On Thursday, most national newspapers carried a message from the Karachi Cotton Association (KCA), reiterating the bodys opposition to the introduction of a new product at the Pakistan Mercantile Exchange (PMEX).
The product that pricked the KCA is the iCotton Futures Contract, a cash-settled derivative that mirrors the price of the New York Cotton Futures Contract.
Interestingly, the critics do not allege that the product is faulty; instead they seem to suggest that the PMEX should not be allowed to launch it. They highlight that the Ministry of Commerce had previously allowed the KCA to launch a similar product; and therein lays the debacle.
Although the KCA used to have futures contracts available a few decades back, after the establishment of the Securities and Exchange Commission of Pakistan (SECP), the rules of the game have changed significantly.
The Ministry of Commerce is no longer the appropriate authority for allowing or denying a futures contract; the SECP is. Besides, only registered exchanges are allowed to launch futures contracts. Against this back drop, it appears that the biggest hurdle in the way of the KCA launching a cash-settled futures contract the likes of the iCotton, is itself.
In order to make such an offering, the association would first have to develop internal consensus among its members to attempt its conversion into a registered exchange. Only then will it be able to approach the SECP to launch such a product.
So it is apparent that the road is long and arduous for the KCA, if it is to offer a futures contract similar to the iCotton. Talking to BR Research, a prominent KCA member clarified that in the event that the KCA does launch a futures contract, it will be based on physical delivery, not cash-settled. However, that may not even be the intent of the association.
Whats more, the PMEX which is celebrating the launch of its new product right now may also hit a road block subsequently. The KCA member informed that a case has been pending before the Federal Shariah Court regarding the permissibility of cash-settled futures contracts. In the event that the verdict in that case goes against such contracts, the iCotton itself may have to be weeded out of the market.
So even though the PMEX has successfully launched its iCotton contracts, the tussle with the KCA is by no means over. Once the new government takes charge, delegations from both sides of the fence are sure to court relevant ministries. How the cookie crumbles may depend as much on each lobbys ability to move around in political corridors as the mettle in their respective arguments.
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