The Forward Markets Commission (FMC
), the commodity derivatives markets regulator, has levied base minimum capital (BMC) for algo members
five times higher than that of normal manual members. Until now, minimum base capital was determined by individual exchanges based on the membership criteria.
Interestingly, FMC has kept both the Multi Commodity Exchange (MCX
) and the National Commodity & Derivatives Exchange (NCDEX
) in the same category with Rs 50 lakh of BMC requirement for algo traders. Against that, the normal manual members should require to have a BMC of Rs 10 lakh.
The development assumes significance especially in the wake of the risks involved in algo trading. The BMC would give additional security to traders from situations such as Flash Crash in the US market, which wiped out billions of dollars in a few minutes.
“This is a welcome move,” said Naveen Mathur, associate director, Angel Broking. “Risk is higher in algo trading. Hence, the base capital should be more for algo members than normal manual members.”
The MBC for the remaining four national level commodity exchanges — National Multi Commodity Exchange (NMCE), Indian Commodity Exchange (ICEX
), Ace Derivatives & Commodity Exchange (Ace) and Universal Commodity Exchange (UCX
) — has been fixed at Rs 25 lakh, compared with Rs 5 lakh for normal manual traders.
Out of 6,000 membership base of all commodity exchanges, around 900 members have opted for algo trading facility. It is, however, unclear how many of these have been trading actually.
The FMC has decided to protect traders’ interests by not allowing any exposure on the BMC, unlike in the past when exposure was given on all deposits.
“The commission has observed that the exchanges give exposure on all the security deposits made by their members. As a result, when a member defaults, there is practically no deposit with the exchange which can be used for settlement of claims of the clients, payment of arbitration fee by the members, dues payable on account of pending arbitration cases / arbitration awards, etc. Therefore, the FMC, after consulting the national commodity exchanges, has decided to have a BMC requirement of their members,” said FMC in a circular.
The regulator has asked members to deposit the required amount in two instalments. The first instalment of 50 per cent of the amount should be deposited by April 30, and the remaining by September 30 this year. The proportion should be 25 per cent in cash and the remaining 75 per cent in the form of cash equivalents like fixed deposit or bank guarantee.
In case of a member’s non-compliance with this requirement, the exchange shall block the member’s existing security deposit towards the BMC, and the balance, if any, should be deposited by the member by the respective dates, the FMC clarified.
The regulator has asked exchanges to keep these funds in a separate account and use these only towards settlement of claims, payment of arbitration fee by the member and dues payable by the member on account of pending arbitration cases. The BMC would be refunded to the member at the time of surrendering membership, provided there is no unsettled claim of clients and no arbitration cases are pending against the member.
The FMC asked exchanges to de-activate trading facility of a member who fails meet the BMC requirement by the specified time.