Brokers jump onto foreign commexes

FMC may be flummoxed,but a whopping Rs 25,000 cr of daily turnover comes from foreign trading.

Poor regulatory oversight,technology that renders boundaries meaningless and significant arbitrage opportunities yielding 4-5 per cent profits a month,have led to a situation where a whopping Rs 20,000 crore to Rs 25,000 crore of daily turnover in commodities comes from online trading in foreign commodity exchanges,according to industry players. Such trading,though,illegal seems to be escaping the scrutiny of the commodities regulator,Forward Markets Commission FMC.

The CEO of a leading commodities brokerage house told The Indian Express that more than 100 players today trade online on commodities in foreign exchanges to take advantage of the difference in prices of say,copper traded in an Indian commodity bourse and Comex,part of the New York Mercantile Exchange. When contacted,BC Khatua,chairman,Forward Markets Commission FMC,the regulator for commodities trading in India,said such practices have not been brought to his notice,but warned that trading in foreign commodities exchanges was illegal and punishable. The FMC had,through two separate circulars issued in June 2006 and March 2007,specifically said that real time trading on terminals of foreign commodity exchanges in India was illegal and punishable under Section 21 of the Forward Contracts Regulation Act.

Acknowledging that such trading had gradually increased over the last year,another FMC source said it was difficult to track online trading of commodities in foreign exchanges. The returns a year ago were as high as 7-8 per cent a month. The FMC had allowed some companies to offer business process outsourcing BPO or knowledge process outsourcing KPO services to foreign clients in commodities trading business about a year ago, the source said. These companies,under the garb of offering advisory and broking services to foreign clients,started trading themselves,the source added.

FMC chairman Khatua,however,pointed out that the regulator had on March 28 through a circular told all commodity exchanges that none of their members must undertake BPO or KPO services to foreign clients trading on foreign commodity exchanges. The circular further said companies that offer such services cannot be made members in any of the recognised commodity exchanges either. It is,however,learnt that some that were originally members in some domestic commodity exchanges,got permission to get into BPO/KPO business,and subsequently withdrew their memberships from the exchanges.

When asked,Khatua admitted this,but said,There are only a couple of them. According to the FMC chairman,the regulator will definitely take action when such practices come to its notice. However,we do not have sufficient staff strength to undertake elaborate investigation, he said.

Another leading commodities broker,who did not want to be identified said,Boundaries are only in peoples mind. Many players are trading out of two-room houses with high-speed internet connectivity.

Explaining the modus operandi,the broker,said players set up two companies,one registered in India to trade in commodities through domestic exchanges,and the other registered in say,the US or Dubai,to trade in foreign exchanges. While prices across commodities and geographies should be same in an ideal market,they are not so in reality,throwing open opportunities for ingenious market players to buy in one region and sell in another. Of course,they square up their positions by buying futures or options. In the last 12-18 months,bullion gold and silver and some other metals such as copper have offered returns of as high as 7-8 per cent a month,attracting many brokers to play this market.