FMC increases penalty on illegal fresh positions

The Forward Markets Commission (FMC), the commodity market regulator, has raised penalty on both option contracts on fresh positions taken within the five days prior to the expiry of contracts.

Applicable for seller or both option contracts, the penalty has been increased to Rs 2,500 per occurrence from Rs 1,000 earlier.

As per the existing regulations, fresh positions by members within the five days before the expiry is not permissible.

According to sources, there are instances where positions were made and, thereby, the regulations were violated even within the five days of the expiry day.

"The increase in penalty would surely restrict traders to take position. This is a good step by the FMC," said Ajoy Pathak, Research Head of Kotak Commodity Services Ltd.

Now, traders would be able to roll over their investments to other commodities if they do not find suitable investment options in one commodity, he added.

The online trade system has opened options for all clients to keep track of open position limits and open interest through which keeping a watch on violators becomes more easy, a trader said.

FMC chairman S Sundareshan had hinted at the sidelines of a seminar held recently in Mumbai that severe penalty would be imposed on violation of FMC regulations for those traders and clients who cross over the position limit.

Sundareshan said the penalty of Rs 1000 was negligible in comparison with the profit and, hence, traders cross the over limit.

Although, traders are struggling in some commodities with such a lower position limit, the spillover investment would strengthen other commodities trades in future, a trader said.

No penalty would be imposed for fresh position in case of compulsory delivery option contracts even though the position is built within five days of the expiry of the contracts.

Five days limit has been imposed by the regulator which indicates the real price movement in a particular commodity which helps determine the settlement price at the end of the expiry of the contract.

The position can be built artificially by vested interest traders within the five days of the expiry of the contract with a view to settle the price higher. Such traders may make money with no investments as most of future contracts in India are at sellers' option.