The Forward Markets Commission (FMC) has started a review of its regulatory provisions to curb speculative deals in the commodity market. Sources close to the development say margins may go up across commodities.
“Margins are too low on the clients positions according to international standards. Usually, it ranges from 6-10 per cent of the net open positions of trade and five per cent special margin in some cases. Only in case of volatility, it is 20-40 per cent and even 60 per cent cash margins. It cannot be as low as 10 per cent in normal times. Therefore, there is a need to level the margins by raising them,” they added. FMC is also considering imposition of margins on both sides of the trade so as not to make it lopsided. Currently based on prices, margins are imposed either on the long or buy side if prices are going up or on sell or short side if prices are going down. For the first time, a 10 per cent margin on the sell side along with a 60 per cent special margin on the long side was imposed for guar gum.
Similarly, the commission may further widen the open position limit for commodities. Currently, the Comm-ission, sources said, allocated open positions in trade very conservatively. However, to deepen genuine trading interest in the market, it is important to have wider open position limits, they added. Currently, a member’s open interest limit at aggregate (all contracts) level will be either the absolute number indicated by FMC or 15 per cent of the total market wide open position in the commodity, whichever is higher.
Margin is the money paid by the client as a percentage of net open positions maintained by him/her on the exchanges. It can be in the form of securities, cash or any other form, unless exclusively specified. The objective is to collect the amount as collateral to ensure seriousness of the trader in taking positions besides ensuring paying ability upon expiry.
Net position is the difference between total open long (or buy) positions and open short (sell) positions in a given asset, in this case a commodity held by an individual or group. Every exchange has a commodity-specific limit for total open positions held by a party as a single entity or as a group exposure.
Recently, FMC had directed all national commodity exchanges to rework their net open positions — meaning futures contracts bought or sold but not settled through delivery — to prevent any concerted manipulation. New norms ask for a watch on concentration of positions of a single group or entities by ‘acting in concert’ through common ownership and control structures of a company or a trading entity.