanges, said the source.
While domestic institutional investors are likely to be permitted in commodities derivatives, foreign investors will have to wait for such facilities in commodities. Both, the consumer affairs ministry and FMC are cautious on allowing these in commodities, said the source.
Said Anil Mishra, MD & CEO, National Multi-Commodity Exchange: "Options would be introduced and futures and options together would provide better liquidity in the market. Farmers' participation would increase through the options route because this would not only become insurance for them in case the market goes down but shall also give them opportunity to capture the best possible price in case of a rally."
