FMC considers nod to trading in short-term delivery contracts

While the issue of who would regulate spot exchanges is unclear, short-term delivery contracts might be on their way to derivative exchanges' platforms.

Spot exchanges are for delivery and futures exchanges for hedging, where delivery is a per cent of the trades. But the commodities market regulator, Forward Markets Commission (FMC), is considering allowing trade in short-duration forward contracts, different from the futures contracts.

Forward contracts are compulsory delivery contracts, with a duration of seven or 11 days. The contract may remain open for the duration. Two commodity futures exchanges have given proposals to launch trade in the contracts. FMC is considering the proposals. Regulatory sources said there was no final word.

THE WAY FORWARD

• Two exchanges have given proposals to launch trade in short-term forward contracts
• These are compulsory delivery contracts, with a duration of seven or 11 days
• Delivery can take place by warehouse receipts
• Futures contracts have a long maturity, one to three months
• This is a reason to have short-term contracts
• These would help price discovery in the spot market

Sources said Section 2 (I) in the Forward Contracts Regulation Act (FCRA) allowed such contracts. However, with the FMC under the finance ministry, some systems adopted by the capital market regulator, Securities and Exchange Board of India (Sebi), could be adopted. So, there could be a separate segment in the exchange for trading in such contracts.  

In 2007, the Multi Commodity Exchange of India (MCX) had proposed trading in compulsory delivery-settled forward contracts. It was permitted. But, it didn't pick up, perhaps due the nascent stage of the market. FMC feels the market could be again tested, said a source.

For spot market traders in agri commodities, short-term delivery-settled contracts could be use: Delivery could take place by warehouse receipts. But, for this, delivery mechanism of the exchanges should be robust. At present, in gold, the premium for physical delivery is much higher than its trading on MCX. Gold forward contracts could help tame the cost of acquiring the metal. Futures contracts have a long maturity, one to three months. This is a reason to have short-term contracts. These would help price discovery in the spot market, said the source.