Of late, the Forward Markets Commission, the commodities futures market regulator, has been under fire from several quarters.

It has been accused of failure to rein in excessive speculation in a number of commodities — some essential, such as soyabean and mustard, and some non-essential, such as guarseed and guar gum.

Chambers of commerce and trade associations have mounted pressure on the Commission.

There is also a demand to ban futures trading in essential commodities.

The Commission Chairman, Mr Ramesh Abhishek, who took charge last year, initiated several measures which were piecemeal and, therefore, failed to douse the fire.

He has now ordered a comprehensive review of the working of the commodities futures market.

The review will look into the role of speculators, brokerage firms, exchanges and other interested parties.

In an exclusive interview to Business Line , Mr Abhishek unveiled his plans to reform the market with effective regulation.

The futures market is in turmoil. There are allegations of excessive speculation in several commodities. How does the Commission propose to respond?

We are doing a comprehensive review of the futures market in commodities to align it better with the physical market requirements.

This is so that it serves the purpose of price discovery and price risk management.

The basic principle is that a commodity should be available in sufficient quantity so that it can be traded and it can be delivered.

The delivery centres, the open interest, the position limits — all these must be attuned to the needs of the physical market participants.

I think our physical market is too precious.

We are very clear that the futures market is basically an adjunct of the physical market for commodities.

What we have seen in many cases is that sometimes the contracts which are traded on our exchanges are not exactly attuned to the needs of the physical market participants.

So they become only a means of speculation. Speculation is an integral part of the market. Nobody denies that.

But the basic role of speculator is to assume risks while the hedger is the one to transfer. If there is no hedger who wants to transfer risks, then what risks are the speculators assuming? That is the question.

What is this project called, and is the Commission doing this exercise on its own?

We are doing this ourselves; as a matter of fact we have started an internal exercise.

After we get feedback internally, then we will write to the exchanges for their feedback.

We would put up the details on our Web site. We will send it to the large number of physical market participants and stakeholders for their views.

And this exercise is for all commodities and futures markets.

We expect to complete the exercise by June.

There has been a lot of speculation in the guar complex recently. There is suspected speculation in oilseeds too. What is the regulator doing about it?

We have taken a series of actions.

Guarseed production was 15.5 lakh tonnes last year; this year it is said to be 12.1 lakh tonnes. Exporters were getting $7,500 for guar gum in December.

I have been told that now the prices have gone up to $22,000. So we have high demand and lower availability.

When prices started going up in December we increased the cash margins on the long side and it went up to 60 per cent and ultimately to 73 per cent including the initial margin.

We reduced the position limits of guarseed and guar gum because of lower production.

We also relaxed the clubbing guidelines for the first time.

Earlier, the clubbing guidelines were very stringent I would say.

What does this imply?

A client can only take only a specified limited position. But if he takes positions in several names then it becomes a related-party transaction. In that case we club all those and the position limit is cut to that of one client.

So earlier the guidelines provided that if you had common directors, common partners, etc., then you could club them.

Then people very smartly chose clients' names where such clubbing could not be done.

But the exchanges knew that they had common telephone numbers and common office addresses, but they could not do anything.

What we did in January was very interesting. We made the clubbing criteria flexible.

We said that if the exchanges find any common pattern of acting-in-concert, the trades could be clubbed.

The exchange then clubbed the positions of several very large clients and groups.

We also ordered in January that no fresh positions will be taken.

Gradually because of this the open interest and trading volumes came down sharply, from 3.5 lakh tonnes of guarseed to 60,000-70,000 tonnes.

By early March it came down to 7,000 tonnes.

The exchange came out with a proposal to reduce the trading lot to encourage the participation of small traders. But all this did not have any effect.

So we decided that we should basically end this contract.

We are getting an enquiry done.

We have asked the exchanges to give us a list of gainers in all the major agri-commodities since October last so that we know whether there have been people acting in concert, whether there has been margin funding or other trading irregularities.

Also now we have ordered the exchanges not to launch soyabean contracts.

All this is part of our review. September contracts were supposed to be launched on April 10, they will not [be launched]. We are going to do this for all agri-commodities.

We are not going to allow contracts in the leanest months, when it is very doubtful that any meaningful futures trading can be done for price discovery.

Will you be looking at something to segregate hedge contracts from speculative contracts?

This is high on our agenda. It is one of the weaknesses of our market that there is no distinction between different types of clients.

The only distinction we make is in case of those large clients who get short hedge exemption from us, and the exchanges.

Otherwise, there is absolutely no identification of a hedger.

We are going to come out with a policy of how this identification is to be done and we are going to do this in the coming weeks.

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