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    Chapter 4 - Cotton trading - Other futures markets 

    India has a rather long history of futures trading. Trading of cotton futures started informally in 1875 after the country emerged as a major cotton exporter, following the disruption in supplies of United States cotton to the United Kingdom due to the American Civil War. Cotton futures trading was formally introduced in 1922 when the Government of Bombay enacted the Cotton Contracts Act which granted recognition to the East India Cotton Association and gave it the authority to administer a cotton futures contract equivalent to 19,600 pounds. Because of price ceilings imposed by the Government, the futures market closed in 1929. When it reopened in 1932, more regulations were put into place. In 1952 the Government prohibited the trade of options (under the Forward Contracts Regulation Act) and also limited the flexibility of the futures contract, making it similar to a forward contract. In 1966 the Indian Government prohibited the trade of cotton futures altogether (along with a number of other commodities).

    The recent cotton contract

    The National Commodity & Derivatives Exchange (NCDEX – see www.ncdex.com) in Mumbai started futures trading in December 2003. It is the largest commodity exchange in India by volume traded and is currently trading 44 commodities, including cotton. Contract size is 50 bales of 170 kg (8.5 tons) for all contracts except for medium staple cotton, which is set at 55 bales (9.35 tons). The long staple cotton contract was traded between October 2004 and July 2005; a total of 77,000 bales of 170 kg (13,090 tons) were traded during that period. The largest volume of 61,050 bales (10,379 tons) of long staple cotton was traded at the exchange in March 2005. The Indian 31 mm cotton contract was traded between October 2005 and January 2006 only, with a total volume traded of 10,800 bales (1,836 tons). Indian 28 mm cotton was traded between October 2005 and February 2006 with a total volume of 22,800 bales (3,876 tons). The currently active contract with the largest volume is medium staple cotton, which started trading in October 2004.

    Total volumes of all cotton contracts traded through July 2006 reached 2.13 million bales or 361,539 tons. The largest cotton futures trade volume of 35,455 tons was reached in December 2004. Large volumes were also traded between December 2005 and July 2006, totalling 146,466 tons.

    The medium staple contract now covers all cotton traded as J 34 (SG) with a base staple length of 25.5 mm and tenderable range of 24–27 mm, with no premium above 27 mm. The delivery centre is located at Abohar (Punjab), but delivery is also allowed at Sirsa (Haryana), Hanumangarh and Sriganganagar (Rajasthan). Hours of trading are 10 a.m. to 5 p.m. Monday through Friday, 10:00 a.m. to 2 p.m. Saturday. Trading and delivery months are January, February, March, May, July, August, October, November and December. A special margin of 4% of the value of the contract is levied whenever prices change by more than 20% compared with the price settled 90 days.

    There are currently 700 members of the exchange who can trade electronically at 858 terminals located at 553 exchange centres across India. Members can trade for their own account or for their clients’ accounts. Individuals, sole proprietors, partnership firms, cooperatives, corporations, companies as defined in the Companies Act of 1956 and other persons or entities as may be permitted under the Forward Contracts (Regulation) Act of 1952 are eligible for membership. The major shareholders of the exchange are banking organizations.

    Information on prices, volumes, deliveries, contract specifications, rules and educational materials are provided on the exchange’s website. The exchange declares that the major functions of this market are to provide a trading platform, price discovery mechanism, speculation and hedging tools. According to exchange data, more than 80% of contracts are closed by physical delivery of commodities, compared with less than 1% of contracts at ZCE in China. This means that there are few speculators participating in this market, and as a result a limited number of hedging operations exist at this exchange. Rather, participants use this market mostly as a trading platform, price discovery tool and physical trade forward contracting.

    The Multi Commodity Exchange (MCX) is an electronic trading platform based in Mumbai, which has 1,000 members in 500 cities across India. The exchange offers futures contracts in medium and long staple cotton as well as in kapas (seed cotton). Cotton contracts started trading in April 2005. Contract specifications are very similar to the NCDEX contracts, but the volumes traded are substantially smaller, though rising. The largest volume for a single cotton contract so far was the May 2006 medium staple contract, with total traded volume of 5,365 tons. Six trading months are offered at the exchange, but based on available statistics traders do not take very long positions. Most positions are taken a month of two before the expiration of the contract. As in the case of NCDEX, most settlements result in the physical delivery of commodities.