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Commodity derivatives market regulator the Forward Markets Commission (FMC) has sought public comment by August 14 on allowing warehouse service providers (WSPs) to hedge their risk on futures exchanges with a caveat.
WSPs are currently not allowed to trade on an exchange for which it has been accredited. However, there is no such restriction on trading in forward segment of exchange in delivery-based forward contracts.
In a recent meeting, however, exchanges were of the view that WSPs should be allowed to trade in futures platform also as large multinationals having a variety of businesses would need to ensure that there are enough checks and balances with well defined processes to ensure transparency and corporate governance. Hence, not allowing one entity to handle the commodity being dealt by the other entity of the same group brings unnecessary restrictions on the ability of the entities / groups to offer effective risk mitigation solutions. Thus, there is a need to have a re-look at the existing system.
FMC proposes to allow WSPs to hedge their exposure in futures markets provided WSP deposits their procured commodities of its exposure in exchange accredited warehouses other than their own and the concerned exchange monitors hedged positions.
