With reference to the editorial, “Proceed with caution” (March 23), like other financial derivatives, commodity derivatives play a crucial role in both price discovery and deepening of the underlying spot market. Apart from adding liquidity to the market, these derivatives also help in managing and hedging risks.
Against this backdrop, the Securities and Exchange Board of India’s (Sebi) plan to expand eligible participant categories for commodity derivatives market as well as the bouquet of trading products is certainly welcome.
In the past, commodity derivatives were made the scapegoat for supply-side issues that led to skyrocketing of prices of a particular commodity. Many people including policymakers tend to believe that derivatives are nothing less than gambling instruments driven by greed and speculation. Or, people have been hoodwinked and derivatives blamed for it.
Being leveraged products, derivatives of any kind are potentially risky. For developing a liquid commodity derivatives market that functions well, the role of top-class regulation and supervision cannot be gainsaid.
All safeguards must be put in place to ensure that the market does not become one-way traffic operated by fly-by-night operators. At the same time, the task of educating the public as well as policymakers on the role of derivatives in enhancing liquidity and better price discovery may also be undertaken by Sebi in public interest.
The plan to include, inter alia, banks in the list of eligible participants will go a long way in providing a larger set of risk-mitigating instruments to India’s beleaguered banks. Further, with the introduction of new derivative products like option contracts in the commodity exchange, Indian banks will be able to better hedge some of the commodity-related risks in their credit portfolio.
Santanu Sarma Barua Bhubaneswar
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