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Thursday, February 10, 2011

Why the FMC Chairman Mr BC Khatua opposes amoral speculators.

The FMC Chairman Mr BC Khatua views pure speculators as amoral(see interview in Mint). But it was only today during his lecture at IIMA, that I got to know the genesis of his views on this subject. And it was truly shocking to hear-its also an excellent example of being careful about the impression you make on others.

When he had visited the NYMEX in May-08(when oil prices were $125 a barrel and rising), he had interacted with a young trader(maybe someone like me 1 yr hence!!!). He had asked the trader his views on oil prices in 6 months and beyond but was answered with a nonchalant shrug that the prices could go only one way-UP. Now, Mr Khatua knew that(then), the oil supply was almost balanced and there was no fear of shortage. When he probed the trader, he heard that the PE/hedge funds/HNI's were all seeking that alpha(extra return to tune of 30%-40%) for which they decided to go bullish on commodities like oil. After all, the slightly balanced situation could tip at the margin with sudden demand from emerging economies like India/China. Now, I do not see anything morally wrong with this approach but Mr Khatua felt that this was misusing a legitimate hedging tool to exploit one sided supply side issue(?).

He also faulted the SRO(exchanges) for following herd mentality in their regulatory tools like margining, position limits etc While he could find some justification in their fear that trade would shift offshore(UK/Singapore etc) if they enforced tough limits, he still felt that this reluctance to enforce their own powers, was the reason speculators could ride freely.

This experience seems to have deeply impacted him as these views persist even nearly 3 yrs hence. And while he is at the helm of FMC, it is unlikely that high frequency traders/ huge financial investors will be allowed into India's commodity futures markets.

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