Commodity Market Evolution

Commodity derivative trading in India commenced even before financial derivative trading. The first organized commodity trading centre in India, the Bombay Cotton Trade Association commenced its operations within a short span of time after establishment of the first international level exchange, the Chicago Board of Trade in 1848. There was active trading in many commodities, especially agricultural commodities. New exchanges were formed in due course and additions were made to trading commodities. After independence the Forward Market Commission was established to regulate the functions of derivative trading.

Policies in connection with commodity derivative trading had a lot of twists and turns. Critics were of the opinion that future trading actually led to widespread price fluctuation on account of unscrupulous speculation. Tougher restrictions were imposed and by 1960s, there was practically a ban on futures trading of commodities barring a couple or few. This situation continued upto 1980s. A slow change in policy regarding commodity futures was observed. The Government appointed various committees to come out with creative suggestions in connection with derivative trading. The era of LPG witnessed a thorough change in the policies regarding commodity future trading. The ban imposed was lifted and once again, active trading in commodity futures emerged. The initial years of the new millennium witnessed the emergence of National Level

Commodity exchanges which permitted trading in multiple commodities. Online trading platforms were established. Many new regional exchanges, mostly specializing in single commodities were established. Of course, the regulators imposed ban on some commodities like sugar in between, but as and when situations were under control, such ban was repealed. The Government felt that the regulator FMC lacked necessary zeal and powers but curtail the fluctuations and to tame the irregularities. Besides, the market witnessed large quantum of speculative activities and even illegal trading. As early as 2003, there were talks to unify the regulators. But the NSEL scam which witnessed payment default in the national Spot Exchange in 2013 prompted the finance ministry to bring the regulator of commodity markets under its control. As a result, the Forward Contract Regulation Act was repealed; SEBI took charge as the ultimate authority of commodity trading or in other words, Forward Market Commission was merged with SEBI in September 2015. SEBI established new commodity cells and separate divisions for the monitoring and regulation of commodity trading. In the budget speech of 2016-17, Finance Minister Sri Arun Jaitley announced that trading in new derivative instruments in commodities would be permitted by SEBI, subject to conditions. In June 2017, SEBI permitted Option Trading in commodity markets with an intention to deepen the market. Initially, trading would be permitted in one commodity which is in the top 5 list of trading based on turnover of last twelve months. The developments in Commodity Markets are presented in a timeline frame below:

• 1875: Bombay Cotton Trade Association, the first organized future exchange was established to trade in cotton contracts
• 1893: Bombay Cotton Exchange Limited, an independent institution was established following the unhappiness among the members and traders of Bombay Cotton Trade Association.
• 1900: Gujarat Vyapar Mandali was established for carrying out trade in oil seeds like castor, groundnut etc.
• 1913: Establishment of Wheat Future Market by Chamber of Commerce which later spread to various parts of Punjab and Uttar Pradesh.
• 1919: For trading in raw jute and jute goods, Calcutta Hessian Exchange Limited was established.
• 1920: Future trading commenced in gold and silver in Bombay and later it was spread to Kanpur, Jaipur etc.
• 1927: East India Jute Association was established to offer future contracts in raw jute.
• By the end of 1930s, there was trading in almost 300 commodities.
• 1945: Merger of Calcutta Hessian Exchange Limited and East India Jute Association to form East India Jute and Hessian Limited
• 1950 Shroff Committee was established for recommendation of regulations in connection with commodity futures.
• 1952 to 1954: Forward Contract Regulation Act was promulgated in 1952 and Forward Market Commission was established in 1953 to regulate commodity derivative trading. Rules were subsequently framed
• 1957: Indian Pepper and Spice Trade Association (IPSTA) was established at Kochi for trading in black pepper and other spice products.
• 1960s: Suspension in trading of select commodities was imposed.
• 1966: Dantwala Committee was formed to review the role of commodity future markets. Comprehensive ban on commodity future trading was imposed by the Government.
• 1980: Khusro Committee recommended re- introduction of commodity derivative trading.
• 1980s: Trading was permitted in some commodities like potato.
• 1993-94: Kabra Committee was established to give recommendations in the modus operandi of commodity derivatives following the changes in the economic policies. It recommended changes in the FCR Act and also introduction of trading in 17 commodities. The Government later allowed trading in 15 commodities.
• 1990 to 2000 Many regional exchanges (like National Board of Trade Limited, Indore, Rajadhani Oil and Oil Seeds limited, Delhi, Coffee Futures Exchange India Limited Bangalore, First Commodity Exchange of India, Kochi ) were established
• 2000: National Agricultural Policy was formulated based on the findings of the expert committee headed by Shankarlal Guru. The Government permitted commodity futures trading accordingly.
• 2002: The first National Level Exchange, National Multi-Commodity Exchange (NMCE) Limited was established.
• 2003: National Commodity and Derivative Exchanges Limited (NCDEX) and Multi Commodity Exchange Exchange Limited (MCX) were established as ANtional Exchanges. Electronic trading exchanges stated operation.
• 2006: 2008 National Spot Exchanges were established by NCDEX and MCX.
• 2007: Abhijith Sen Committee was established to examine the impact of futures trading on agricultural commodity prices.
• 2009: Indian Commodity Exchange Limited, the 4th National Level Exchange was established.
• 2010: ACE Commodities and Derivatives Exchange Limited, the fifth national level exchange was established.
• 2012: The sixth National Level exchange, Universal Commodity Exchange Limited was established.
• 2015: FCRA was repealed and FMC merged with SEBI. SEBI became the regulator of commodity derivative markets.
• 2017: Introduction of option trading in commodities on a prototype basis.