Wider hedging limit likely in futures trade

The Forward Markets Commission (FMC) may relax hedgers’ exemption limit for maintaining open interest in the commodity futures market. The open interest in question is maintained by entities hedging their actual commodity holdings with positions in the futures market. The limit now is Rs 30,000–1,00,000 for a particular commodity, or 15 per cent of the total market open interest of the hedger, whichever is higher.

Actual holding here is the distinction, as against speculators who take positions in the futures market purely as a trading and investment interest, with the holdings not backed by actual quantities of a commodity. Open interest in a commodity refers to the total of futures or options contracts yet to be settled (meaning, not closed or delivered) for a specific underlying security. The exemption is granted after careful examination of the entity’s production, holding and warehousing of a particular commodity, beside other details.

This move follows FMCs’ move to increase the number of hedgers in the commodity market. FMC has suggested to the Reserve Bank of India (RBI) that banks be allowed to play the role of aggregator hedger in the commodity market, to increase volumes in the latter. An aggregator is one who aggregates others’ risk and hedges on their behalf as an institution.

“Banks lend to commodity traders, and companies dealing in commodities and, thus, they have better idea of the risks emerging from a genuine commodity position. It does not require any amendment (in banking laws), since banks are not required to take any positions on their own books or proprietory positions. They will take a position on behalf of others,” said official sources. The Abhijit Sen committee set up by the Planning Commission and Parliament’s standing committee on consumer affairs, food and public distribution have also recommended allowing banks and financial institutions to participate on commodity derivatives platforms.