Ace to launch spot market-linked cotton contract by month-end

Trading to be done in candy (356 kg), as opposed to bales (170 kg) for the first time in India

Kotak anchored Ace Derivatives and Commodity Exchange Ltd (Ace) is planning to introduce spot market-linked cotton contracts on its platform by the end of this month. The exchange has already obtained necessary approvals from the commodity markets regulator the Forward Markets Commission (FMC) in this regard.

Initially available for trading for expiry in October 2012, November 2012, February 2013 and March 2013, these contracts would be traded in candy (356 kg each) for the first time in India.

“In spot market, cotton is traded in per candy term. Hence, Ace members do not require to the mindboggling arithmetic calculations for margins and other payment related issues,” said a senior Ace official.

Cotton contracts are available currently on the Multi Commodity Exchange (MCX), India’s largest commodity derivatives trading platform with over 86 per cent of market share. But, the commodity is traded in bales (170 kg each). The cash crop generates around Rs 40 crore daily average turnover on MCX.

Another agri centric exchange NCDEX offers Kapas contract for trading.

Apart from being spot market linked, Ace claims these contracts to be Gujarat centric where a majority of traders have direct or indirect link. Hence, the contract has wide acceptability and potential to be a success. All delivery centres currently exist in Gujarat where no premium or discount is offered for taking or giving delivery for the quality prescribed in the contract specification. In case of a variation in quality, however, a marginal premium / discount is proposed.
Ace has kept an initial margin at 5 per cent for commencing trade in cotton contract with tick size of Rs 25.

The exchange is also looking for the contract’s to be made available for trading in lean season i.e. November 2012, December 2012 and January 2013 for which FMC’s separate approval is required.

Through this innovative Cotton bales contract, Ace endeavours to meet the requirements of the entire value chain of cotton industry- ginners, millers, exporters and brokers. It provides an effective price risk hedging platform as well as facilitates participation of small and medium players on the exchange platform.

“The cotton contract to be launched will provide equal opportunity for both buyers and sellers to hedge their price risk. The prices quotation is Rs./ Candy which mirrors the practice prevalent in physical markets. This contract also aims to improve retail participation through a lower trading unit of 1 candy, thus leading to lower margin requirements,” the official added.

The contract provides for delivery of “traded as Shankar 6 or S6 equivalent”, and all the delivery centers are based in Gujarat thus ensuring that the buyer is sure of the quality and location basis. The exchange has also set up a strong and robust assaying process to ensure that quality specifications are met at the time of deposit of goods in the warehouse.