Once suspended, twice shy: Commexes

Relaunched agri contracts failing to attract wide participation, with corporate groups not wishing to get trapped again

Commodities delisted and later relisted have failed to re-attract traders' fancy due to the absence of corporate participation from exchange platforms.

In the past, futures trading had been suspended in chana, guar, refined soy oil, rubber, sugar and potato and then resumed. In most of these, the earlier peak in volumes are missing.

Barring refined soy oil and chana, the re-launched contracts have so far failed to get traders' momentum to the extent of the pre-launch level. Even refined soy oil and chana have not achieved the daily average turnover of the pre-ban level.

According to trade sources, large companies such as Bajaj Hindusthan, Shree Renuka Sugars and Balrampur Chini, along with others, were hedging their risks on commodity exchanges before the Forward Markets Commission suspended trading in sugar from May 2009. Although, sugar contracts were restored on the exchange platform in December 2010, these companies preferred not to hedge on exchange platforms.

"Large corporate groups get trapped in case they hedge on exchanges (where trading is suspended) due to their large quantity. Also, it is easy to get hold of bulk traders on exchanges in the case of high volatility. Hence, amid fear of action from the regulator, they chose to remain absent from futures exchanges," said Prerana Desai, vice-president (research), Kotak Commodity Services.

Exchanges generally make an immense effort in developing a contract. Large corporate groups or traders are either big suppliers, traders, producers or consumers of the commodity in question. Hence, their hedging requirement by default is a large quantity, sufficient to take the price in either direction.

"On suspension, however, the entire efforts go haywire. Large traders lose faith in commodity exchanges, which proves a big barrier for their return," said Desai.

Futures trading in guar seed and gum ware suspended in March 2012. The average daily turnover (DAT) for December 2011 on the NCDEX was Rs 222 crore, followed by Rs 168 crore in January 2012. Similarly, turnover in guar seed shot up to Rs 868 crore and Rs 494 crore in December 2011 and January 2012, respectively. The turnover steadily declined after the FMC announced the suspension in futures trading.

And, after over a month of re-listing, the DAT in guar gum and seed has not achieved even one per cent of the pre-suspension level. While the DAT in gum was Rs 17 crore, that of seed was Rs 20 crore in June.

Traders fear that the hedging in large quantities on commodity exchanges might make the trading counter volatile, resulting in uninvited action from the FMC. As witnessed in the past, FMC takes action on high volatility in agri commodities, starting with increasing margins and ending with suspension.

"Revival in sentiment becomes difficult when traders lose continuity. It takes quite a good time for exchanges and broking firms to convince clients to hedge in the re-launched contracts," said Naveen Mathur, associate director (commodities & currencies), Angel Broking.