The Forward Markets Commission (FMC), regulator for the commodities futures market, is likely to soon issue norms for introducing a call auction in commodities to arrive at a final settlement price for futures.
The move is seen as a significant deviation from what is prevalent in equities markets, where a call auction is held before trading begins on a daily basis for price discovery. In commodities, it is proposed to be held at the end of the day’s session for deliverable commodities – largely agricultural. The price arrived at will be treated as a final settlement one for that commodity for that day. Trades will be real and delivery-based.
“FMC has received comments from exchanges and will soon take a final decision in this regard,” said a person familiar with the development.
At present, the settlement is derived from polling, not seen as a true and practical way for price discovery. From that perspective, a call auction resulting in compulsory delivery will be a better option but exchanges have raised certain issues with the process proposed by FMC.
Among the major issues they have raised is a two-day period for delivery mentioned in the draft proposal. One suggestion to the regulator is that the delivery period be raised to 10 days from two for agri-commodities.
Another issue was of liquidity during the call auction. While the move is being made by introducing this system for obtaining a spot price so that the futures price can be synchronised well with the spot market, if volume is thin during the 20-minute period, the price can be manipulated. FMC’s views on this are not known.
According to market participants, using a small fraction of the commodity in the warehouse to determine the entire commodity’s price is not justified.