FMC to raise trade position limits

RMG recommendsin its favour, feels current limits is inadequate to attract widerparticipation

Acting on the recommendations of the Risk Management Group (RMG), the Forward Markets Commission (FMC) is looking at revising trade position limits for clients and members. The move is to increase participation in commodity exchanges.

To take a final decision on this, FMC has sought public comments by April 15. In a note to all stakeholders of commodity exchanges, the derivatives market regulator proposed to double client-wise position limit from the existing one. FMC argued that existing client-wise position limits have been utilised almost every time.

“RMG, in its meeting held on January 3, had recommended that the current member- and client–wise position limits are very thin and not in consonance with the annual output, restricting, thereby, wider participation, especially in agri commodities segment. Hence, an increase in the trade position limit is the need of the hour,” the note said.

REVISED POSITION

Proposals on the cards for agri commodities

• Position limits to be revised every year; exchange-wide gross open position limit might be capped at 50 per cent of annual production
• Member-level position limits at 10 per cent of the production or 20 per cent of the market-wide open positions, whichever is higher
• Client gross position limit might be up to one per cent of the annual production or five per cent of the market-wide open position, whichever is higher
• The near-month position should not be netted out with far-month positions

Feeling the need to widen the scope for participation from genuine hedgers, value chain participants had urged FMC to increase trade position limits in both agri and non-agri commodities.  RMG was set up to advise FMC in framing market-oriented policies. In the case of agricultural commodities, market-wise, member and client level open positions limits are reviewed and revised periodically based on the crop prospects, market feedback, commodity-specific information, etc.

Current client level position limits in the case of non-agri commodities are narrow and are far less than the prescribed one per cent of the production. The present client level position limits in the agri-commodities are within the range of 0.03 -0.70 per cent of the annual production.

The annual production estimates kept changing every year; however, these position limits were not revised frequently. Further, the near month position limit is restricted to one-fifth of the total position limit, making it very narrow. It is therefore, proposed that the overall exchange wide gross open position limit may be capped at 50 per cent of the annual production as all the produce do not come to market for trading and a major chunk is retained by farmers and others for self-consumption.

Client gross limit may be up to one per cent of annual production (production + import) or five per cent of the open interest, whichever is higher. Similarly, member level position limits may be up to 10 per cent of the production or 20 per cent of the market wide open positions, whichever is higher. These are total position limit and near-month position limits might be gradually restricted to 50 per cent of the total position limits.

The concept of far-month and near-month limits is not relevant for non-agricultural commodities contracts. The present position limits in the case of silver, copper, zinc, lead may be revised upward for clients.The FMC also felt the need to intensify monitoring and surveillance by exchanges on client-wise position to monitor manipulative intent.

Cash transactions
FMC has also said members of commodity exchanges can accept cash from their clients, subject to the provisions of the relevant laws in this regard like the Income Tax Act, Prevention of Money Laundering Act and any other law in force.