No hike in delivery default fine: FMC

Commodities markets regulator, Forward Markets Commission (FMC), has rejected the demand of traders and exporters to hike the delivery default penalty, saying that it is working on alternatives to tighten the system.

“Imposing hefty penalty is not the only solution. Now we cannot raise it as it was recently slashed to 2.5 per cent from 8 per cent to converge spot and futures prices,” FMC Chairman B C Khatua said.

The Agricultural Produce Marketing Committee (APMC) of Unjha, Gujarat, had urged FMC yesterday that it should either hike the penalty up to 25 per cent on sellers or ensure 100 per cent delivery of the commodity.

Jeera exporters had also complained of delivery defaults as sellers could exit the market by paying only 2.5 per cent of the traded contract amount as penalty.

Khatua said, “Apart from the penalty provision, we are working on alternatives to penalise defaulters”.

One of the options, which FMC is working on currently, is that the exchange should buy and ensure the delivery of commodities to the opposite party and recover the differences in the futures and spot prices from the defaulter.

As delivery of many farm commodities in the futures market have been made compulsory, the regulator has received complaints from traders and exporters that low penalty provision is encouraging more defaults. Khatua pointed out that defaults are not large in many cases, but “we are tightening the system to ensure healthy trading practices”.

On the other hand, the leading agri commodity bourse NCDEX denied any delivery defaults.

“We do not have any cases of defaults as all contracts are settled as per the contract terms stipulated in all contracts,” NCDEX Chief Business Officer Unopam Kaushik said. He termed the allegation baseless when pointed out that jeera contracts on the NCDEX have maximum delivery defaults as alleged.

Kaushik said, “In futures trading, the exchange is a price discovery and risk-hedging platform and not a delivery platform for compulsory delivery contracts”.

He said all the liquid contracts of NCDEX are running successfully with the present penalty structure.

After the penalty was reduced in October last year, jeera delivery on NCDEX has dipped as low as 30 tons in May this year from a level of 750 tonnes in November 2007. In July, 234 tonnes of jeera were delivered through the exchange, which has seen a significant slump in the delivery volume in the last one year, according to NCDEX data.