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FMC cuts open positions in 4 products

Regulator says move to curb rising volatility, given revised output data analysts point to implementation issues

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Dilip Kumar Jha Mumbai
Last Updated : Jan 21 2013 | 2:54 AM IST

In a setback for agri-focused online commodity exchanges, the commodity derivatives market regulator, the Forward Markets Commission (FMC), has reduced open position limits by 25-33 per cent in highly liquid commodities, to reduce volatility.

An open position limit is the quantity an individual can hold under his account on the exchange platform.

In a note to commodity exchanges, FMC has said, “After examining the excess volatility observed in the prices of soybean, rape/mustard seed, chana and refined soya oil contracts and also keeping in view the revised production data of these commodities, (we have) decided to revise the open position limits in the said contracts.” This limit constitutes ideally one per cent of the marketable commodity.

While the member-level limit for all contracts’ aggregate position has been brought down by 33 per cent to 100,000 tonnes in soybean from 150,000 tonnes earlier, those in chana and mustard seed are down to 75,000 tonnes each, from 100,000 tonnes and 125,000 tonnes previously. The open position limit for member-level in refined soy oil was brought down to 85,000 tonnes from 125,000 tonnes earlier.

A member’s open interest limit at aggregate level (all contracts & all exchanges) will be either the absolute number indicated above or 15 per cent of the market-wide open interest in the commodity, whichever is higher. In the case of the delivery (near) month, a member’s open interest limits (in all exchanges) will be either the absolute number indicated above or 15 per cent of the near-month market-wide open interest in the commodity, whichever is higher.

Likely effects
Online national agri-centric commodity exchanges, including the National Commodity & Derivatives Exchange (NCDEX) and Ace Derivatives & Commodity Exchange (ACE) would be hit the most, as these would now lose business to offline markets. Apparently, with the ongoing panic-like situation in agri commodity futures with frequent regulatory interventions, NCDEX’s daily turnover plunged to Rs 6,793 crore on April 2 as compared to Rs 8,584 crore on March 29, a day after the FMC suspended guar gum and seed for trading on the exchanges. Similarly, the turnover of ACE declined to Rs 472 crore on April 2 as compared to Rs 649 crore on March 29. The two suspended commodities were highly liquid on these exchanges.

“We may lose some more business due to the (new) open position limit. The regulator must have felt the need to reduce position limits to curb volatility. We are going to implement it immediately,” said Ananda Kumar, chief - corporate services, NCDEX.

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NEW OPEN POSITION LIMITS
(In tonnes)All contracts aggregate position  limitsNear month contract position limits
CommodityMember levelClient level Member levelClient level
 OldNewOldNewOldNewOldNew
Chana100,00075,00020,00015,00020,00015,0004,0003,000
Soybean150,000100,00030,00020,00040,00027,0008,0005,400
Mustard seed125,00075,00025,00015,00035,00021,0007,0004,200
Refined soy oil125,00085,00025,00017,00030,00020,0006,0004,000
Source : Angel Broking

The revised open position limit would help reduce price volatility in these commodities, said Naveen Mathur, associate director, Angel Broking.

However, according to an analyst, the new guidelines would be difficult to implement, due to the lack of a central server at FMC for one-point monitoring and surveillance. By the time FMC comes to know that client A, for example, has violated the aggregate open position limit accumulating on all exchanges, the client would square off the position. Since exchanges do not share data among themselves on a daily basis and FMC also gets a data update only periodically, there are fears of frequent breaches of the aggregate position limit.

According to Kumar, the FMC may call for daily or alternate day position limit data of leading traders for close monitoring. Others doubt if this would suffice.

“What would FMC do? The regulator can neither penalise exchanges nor brokers, as none of them would be knowing what position limit a client is holding in his account on each of these commodity exchanges. Hence, implementation of the aggregate position limit would be difficult,” said an analyst.

The regulator’s decision to cut the open position limits would lead to dabba trading (the common term for off-market, informal, illegal trade by speculators to make quick money without paying taxes or other transaction fees), say many, as traders with large selling commitment would hedge their risk in the parallel offline market to meet their requirement.

Meanwhile, many traders said they were surprised at the FMC not bringing other highly volatile commodities, such as mentha oil, potatoes and cardamom under the ambit of the new open position limit.

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First Published: Apr 06 2012 | 12:35 AM IST

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