SECP responds to cotton futures concerns

The Securities and Exchange Commission of Pakistan (SECP) has dismissed the concerns raised by several sections in Pakistan about trading of futures contract in cotton at the Pakistan Mercantile Exchange Limited (PMEX), as unsubstantiated.

The SECP has said that it had granted the approval for futures contract in cotton only after the PMEX had completed a lengthy procedure of consultations with textile mills and cotton traders.

It said that the approval has been granted in accordance with its mandate under the 1969 Securities and Exchange Ordinance and the 1997 Securities and Exchange Commission of Pakistan Act. Under these acts, the SECP is responsible to oversee matters relating to listed securities and this includes derivates like futures contracts in commodities.

“The trading in ‘futures contracts’ is different from ‘spot’ or ‘forward’ trading, which the SECP does not regulate. A futures contract in a commodity is a standardised marketable security based on a certain pre-determined quantity, whereas spot or forward trading involves physical commodity itself with immediate or deferred delivery. Hence, a futures contract may or may not involve physical delivery, but spot or forward trading definitely involves delivery,” the SECP explained.

Responding to the concerns raised by the Karachi Cotton Association (KCA) that the futures contract in cotton will lead to price volatility, the SECP said that the futures contract will utilize the trading price of an international contract only as a reference and it will be settled in local currency, as is presently being done in the case of futures contract in gold and silver that are being traded at the PMEX.

The SECP further clarified that the listing of futures contract in cotton on the PMEX cannot influence the price of the primary cotton contract that is traded on the international exchange. Since both the underlying price and cash settlement price will be of the same international deliverable contract, the cash-settlement procedure is in no way detached from underlying international physical futures trading.

“Futures contract in a range of commodities are being offered by several commodity exchanges in various countries. These contracts are based on international contracts, i.e. similar to the PMEX cotton contract, but are settled in local currency of that countries and these do not involve any physical delivery of the commodity,” the SECP concluded.