New curbs on agri commodities won't impact hedging: Sebi

The Securities and Exchange Board of India (Sebi) believes its direction on tightening of open positions and circuit filter norms for agricultural commodities would not affect hedging in these.

On Friday, it had directed the reducing of open interest (OI, contracts not settled at the end of trade) by half for near-month (expiry month) contracts. And, cut the limit for daily price movements on either side from the existing six per cent to four per cent. A year ago, the then regulator, the Forward Markets Commission (FMC), had increased all these limits to improve participation and liquidity, along with encouraging of hedging.

Sebi has not touched the OI or position limits for far-month contracts, or any limits for hedgers. Rajeev Agarwal, its fulltime member, said “The reduction of OI limits for the near-month contract will reduce volatility in the near-month but improve liquidity in far months.” Also, that the reduced OI limits, “will not affect hedgers, as they will continue to seek higher limits as per extant norms”. The decision to suspend the forwards segment was a, "precautionary measure because there was thin liquidity at a time when agri commodity prices are very volatile. The product was not covered under settlement guarantee”, explained a source.

Usually in agri commodities, positions and liquidity were built into near-month contracts. Far-month (future months for which contracts exist) contracts trade at a thin liquidity. The changes made by Sebi will help in increasing of positions in far months.

In some commodities, with a higher circuit filter in futures, traders used to rig prices in the spot market, too, and this would get some check with tighter norms, said a sectoral official.  

The near-month limits are still higher than a year before, is another justification.

To encourage hedging on commodity derivatives, FMC had a  year before liberalised the limits. Hedgers who were selling and depositing goods in exchange-accredited warehouses were given margin relaxations. The hedging positions would continue as before, a major relief for hedgers, said an exchange official.

Sebi was tracking commodity derivatives for the past three months, after this came under its purview. During the period, volatility was quite high, as most agri commodity prices went up after an erratic monsoon and less sowing.

“Sebi decided to announce some measures without impacting overall market growth, with a view to curb excess volatility and manage risk,” said the source mentioned earlier.