Business Standard

FMC plans boost for commodity markets

Easier position limits, sops for hedgers to push sagging volumes

N Sundaresha Subramanian  |  New Delhi 

The Forward Commission (FMC) is planning several steps in the New Year to revive the commodity markets, which were hit badly by the National Spot Exchange Limited (NSEL) scandal in 2013. The regulator is planning to reduce the curbs on individual members and clients and encourage hedgers in the market.

Position limits of individual clients in the commodity exchanges are likely to be made dynamic soon. At present, these limits are fixed for each client irrespective of the overall open interest.

“We are planning to introduce client limits linked to the overall open interest in the market,” a senior official told Business Standard.

GIFT CHEST
  • Significant dip in volumes in following fiasco
  • mulls several step to incentivise traders and hedgers
  • Position limits of individual clients to be made dynamic, linked to open interest
  • Member limits to go
  • Margins to be removed for hedgers
  • Uniform formula

Position limits refer to the maximum number of contracts a client in the derivatives market can hold on a particular underlying. The limits are prescribed by regulators based on various parameters such as volume, risk weightage, volatility etc.

“Further, the member limits will be removed altogether. At present, there is no difference between a member with 10 clients and one with 10,000 clients. Both are restricted by same limits. The proposed move will free up the hands of members and help develop a robust market,” the official added.

The moves are based on recommendations made by the commission’s risk management group to bring in greater flexibility for the commodity market participants. In other moves, the commission is also planning to do away with additional or special margins payable by hedgers.

“The hedgers already have their positions covered by paying in commodities. There is no point levying additional and special margins. These margins will be removed,” the official added.  

The moves come at a time when the commodity futures market is facing one of the most difficult periods in its 10-year history.The finance ministry, under which the commission functions now, is said to be keen to develop a robust and vibrant commodities market, at par with the securities market.

Total traded turnover has halved in terms of volume and value. According to figures reported by the commission, total traded turnover for this financial year (till November 2013) stood at Rs 76.77 lakh crore on a volume of 658.1 million tonnes (mt). During the corresponding period in last year (April- November 2012), FMC reported Rs 116.26 lakh crore on a volume of 1,011.8 mt.

This financial year, the fall is drastic in the period after the NSEL scam broke at the end of July. In the four months between April and July, the commodity market clocked a turnover of Rs 50.29 lakh crore on volumes of 417.9 mt.

In the next four months (July- November 13), it added just about half of those numbers. Trades worth Rs 26.48 lakh crore happened on goods of 240.2 mt.

The regulator is also likely to take steps to finalise norms governing the settlement guarantee fund in the commodity exchanges. These norms are likely to be in line with norms put in place by IOSCO, the international body of market regulators.The move is aimed at winning back the confidence of investors and traders, who have become sceptical about the reliability of exchange settlements after the scam.

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FMC plans boost for commodity markets

Easier position limits, sops for hedgers to push sagging volumes

Easier position limits, sops for hedgers to push sagging volumes The Forward Commission (FMC) is planning several steps in the New Year to revive the commodity markets, which were hit badly by the National Spot Exchange Limited (NSEL) scandal in 2013. The regulator is planning to reduce the curbs on individual members and clients and encourage hedgers in the market.

Position limits of individual clients in the commodity exchanges are likely to be made dynamic soon. At present, these limits are fixed for each client irrespective of the overall open interest.

“We are planning to introduce client limits linked to the overall open interest in the market,” a senior official told Business Standard.

GIFT CHEST
  • Significant dip in volumes in following fiasco
  • mulls several step to incentivise traders and hedgers
  • Position limits of individual clients to be made dynamic, linked to open interest
  • Member limits to go
  • Margins to be removed for hedgers
  • Uniform formula

Position limits refer to the maximum number of contracts a client in the derivatives market can hold on a particular underlying. The limits are prescribed by regulators based on various parameters such as volume, risk weightage, volatility etc.

“Further, the member limits will be removed altogether. At present, there is no difference between a member with 10 clients and one with 10,000 clients. Both are restricted by same limits. The proposed move will free up the hands of members and help develop a robust market,” the official added.

The moves are based on recommendations made by the commission’s risk management group to bring in greater flexibility for the commodity market participants. In other moves, the commission is also planning to do away with additional or special margins payable by hedgers.

“The hedgers already have their positions covered by paying in commodities. There is no point levying additional and special margins. These margins will be removed,” the official added.  

The moves come at a time when the commodity futures market is facing one of the most difficult periods in its 10-year history.The finance ministry, under which the commission functions now, is said to be keen to develop a robust and vibrant commodities market, at par with the securities market.

Total traded turnover has halved in terms of volume and value. According to figures reported by the commission, total traded turnover for this financial year (till November 2013) stood at Rs 76.77 lakh crore on a volume of 658.1 million tonnes (mt). During the corresponding period in last year (April- November 2012), FMC reported Rs 116.26 lakh crore on a volume of 1,011.8 mt.

This financial year, the fall is drastic in the period after the NSEL scam broke at the end of July. In the four months between April and July, the commodity market clocked a turnover of Rs 50.29 lakh crore on volumes of 417.9 mt.

In the next four months (July- November 13), it added just about half of those numbers. Trades worth Rs 26.48 lakh crore happened on goods of 240.2 mt.

The regulator is also likely to take steps to finalise norms governing the settlement guarantee fund in the commodity exchanges. These norms are likely to be in line with norms put in place by IOSCO, the international body of market regulators.The move is aimed at winning back the confidence of investors and traders, who have become sceptical about the reliability of exchange settlements after the scam.
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