It is claimed that there is a great deal of malpractice on the commodity futures market. On one hand, it is important to maintain a sense of perspective about the incidence of difficulties. There is perhaps one episode of difficulty associated with every hundred contract expirations. The media tends to emphasise the one plane crash, while being silent about the 99 flights which flew smoothly.

These difficulties can be further reduced by strengthening public policy. The regulation and supervision of derivatives markets has many complex issues which require a correspondingly sophisticated apparatus in government. Consider one example of these issues: the problem of a dominant trader who can manipulate market prices. In order to stop this, there are ‘position limits’. However, it is easy for a person to spread his position across many securities firms and thus stay below the limit with any one securities firm. In order to combat this, a universal identity number needs to be given to all market participants, and a central surveillance facility needs to add up the position seen for a person across all securities firms, in order to verify that the position limit is not violated. Further, positions need to be aggregated across family members, which requires corresponding sophistication in the database for tracking family members. Such a system is in the process of being created for stock markets. It will need to be created for commodity futures markets as well.

The correct response lies in addressing problems, and not banning the market. As we have seen with stock markets, the sound functioning of markets requires complex institutional structures, which requires sustained efforts over decades on drafting of law and regulations, building human capital, inspection capacity, an appeals process, and arriving at a judicious blend of competition, market design, policy and supervision.

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