Within barely a week of discontinuing fixed deposit receipts (FDRs) as obligation towards cash margin, the National Commodity & Derivatives Exchange (NCDEX) has kept the decision in abeyance.
On June 7, commodity derivatives market regulator, the Forward Markets Commission (FMC), had informed all exchanges not to accept FDRs towards cash margin obligations. Broking firms criticised the move, saying all FDRs were received only by depositing cash in banks. Hence, these FDRs were as good as cash.
On Friday, however, the FMC again allowed exchanges to accept FDRs towards cash margin obligation.
Commodity exchanges, with prior permission of the FMC, levy margins and special margins, depending upon the volatility in commodity futures. A few commodities closely linked with US and EU markets like gold, silver, crude oil and refined soy oil witness high volatility in evening sessions. Consequently, trade limits of participants are automatically squeezed. In case traders raise their position to full capacities and prices remain highly volatile, clients either have to square off their positions or deposit margins in banks early next day. Their trade limits are, therefore, eroded in case the commodity price is volatile in the evening session. Under these circumstances, clients deposit FDRs and cash to their members to fulfil margin obligations.
“FMC’s restoration of its earlier decision can be beneficial for member brokers,” said Naveen Mathur, associate director (commodities and currencies), Angel Broking.
Almost all commodity exchanges offer full exposure to minimum base capital deposits of members. For instance, for the minimum base capital requirement of Rs 30 lakh for an NCDEX membership, a member has to pay Rs 15 lakh in cash, while the remaining Rs 15 lakh can be paid in FDRs and share certificates of companies shortlisted by the exchange.
“The withdrawal of FDRs from the security deposit as minimum base capital favoured exchanges. Since FDRs are as good as cash, the regulator should have no problem with certificates, too,” said a senior official with a city-based commodity broking firm.
The guidelines, however, do not debar a member for not depositing FDRs of the entire amount, excluding the cash. For instance, for the base minimum capital requirement, a member can deposit 50 per cent (the figure varies for different exchanges) in the form of FDRs and share certificates.
However, he can also deposit the entire minimum base capital in cash.
Margins and special margins levied by exchanges, in consultation with the regulator, however, have to be paid in the mode specified by the regulator at the time of levy. According to current guidelines, a member may deposit the entire margins in FDRs. Margins and special margins are levied to limit volatility in commodities. Before the suspension of guar trading on futures exchanges, a cash margin of up to 60 per cent was levied. The intention behind the levy of such cash margins was to limit volatility, said Ananda Kumar, chief business officer, NCDEX.
According to Ashok Mittal, chief executive of Emkay Commotrade, levying cash margins also benefits exchanges. This is because while interest earned on FDRs would be a member’s income, the cash margins, if deposited in banks, would earn interest for exchanges, he added.