Continuing with the concepts of ‘excessive speculation’ and ‘position limits’ to make the market more stringent, discussion on future prices/spot prices, liquidity-speculation regimes and possibilities to standardize speculation also becomes indispensable.

Despite many believe that future prices don’t affect spot/cash market prices paid by market participants (business/consumers), in fact, future prices directly affect spot prices of commodities. In many large economies around the world, large commodities purchases are solely based on the nearest-month’s futures prices as basis of pricing. For instance, in case when futures prices of gasoline surge amidst market fundamentals, wholesalers and retailers adjust spot prices for gasoline. This concept clearly exhibits that futures prices eventually affects spot prices of commodities.

It is also believed that cushioning market speculation ultimately decreases liquidity and surge hedging costs. Concerning these issues, chairman of CFTC opines, “the vast majority of trading volume is key futures markets-up to 80 percent in many markets – is day trading or trading in calendar spreads.:” This implies that only 20 percent of trading is executed by the market participants facilitating long-term perspective to the commodity markets, i.e., impact on prices of commodities.

One major concern about speculation at international market is that it is utterly impossible to absolutely streamline speculation. But market participants and economists from around the world come forward with their opinions differently. They argue that a lot can be done about market speculation. The concept of stability and competition has been much talked in a bid to monitor market speculation. The major reforms required to improvise market speculation is believed to be effective execution of position limits, standardizing margin requirement mechanisms, mandatory clearing and data reporting requirements and prohibitions on dangerous proprietary trading activities.

Finally, it can be interpreted that, earnest reforms on speculation, position limits, strict regulation on market manipulation, focus on market transparency and limit speculation in addition to other related market mechanisms are indeed mandatorily required to streamline the commodity market.

It would be better if concerned entities from both government and private sectors look up on these international issues and endeavor to seriously act on these regimes to develop commodity market in Nepal and carry on this market as one of the indispensable component of Nepalese financial system.

Lastly, with abundant hopes for the Nepalese commodity market in our hearts, let’s start our new lives on post 21-12-2012 era.

Have a great weekend everyone!