FMC increasingly using special margin rule

Finds it a useful tool to curb excessive speculation in agri products also curbs turnover on exchanges

In a major hit to agri-centric futures commodity exchanges, the commodity derivatives market regulator, the Forward Markets Commission (FMC), has frequently levied special margins on a number of farm products.

The latest is on barley, on which the Commis-sion levied 20 per cent special margins effective April 27 to control the volatility in prices.

Over recent months the regulator has used this tool (special margins) as a major instrument to restrict traders from excessive price speculation in farm commodities.

The action, however, has resulted in a sharp reduction in turnover at agri-centric commodity exchanges, including the National Commodity & Derivatives Exchange (NCDEX) and Ace Derivatives & Commodity Exchange (ACE).

The special margins are levied by the regulator through the respective exchanges on which the commodity remains active. This is over and above the initial margins — an amount of money required to be kept with the exchange before buying and selling positions on a futures contract, as protection to compensate in case of default by traders.

“The special margins levy has, however, created more problems for commodity exchanges, through restricting traders from taking wide positions. Since the margin money is blocked with the exchange, traders get no exposure with that money which results into lower exchange business,” said an analyst.

The turnover of NCDEX, for example, has declined from a record high of Rs 11,290 crore on January 3 to Rs 5,485 crore on April 26 in the morning session. Its turnover before the special margins phenomena started was between Rs 8,000-8,500 crore till the beginning of this year. Similarly, the daily turnover has witnessed a decline of around 15 per cent on ACE from the level of Rs 650 crore until the beginning of this year to Rs 550 crore now.

The special margins, however, have helped reduce the volatility in some commodities. According to Dilip Bhatia, CEO, ACE, “The special margins reduces traders’ position limits, which, if they want to maintain, would require infusion of fresh capital. This means traders require proportionately additional capital for the same position limit. Sometimes, it helps at least temporarily to control volatility in the futures market.”

According to a study by city-based commodity broking firm, Angel Broking, mentha oil price has plunged to trade currently at Rs 1,693 a kg from Rs 2005.7 a kg on March 1, the day FMC levied a special margin of 10 per cent.

Similarly, pepper price today plunged to trade at Rs 38,350 a quintal as against Rs 39,070 a quintal on April 3, the day FMC levied a 15 per cent special margins on all long- side contracts.

A report by SMC Research said barley prices have shot up to a record of Rs 1,793.50 a quintal yesterday, a rise of a little over 50 per cent in the past two months.

Naveen Mathur, associate director, Angel Broking, said, “The special margins, though reducing volatility temporarily in the commodity, comes back to move according to fundamentals after a couple of days of knee-jerk reactions.”