KCA against cotton futures trading

The decision of the Securities and Exchange Commission of Pakistan (SECP) to authorize Pakistan Mercantile Exchange Limited (PMEX) to introduce futures trading in cotton has been opposed by the Karachi Cotton Association (KCA).

The KCA has claimed that the SECP did not adequately consult the cotton industry stakeholders including All Pakistan Textile Mills Association (APTMA), KCA, Pakistan Cotton Ginners Association (PCGA) and Pakistan Cotton Forum (PCF) before arriving at the decision.

In a recent press release, the KCA has said that apparently, PMEX International Futures Contract depends on the NY Cotton Futures Contract and the transactions are settled in cash.

Also, PMEX has averred that this contract would provide all those involved in different activities in the cotton value chain with hedging facility. Meanwhile, in its personal notes, PMEX has stated that domestic cotton does not form the base for trading. There is, thus, an anomaly as both the claims vary from each other.

Further KCA has even stated that interestingly US cotton, which hardly constitutes around 15 percent of the total global output, is solely tenderable in NY Futures Contract. Thus, it is difficult to grasp as to how NY futures market would be able to mitigate any concerned risk against Pakistan. PMEX however, claims that NY Futures Contract forms base of their contract.

Nonetheless, this calls for another anomaly as wherein NY Futures is a deliverable contract, PMEX contract has no provision for physical delivery. Besides, there is also a need to consider that cotton surplus advanced economies like Brazil, Australia and India have not yet introduced NY Futures Contract, while PMEX has introduced the same in a cotton scarce country.