FMC seeks comments on introducing liquidity enhancement scheme

Commodity markets regulator FMC has sought public comments on allowing commodity bourses to introduce incentive schemes to encourage participation in low-liquidity commodity futures.
Forward Markets Commission (FMC) has come out with broad guidelines to enable exchanges introduce Liquidity Enhancement Schemes (LES) and has sought public comments on the norms by January 21.
"Trading is a function of demand-supply and liquidity is generated by active participation of various market participants. However, to bring in initial liquidity, certain special efforts may be required by exchanges," FMC said.
Liquidity enhancers are also know as 'market-maker'.
As per the guidelines, the commodity bourses should introduce 'liquidity enhancement schemes' on any commodity for a maximum period of two years.

Any eligible member of the exchange is free to participate in the scheme and should have a net worth of at least Rs 1 crore and should deposit Rs 25 lakh with the exchange as advance towards margins.

The exchanges should formulate their own benchmarks for selecting commodities for liquidity enhancement with the broad objective of enhancing liquidity in illiquid contracts.
At present, commodity futures in agri-commodities having a daily turnover of Rs 100 crore and non-agricultural commodities having turnover of Rs 500 crore at the exchange should be considered liquid for this purpose.
Once the scheme is discontinued, it can be re-introduced on the same commodity within three year period of the introduction of the earlier scheme.

However, the scheme should be discontinued as and when average daily turnover reaches Rs 500 crore in the case of non-agri commodities and Rs 100 crore in the case of agri-commodities during last 90 days or 3 years from introduction of the scheme, whichever is earlier.
There should be at least three 'Liquidity Enhancement Providers' for each commodity on which futures contracts are traded.
The list of commodities eligible for liquidity enhancement should be disseminated to the market. The scheme, including any modification therein or its discontinuation, should be disclosed to the market at least 30 days in advance.
FMC said the scheme should be "objective, transparent, non-discretionary and non-discriminatory".

The incentive under liquidity enhancement schemes should be transparent and measurable and may take either of the following two forms:
"Incentives can be given in the form of discounts/ adjustments in transaction fees, admission fees, other membership charges. The Exchanges may specify other types of incentives subject to the condition that there should be no compromise on Risk Management by the exchange," FMC said.
That apart, the total incentive provided by the exchange during a financial year shall not exceed 25 per cent of its net profit earned during the previous year, it added.