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Cotton futures resume in India after a 32-year gap

After a 32-year ban, futures trading in cotton started on Saturday evening at the trading ring of the nondescript cotton exchange building in the Cotton Green area of south central Bombay.

The token futures trading for February 1999 contract witnessed volumes of 14 lots (each lot has 55 bales or 93.5 quintals).

A few traders eagerly gathered at the trading ring and quoted their bid/offer prices to mark the inaugural trading.

February 1999 contract opened at Rs 4,811/quintal and reached a high of Rs 4,925/quintal towards the close of trading, which lasted for around 15 minutes. The settlement price, which would otherwise be the weighted average of the last one hour of trading, in this case was Rs 4,824/quintal.

The East India Cotton Association, which launched the future trading product known as Indian Cotton Contract, will conduct trading for February and April initially and later three more delivery periods -- December, June and September would be launched. ICC is a standardised and exchange-traded product with 26mm staple length, fine grade, 3.6-4.2 micronaire and 18 g/tx strength.

It was launched after getting the nod of the Forwards Market Commission. According to the ECIA sources, monthly prices within a crop season have shown wide fluctuations between 7.5 per cent and 26.2 per cent during the last decade. Therefore, the ECIA contends that ICC would prove an effective risk management tool and transparent future price indicator.

The unit of trading is 55 bales, which can be tendered at any place in India where cotton is pressed, the main centres being Bombay, Ahmedabad, Coimbatore, Madurai and Indore.

Tendering differences will be fixed between 1st and 7th of the delivery month and the maximum permitted price fluctuation is Rs 150 per 100 kg during any trading day. Clearing and mark-to- market will be effected daily at the day's settlement price, which will be the weighted average price of the last one hour of trading.

The ECIA had hired a Bangalore-based commodity and financial risk management firm Fortell Capital Trust Limited to prepare the infrastructure and framework to launch trading. A Bombay-based software firm has developed the software systems for clearing house activities.

Like most commodity futures markets in the world, trading would be through the outcry method. The Forward Markets Commission Chairman V K Aggarwal, who inaugurated the futures trading, hinted at the possibility of developing online trading system in the future.

Cotton futures started a year behind the government's expectations.

The Central government approved the futures trading in cotton in July 1997 and hoped trading to start by December 1997. The ECIA, however, indicated then that they would start trading in April 1998. Eventually, some progress was made, as mock trading commenced on September 30, 1998 and the real trading started on Saturday.

Aggarwal mooted the idea of merging commodity exchanges across the country to improve standards. ''The logical conclusion to this process would be setting up of a national commodity exchange. Such an exchange would organise trading of all permitted commodities, have membership spread throughout the country, provide screen-based trading at different centres, guarantee the performance of contracts and promote facilities of public warehousing and a warehouse-based delivery system,'' he said.

He also suggested that the warehouse receipts of approved warehouses can be used as documents of title to the goods, the ownership of which can be transferred by mere endorsement.

UNI

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