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Will the fundamentals ever
regain control over the market?
Cotton market has
been extremely volatile this season. Expert
opinion suggests that the major force behind the
market volatility was the fallout from the
subprime debacle in the U.S. Hedge funds were
forced to liquidate their positions and the cash
spilled over to the soft commodity market
triggered an unprecedented surge in cotton
price. The size of cash flowed in to the
commodity market essentially dwarfs the size of
the cotton market. The market is no longer based
on the fundamentals rather it represents the
rein of cash, undermining the very essence of
the futures and options long considered as
dependable tools for price discovery and risk
management. Role of speculative activity and
commodity investment funds must be managed
intelligently to regain the confidence in
futures market.
The United States Commodity Futures Trading
Commission (CFTC) must play a constructive role
here to limit the non-index-trading speculative
activities which move the market with greater
ease to an absurd non-fundamental extremes
simply based on the strength of their cash.
Suggestions have been made by the industry
leaders that the CFTC implement more stringent
reporting requirements for OTC activity, higher
margin requirements and exert more control over
the Intercontinental Exchange (ICE) to have the
futures and options better reflect the cotton
fundamentals not the flow of cash. The ICE must
understand that the cotton futures market is not
designed to be a financial investment tool
rather a dependable vehicle for price discovery
and risk management. It is of course the
interest of the ICE to regain the confidence of
trading community. Confidence is not just a
fundamental element of the ICE but it should be
in fact the very purpose of its existence.¨
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