NMCE's auction-based forward contracts to go live on Feb 26

Ahmedabad-based National Multi-Commodity Exchange (NMCE), India’s third largest commodity futures trading platform, is all set to launch auction-based forward trading in rubber on February 26.

A couple of days later, the exchange will also introduce forward contracts in castor seed and rape seed. Depending on the success of these contracts, it will expand such trading in other agricultural commodities as well to gradually achieve the count to 23 for which the exchange has already received approval from the Forward Markets Commission (FMC).

While existing forward contracts on other exchanges allow execution of trade through ‘order matching system’, the forward segment contracts on NMCE will offer flexibility to both buyers and sellers for real price discovery.

“Technology upgradation and manpower training are on advanced stage to launch the first contract in forward segment with rubber on February 26. The basket will be expanded to castor seed and rape seed and later to other commodities depending on their success,” said Anil Mishra, managing director, NMCE.

NMCE is launching three types of contracts to suit all segments of traders.

For producers: The exchange allows them to declare minimum price quote along with quantity, delivery location and quality for a fixed period of trade. Buyers, however, are allowed to quote higher. In the end of the period, however, the highest quote will be the winner.

For buyers: Consumers will be allowed to declare the quantity, delivery location and quality along with the highest price quote. For the bidding period, however, suppliers can quote low price. Those who quote the lowest will be the winner. In case the required quality and quantity does not match the offer and still buyers are interested to seal the order, then both parties are allowed to negotiate the price, quantity and quality.

For open traders: Apart from the above two, the exchange will allow fixed price contracts under which only quantity and location of delivery will change. In this segment, sellers will determine contract terms to match with buyers’ requirement.

“All these contracts are unique in themselves and different from existing ones. We have conducted meetings with traders and found them very enthusiastic about the concept,” said Mishra.

The meetings with stakeholders were conducted before applying to FMC and now training programme of employees is going on.

Forward trading is different from futures because these are customised contracts in forwards versus standard contracts in futures with respect to quality, delivery date and place.

“To avoid misuse of the timeline, there will be a pause period of the last five minutes. In case of any punch, the timeline will automatically be extended by five minutes,” said Mishra.

This will have the flexibility of customised contracts, backed by a guarantee by the exchange. All the grades can be traded in forward contract. Hence, the scope would be much larger for hedging. The delivery locations also would be many compared to limited delivery locations in case of futures contract.

Stakeholders can do arbitrage between forward and futures. Forward contracts would also help in getting the correct price of spot market rather than price polling.

NMCE sees a huge scope for forward contracts once the stakeholders understand how to make best use of it. The government purchase and sales also could be done through this transparent national electronic platform.