Financial matters - History of Commodities Trading

HISTORY OF COMMODITIES TRADING

Historically, the biggest have been made in commodities trading. It started centuries before stock markets came into being. The first organized future market in India was established in 1875 by the ‘Bombay Cotton Trade Association’ to trade in cotton.

Before the outbreak of the Second World War, India had a thriving futures market for a number of commodities such as groundnut oil, rice, raw jute, precious metals like gold, silver etc by 1960; s India had the necessary legislation in place with commodity futures considered as a reasonably successful trading market. In mid 1960’s, due to wars. Natural calamities and the consequent shortages, futures trading in most commodities ware banned.

It took three decades before commodity futures could be re-initiated into India market, This long period of hibernation for commodity futures un India has come to be know as the “lost decades” With the liberalization of the economy, emphasis was once again, to develop commodity futures trading. The kabra Committee set up in 1993 to examine commodity futures trading recommended futures trading in several commodities. Accordingly futures trading for 16 commodities and their by-products, and international futures trading for pepper and castor oil were permitted, by 2002. India had 20 commodity exchanges, trading around 42 commodities, with international contracts being traded for pepper and castor oil.

The history of commodities in India is arranged in chronological order.

1875 - Bombay cotton Trade Association.

1920 – Futures Market in Bullion-Mumbai.

1952 – Forward Contracts (Regulation) Act.

1975 – Futures Trading Prohibited.

1980 – Khusro Committee Recommendation.

1997 – Trading resumed in certain selected Commodities.

2003 – Government Grants Permission for setting up NMCE’s.

Reasons for failure of commodity futures exchanges so far

1. Single commodity exchanges with low liquidity.
2. Open out cry trading, which restricted trading to specific regions and prevented national reach national reach.
3. Dominance of speculators band inadequate participation from hedgers, which resulted in high basis risk, as integration between physical and futures market was limited.
4. Inefficient clearing and settlement procedures.
5. Exchanges with inadequate infrastructure, logistics and financial funding.

Recent Developments:

Forward Market Commission (FMC) the governing body for commodity trading in India in 2002, invited applications from associations companies’ consortium of organizations it set up a Nation-wide Multi Commodity Exchange.

The aim was to create a nation wide efficient commodity exchange, which could provide price discovery and offer price-risk management to all participants involved in the commodity business cycle. The modern exchanges will enable multiple commodities trading on online world standard trading platforms, with nation wide reach.

The exchanges will now provide real time price and trade data dissemination. The new exchanges maintain capital settlement guarantee funds and have stringent capital adequacy norms for brokers, which ensure trade guarantee to participants.

The exchanges will enable deliveries in electronic form. Warehouse receipts exchanged through the depository participant’s facilities efficient settlement procedures and will attract participants from all key sections of the commodity business cycle. The institutions managing the new exchanges comprise banks and government organizations, which bring with them institutional building experience, trust, nation wide reach, technology and risk management skills. The new changes will have rule-based management by professionals having no trade interest.