With rains eluding farmers, commodity futures market regulator has started tightening noose over the agri commodity futures market to ensure speculative activity remains under control, with margins of several agriculture commodities (near month contracts) are trading at discounts, or in backwardation, in the futures market, compared to the spot market. Market participants are attributing this phenomenon to regulatory measures imposed by the regulator, Forward Markets Commission (FMC). Out of 12 actively traded agri commodities, six are at discounts to spot in near month contracts.
Normally in the commodities segment, prices in the futures markets are quoted at a premium, since it includes the cost of carry.
This time, however, because of several regulatory measures taken by the FMC, including doubling of margins from five to 10 per cent on all agricultural commodities, staggered delivery-related restrictions and margins as high as 50 per cent in some cases, in several commodities, near month contracts are traded at discounts to their spot prices. In some commodities like menthaoil, soybean and cardamom discounts are between nine to 11 per cent, compared to prices in the spot market.
FMC chairman Ramesh Abhishek explained, “Futures prices in agriculture commodities are now reflecting positions in the spot physical markets, which is desirable. This means futures prices are not driving spot markets and speculation in future market is under control.”
FMC has raised minimum margins on wheat and sugar to 10 per cent from Monday and that is not all. The commission is considering many more such regulations.
FMC has already implemented the system of not allowing contracts for lean month maturities. In agricultural commodities, there are some months when no new crop arrives in the market and hence there will be hardly any deliveries. Contracts maturing in such lean periods are not permitted by the FMC. For 15 agri commodities, including several spices and oilseeds, the decision has been conveyed to exchanges. Contracts for 2013 lean months have been rejected by FMC.
Stiff regulatory measures taken so far seem to be a beginning as several other measures intended to impart transparency in the futures market are being contemplated.
FMC has sought views of exchanges regarding separate disclosure of positions regarding proprietary and client transactions as well as volumes due to algorithm and high frequency trading. Another proposal is that exchanges should ask clients with large positions in futures to disclose their spot market positions, also. FMC proposes exchanges to collect and maintain such information as that will help identify manipulations, if any. FMC however, has not taken a final decision on this.
In a move that can deepen the market and attract real hedgers into the futures market, FMC has asked exchanges to look at giving relief in payment of margins to hedgers who have deposited goods equivalent to their open positions with the exchange’s recognised warehouse.
The regulator is also considering relaxing norms relating to warehouses in and around delivery centers. At present, warehouses should be within a 50-km radius of the delivery center for agriculture commodities. To allow more warehouses in the delivery centre areas, FMC is considering increasing this limit to 100 km.