Expecting early passage of the amendments to the Forward Contracts Regulation Act, the Forward Markets Commission (FMC) is moving ahead on implementing the next phase of reforms in the commodity futures market.
The commodity futures regulator has decided to sharpen its focus on increasing participants in the futures market and bring more participants, hedgers and farmers to the floor. The real motive of the move is to make agri commodities futures vibrant.
The FMC is also contemplating measures like providing relaxation to hedgers. A hedger is one who already has positions as a consumer, grower or seller and wants to hedge risks associated with price movements on the futures market.
If a person proposing to trade on the commodity futures exchange deposits goods fully in exchange-registered warehouses, he could be exempted from all types of margin levies, including initial margin, special margin and others. This will reduce the cost of hedging.
“Margins are basically protection from delivery default. Since clients already deliver goods under exchange control, they should be entitled to some benefits. Margin exemption would also encourage others to keep their stock with the exchange, resulting in lower delivery default,” said FMC Chairman Ramesh Abhishek.
These clients, however, would have to pay mark-to-market losses, if any, according to the existing exchange guidelines. Through this, hedging activities will go up.
The regulator has asked the country’s two leading exchanges, the Multi Commodity Exchange of India (MCX) and the National Commodity & Derivatives Exchange (NCDEX), to encourage exchanges for delivery (a system utilised for settling exchange-traded deliverable accounts outside the exchange platform between buyers and sellers mutually and submit the report to the exchange with mutual consent). “Why should anyone have a problem once a buyer is ready to take delivery of even sub-standard goods?” Abhishek asked.
Also, the FMC is considering utilising vacant storage spaces with sugar mills as satellite warehouse for delivery of exchange-quality goods locally.
Abhishek argued this would substantially reduce transportation costs, making commodities cost-effective.