EVOLUTION OF COMMODITY EXCHANGES

Most of the Commodity Exchanges, which exist today, have their origin in the late 19th and earlier 20th century. The first
central exchange was established in 1848 in Chicago under the name Chicago Board of Trade. The emergence of the
derivatives markets as the effective risk management tools in 1970s and 1980s has resulted in the rapid creation of new
Commodity Exchanges and expansion of the existing ones. At present, there are major Commodity Exchanges all over
the world dealing in different types of commodities.
ORIGIN OF COMMODITY MARKET IN INDIA
Cotton was the first commodity to attract futures trading in the country leading to the setting up of the Bombay Cotton
Trade Association Ltd in 1875. It was the first organized futures market. Bombay Cotton Exchange Ltd. was established in
1893 following the widespread discontent amongst leading cotton mill owners and merchants over functioning of Bombay
Cotton Trade Association. The Futures trading in oilseeds started in 1900 with the establishment of the Gujarati Vyapari
Mandali, which carried on futures trading in groundnut, castor seed and cotton. Futures trading in wheat was existent at
several places in Punjab and Uttar Pradesh. But the most notable futures exchange for wheat was Chamber of
Commerce at Hapur set up in 1913. Futures trading in bullion began in Mumbai in 1920. Calcutta Hessian Exchange Ltd.
was established in 1919 for futures trading in raw jute and jute goods. But organized futures trading in raw jute began only
in 1927 with the establishment of East Indian Jute Association Ltd. These two associations amalgamated in 1945 to form
the East India Jute & Hessian Ltd. to conduct organized trading in both Raw Jute and Jute goods. Forward Contracts
(Regulation) Act was enacted in 1952 and the Forwards Markets Commission (FMC) was established in 1953 under the
Ministry of Consumer Affairs and Public Distribution. India was in an era of physical controls since independence.
Agricultural commodities were associated with the poor and were governed by policies such as Minimum Price Support
and Government Procurement. Further, as production levels were low and had not stabilized, there was the constant fear
of misuse of these platforms which could be manipulated to fix prices by creating artificial scarcities. This was also a
period which was associated with wars, natural calamities and disasters which invariably led to shortages and price
distortions. Hence, in an era of uncertainty with potential volatility, the government banned futures trading in commodities
in the 1960s. The Khusro Committee which was constituted in June 1980 had recommended reintroduction of futures
trading in most of the major commodities, including cotton, kapas, raw jute and jute goods and suggested that steps may
be taken for introducing futures trading in commodities, like potatoes, onions, etc. at appropriate time. The government,
accordingly initiated futures trading in Potato during the latter half of 1980 in quite a few markets in Punjab and Uttar
Pradesh. With the gradual trade and industry liberalization of the Indian Economy pursuant to the adoption of the
economic reform package in 1991, Government of India constituted another committee on Forward Markets under the
chairmanship of Prof. K.N. Kabra. The committee recommended that some of the existing commodity exchanges
particularly the ones in pepper and castor seed, may be upgraded to the level of international futures markets. The Expert
Committee on Strengthening and Developing Agricultural Marketing (Guru Committee: 2001) emphasized the need for
and role of futures trading in price risk management and in marketing of agricultural produce. This Committee's Group on
Forward and Futures Markets recommended that it should be left to interested exchanges to decide the
appropriateness/usefulness of commencing futures trading in products (not necessarily of just commodities) based on
concrete studies of feasibility on a case-to-case basis. It, however, noted that all the commodities are not suited for
futures trading. For a commodity to be suitable for futures trading it must possess some specific characteristics. The
liberalized policy being followed by the Government of India and the gradual withdrawal of the procurement and
distribution channel necessitated setting in place a market mechanism to perform the economic functions of price
discovery and risk management. The National Agriculture Policy announced in July 2000 and the announcements of
Hon'ble Finance Minister in the Budget Speech for 2002-2003 were indicative of the Governments resolve to put in place
a mechanism of futures trade/market. As a follow up, the Government issued notifications on 1.4.2003 permitting futures
trading in the commodities, with the issue of these notifications futures trading is not prohibited in any commodity.
Options trading in commodity is, however presently prohibited.
The year 2003 is a landmark in the history of commodity futures market witnessing the establishment and
recognition of three new national exchanges National Commodity and Derivatives Exchange of India Ltd. (NCDEX), Multi
Commodity Exchange of India Ltd (MCX) and National Multi Commodity Exchange of India Ltd. (NMCE) with on-line
trading and professional management. Not only was prohibition on forward trading completely withdrawn, the new
exchanges brought capital, technology and innovation to the market.