Margin for different spread month commodity futures cut to 50%

The move will bring depth in commodity futures market

In a New Year gift for traders, the commodity derivatives market regulator, the Forward Markets Commission (FMC), has reduced the margins in different month spread contracts of the same underlying commodity from 60 per cent to 50 per cent, to bring more depth in the futures market.

At present, commodity exchanges collect 60 per cent of initial margins of both buy and sell side contracts, in addition to other levies such as special and cash margins.

For example, if a trader is buying X commodity for February and selling the same for March or vice versa, which entails initial margins of five per cent on both (buy and sell) sides, he has to pay only six per cent cent of margins for trading. From January 1, the trader will have to pay on five per cent. The regulator has liberalised the spread in trading from of one commodity to contracts of its variant, too. This meansspread trading in gold can be expanded to gold mini contracts as well.

“In view of the recommendations made by the re-constituted risk management group, the Commission has decided that spread margin benefits would be permitted in different month contracts of the same underlying commodity and two contract variants having the same underlying commodity. The exchange, therefore, will charge 50 per cent of the initial margins (inclusive of exposure and volatility margin) on the positions,” an FMC circular said.

The regulator, however, has clarified that the spread margins benefit will not be permitted in contracts of two different commodities.

In contrast with earlier guidelines when additional, special and cash margins were allowed, the FMC circular said these extra margins would not be levied in spread contracts within the same underlying commodity. According to trade sources, all these margins were proving an impediment for trading in spread contracts.

“It is beneficial for the market on three counts: reduction in initial margins, exemption in cash and special margins, and leeway to exchanges to charge higher if need arises,” said Naveen Mathur, associate director (commodities and currencies), Angel Broking.

FMC, however, has allowed exchanges to charge margins higher than 50 per cent, depending upon their risk perception. Effective January 1, these changes are applicable for all running contracts. Meanwhile, it has continued the ban on spread trading in different commodities.

“This is a welcome move, as it will bring more depth in the commodity futures market,” said Ashok Mittal, chief executive at Emkay Commotrade.