Boost soon for derivatives in illiquid commodities

FMC panel for market-making measures also clears resumption of futures in guar

The Forward Markets Commission (FMC), the commodity derivatives market regulator, is planning to soon allow market-making in illiquid commodities, to enhance depth in the futures market and provide equal opportunity for producers of all commodities.

Talking on the sidelines of FMC’s advisory committee meeting on Tuesday, Ramesh Abhishek, chairman, said, “Mem-bers were of the view that market-making should be allowed in illiquid commodities to enhance depth in the commodity futures market. We would take our view soon.”

However, he said, this would not be allowed in exchange-specific illiquid contracts. If a commodity is liquid on an exchange and illiquid on another, the regulator would not allow market making in those contracts.

GREEN LIGHT
Advisory panel recommendations

• Allow market making in illiquid commodities
   
• Restore guar futures
   
• Sub-committee to evaluate contract specifications
   
• Increase delivery centres
   
• Effective regulations for narrow commodities

Market making is an attempt to attract participation. Under this system, exchanges pay a fee to member-brokers to encourage traders through various means for trading in certain sections of commodities.

FMC would frame guidelines, based on the views of this first meeting of the 40-member panel. Recently, it had asked commodity exchanges for extensive initiatives to attract participation in illiquid contracts. Exchanges would be asked to generate a minimum daily turnover or minimum members or open interest in each illiquid contract for getting their renewal. A number of contracts were automatically delisted as exchanges were not keen on getting renewal. Recently, 20-odd commodities were delisted from all commodity exchange platforms. FMC might give six months to commodity exchanges to attract some participation in illiquid contracts.

“We understand there are a number of commodities in which participation can be obtained later, given their nature. We would allow exchanges to get some volume in six months, a reasonably good time,” Abhishek said.

It is also planning to allow relaunch of futures trading in guar soon, after a majority of committee members supported the view. After meeting with a couple of government agencies, the guar contracts would be restored. To avoid a repeat of the earlier excessive speculation in guar, which helped its price rise 900 per cent in a short span of time, some safeguards are being considered.

On the panel’s suggestions, FMC has planned a sub-committee comprising members of all sectors of representatives to review contract specifications filed by exchanges for approval. Additionally, it is mulling more delivery centres of agri commodities to facilitate traders to take or give delivery if the price moves abnormally on either side. It might allow exchanges to focus on delivery centres primarily in production and consumption centres.

Exchanges are being asked to identify at least one or two aggregators each, to increase participation of retail farmers. Some exchanges have made progress in that direction and the hope is that others would follow. As a pilot project, the government of Maharashtra has formed an association to integrate small farmers, which needs to be replicated through the country, Abhishek said, without giving details.