Approval granted by SECP for future trading in cotton at PMEX

The Securities and Exchange Commission of Pakistan (SECP) on several occasions has made its mandate clear in terms of regulation of the securities market and other relevant segments of the financial markets.
The recent approval granted by SECP for trading in "Futures Contract" of cotton at the Pakistan Mercantile Exchange Limited (PMEX), is under the Securities and Exchange Ordinance, 1969 and the Securities and Exchange Commission of Pakistan Act, 1997 which empower SECP to regulate matters relating to listed securities that include derivative products, such as futures contracts.
Futures contracts based on commodities are derivative securities, trading in which is clearly distinct from spot or forward trading. The SECP does not regulate spot or forward trading in commodities. A futures contract in commodity is a standardised marketable security based on a certain predetermined quantity and it may or may not involve physical delivery. On the other hand, spot or forward trading in commodity involves delivery and therefore clearly involves physical commodity itself with immediate or deferred delivery, as the case may be.
In fact the international futures contract in cotton, approved by the SECP for PMEX, utilises trading price of an international contract for purposes of referencing and is settled in local currency similar to other futures contract in gold and silver presently traded at the Exchange and therefore will not fuel speculation or lead to price volatility as apprehended by Karachi Cotton Association (KCA). The trading and price activity on PMEX reflects deep and liquid international markets, and is not prone to manipulation by domestic activity on PMEX.
Furthermore, at the time of proposing futures trading in international cotton contract PMEX had undertaken an extensive process of stakeholder consultation which includes textile mills and trades/brokers in cotton. Globally, commodity exchanges offer futures contract in variety of commodities that are based on international contracts similar to PMEX cotton contract which are settled in local currency without involving any physical delivery of the underlying commodity.
As far as forward or hedge trading in cotton is concerned, the same falls within the ambit of KCA under the Cotton Act, 1957. However, hedge trading in cotton by KCA has been suspended by the Government through an administrative order in 1976. Also, the Cotton Act of 1957 is not a special law to regulate trade in Future Contracts. The government in 2005 decided to resume hedge trading under the aegis of KCA but the official notification has till date not been issued.
In terms of Securities and Exchange Ordinance, 1969 only a commodity exchange duly licensed/registered with the SECP can trade in futures contract and therefore KCA not being a registered exchange under the said Law cannot provide a market for futures trading in cotton. Whereas, PMEX is registered with the SECP as a commodity exchange under the 1969 Ordinance to make available trading in future contracts in commodities. In terms of law the futures contract in commodities include agricultural, livestock, fishery, forestry, mining or energy goods and any product that is manufactured or processed from any such goods.
The futures contract in cotton at PMEX will cater to the requirements of all the market participants including the farmers, ginners, traders, spinners, other textile manufacturers, retailers, wholesalers, corporate buyers and even consumers among others. It will benefit the cotton industry, the agricultural sector in particular and the capital market in general from various perspectives. The said contract is also expected to assist the policy makers by giving the demand, supply and price signals which will be helpful in formulating policy decisions for the cotton industry.
With another commodity-based contract available for trading, the local commodity market is expected to contribute more positively towards broadening the investor base and the overall economic growth of the country. The enrichment of commodities portfolio at the Exchange will also assist in bringing PMEX in comparison with other commodities exchanges internationally.
Even today stakeholders in raw cotton market use prices emanating from international futures contract for reference purposes. Therefore, availability of the PMEX cotton futures contract locally will facilitate the stakeholders in their decision making process through a conveniently accessible platform.-PR