Futures market: No stock limits for goods in regulated warehouses

The government has decided to exempt commodities kept in warehouses registered by the Warehousing Development and Regulatory Authority for the futures markets from stock limits

The Union government has decided to exempt commodities kept in warehouses registered by the Warehousing Development and Regulatory Authority for the futures markets from stock limits fixed under the Essential Commodities Act.

The commodities market regulator, Forward Markets Commission, has sent a communication to all exchanges in this regard. The move is a big relaxation for commodity futures market players. Several essential commodities such as pulses, potatoes, edible oils, wheat and sugar are traded on futures exchanges. Governments invariably invoke the stock limits on some of these, depending upon the price and crop situations. Stock limits make the hedging of price risks related to these commodities difficult on the exchange platform.

However, exempting them from such limits if these are stored in WDRA-registered places will be subject to the condition that, "these warehouses publish the information of stocks available with them on a real-time basis", said the FMC communique.

This facility will be available only to those who trade on futures exchanges and having stored the commodity in a regulated warehouse. Other traders' stock in regulated warehouses will not get this exemption.

The logic for giving an exemption, according to an exchange official, is that even if the stock exceeds the prescribed limit, that can be hedged on the exchange and this information will be in the public domain. So, clandestine hoarding will not be possible.

There were earlier cases where a futures exchange was permitting stock and position limits which turned out to be higher than the stock limits prescribed for the commodity. Such cases were found on sugar in Maharashtra and chana in Rajasthan. Civil supply department officials had objected and the issue was resolved with the help of the respective exchanges. The new rule will obviate the need for this.

The move first got in-principle approval of the ministry of finance this August; commodity futures regulated by the FMC comes under it. Then economic affairs secretary Arvind Mayaram recommended the ministry of consumer affairs to provide such exemptions and on October 17, this was notified to the ministry of finance.