Forward trades to begin on commexes

NCDEX gets okay to start with maize & sugar, hopes to add more; NMCE likely to follow

Forward trading is set to debut in commodities on national commodity exchanges. The leading one, National Commodity and Derivatives Exchange (NCDEX), has got approval for launching forward trading in maize and sugar.

On nationwide commodity futures exchanges, such forward trades will be traded on a separate segment, along with futures, the way cash and derivative transactions are happening on stock exchanges.

Forward contracts are otherwise traded in physical or spot commodity markets or mandis, in which deals are done at a specific date with a predetermined date for delivery settled between two parties. The Forward Markets Commission, which will regulate forward trades as well, has approved two types of contracts in sugar and maize — Non-Transferable Specific Delivery and Transferable Specific Delivery.

Participants will have to take separate membership for dealing in the forward segment, to be known as commodity market participants, for which norms are more lenient as compared to the futures segment. Traders who want to do one-off deals have to go through the trading and clearing members of the exchange’s futures segment.

FMC chairman Ramesh Abhishek said, “FMC wants to promote forward trading which is completely delivery-based.”

Ahmedabad-based National Multi Commodity Exchange also plans to introduce forward trading. This segment, he and others hope, can be a big success and bring credibility, synchronise the physical market with futures and eventually help develop a national reference price for commodities, especially agricultural ones.

The benefit for participants to trade in such contracts on an exchange is that the latter will be the counter-party guarantor for payment and delivery-specified quality of goods. In physical mandis, such trades are not guaranteed for payment or delivery.

An NCDEX spokesperson said, “We have introduced these two commodities in the forwards segment because in our spot exchange business, these two commodities have done well and we are in touch with the traders. Once the trading in forwards picks up, we will introduce more commodities in the segment.”

The contracts will have some fixed criteria and the other terms will be as agreed between the parties, and will be reported on the exchange. The latter will levy margins; for reference price contracts, it will be five per cent; for fixed price ones, it will be 7.5 per cent for a contract duration up to 30 days and 10 per cent for beyond 30 days and up to 60 days. An exchange may also have incremental margins. The duration for the contracts will be a maximum of 180 working days for a reference price contract and 60 days for a fixed price one.