FMC proposes call auction for spot prices

The Forward Markets Commission, the commodity markets regulator, has sought public comment on introduction of call auction in commodity markets for all contracts, settled in deliveries, by next month. FMC has proposed March 15 as the date for starting call auction trading.

Contracts not settled in deliveries can continue their existing system of arriving at spot prices. The new arrangement will be for agri commodities, where exchanges are currently using spot prices arrived through polling for fixing settlement prices.

Call auction is a mechanism whereby exchanges invite bids and actual trading takes place. Spot prices are based on actual trading.

FMC has proposed call auctions as polling is not considered a transparent method. Exchanges fix settlement price of futures contracts based on the spot market price but since the latter are not transparent and not available nationally, polling has been an accepted market practice since 2003, when national commodity exchanges started trading.

“Another aim of introducing call auction trading on the commodity market is to bring liquidity in illiquid contracts. Instead of spot price polling, there will be actual trading and the price will be decided,” said a senior FMC source.

Draft guidelines say the auction shall be for quality and delivery centre of the commodity, traded and the duration will be 20 minutes. Of this, 15 minutes will be for order entry, modification and cancelling, and the last five minutes for order matching and confirmation.

“Currently, we have daily settlement and final settlement prices. When call auction comes into play, the price which will be entered into the market will be treated as the spot price for the settlement of the contract. This will help bring in a lot more transparency and certainty into the system,” said Naveen Mathur, associate director of commodities and currencies at Angel Broking.

FMC has also proposed a mechanism and guidelines for arriving at final settlement prices based on call auction. Considering final settlement price is merely on the basis of volume weighted average price of all the trades on the date of expiry in the expiring futures contract is potentially risky in illiquid contracts.

The time for call auction will be from 4:40 pm to 5 pm in the evening for commodities which will be traded till 11:59 pm. The exchange can also conduct call auction every day and multiple times a day to arrive at a spot price.

“Call auction will help traders to participate on the market even if one has not taken a position on the futures market,” said Viral Shah, head of commodities at Geojit Comtrade.

All deliveries will take place only from exchange accredited warehouses and the delivery period will be trade day plus two days. Trading will not be available for on holidays.

“It is expected to bridge the gap between spot and futures prices of the commodity by providing a window there by market participants can trade on the spot price of the commodity,” said Viral Shah.