FMC takes measures to liberalise commodity futures trade

To draft guidelines for a uniform penalty structure and simplify KYC norms.

The commodity derivatives market regulator, the Forward Markets Commission (FMC) has decided to take a slew of measures to liberalise the futures trade.

FMC is planning draft guidelines for a uniform penalty structure on all commodity exchanges. Currently, the penalty is decided by the individual exchange, depending upon the gravity of guilt and performance of the trader on the exchange platform. Therefore, these differ.

Second, the regulator has also committed to exchange officials in a meeting last evening to simplify know-your-client (KYC) norm to make it more trader-friendly. Traders and exchange officials feel the ambiguity in KYC norms made trading difficult.

Also, FMC set up a committee of its officials headed by experienced member D S Kolamkar to oversee other norms on commodity futures trade.

The Kolamkar-led committee is likely to bring up issues relating to extension in trading time from the existing 5 pm to 11.30 pm in internationally commodities like soybean and soyoil. Traders say Indian exchanges close before opening up of global exchanges in developed countries like the US and the EU.

Hence, contracts open on domestic exchanges with wide premium and discount, depending upon the volatility in global markets. By the time the benefit is replicated in India, fundamentals generally change. Therefore, Indian traders are virtually barred from the benefit of price volatility in global trading hours. But, FMC chairman B C Khatua emphasised the need for more deliberation on the issue before taking a decision.

Khatua is believed to have directed Kolamkar to take a consensus from all commodity exchanges on issues like appointment of market makers, slashing transaction charges for bullion and energy, uniform position limit, etc. But exchange officials were apprehensive on all these issues.

For market makers, exchange officials argue, the commodities futures market is not mature enough to accept such mechanism. The system cannot be replicated from overseas either as one commodity is traded in one exchange there.

In India, however, one commodity is traded on many exchanges and the same commodity is liquid on one exchange and illiquid on the other. Hence, promoting market makers will snatch volume and turnover from one exchange to the other and exchanges will clash for the same space, which will not be a healthy sign for the commodity futures trade.

Commodity exchanges were primarily set up to promote agri futures. Hence, slashing transaction charges for non-agri would hit the primary objective. Many exchange officials, in contrast, had asked to slash transaction charges for agri commodities to attract retail participation.

It is very difficult to trace a trade for a uniform position limit unless FMC, like Sebi, monitors the entire trade on a centralised server at the regulator’s office. Since each exchange differs in its position limit, hence, it would not be practical to call upon a uniform position limit for every exchange in each commodity. The remaining issues like mini contracts in agri commodities, fungibility of warehouse receipts, etc. were also deliberated without any consensus.