The commodity futures market regulator, the Forward Markets Commission (FMC), has taken a slew of decisions to stem excess speculation in agri commodities. It has introduced a staggered deliveries option for sellers 15 days prior to expiry in certain agri commodities, including oilseeds, chana and pepper. This will be extended to more commodities later. FMC has also sought comprehensive feedback on contract specifications aimed at establishing proper price discovery and linkages between physical and futures markets, to curb excess speculation.
This was a major complaint of those hedging their spot market price risks in the futures market, even as futures prices were seen behaving quite differently, at certain times, from the physical or spot market. This behaviour was the result of lack of depth in several agri commodity market segments.
“We received reports/feedback from various stakeholders that the contract specifications designed for the commodities traded in futures markets are often not compatible or in sync with the needs of the physical market participants. In view of this, the Commission has decided to review the contract specification of futures contracts,” said an FMC official. Feedbacks have to be submitted by the end of this month, so that, “we can complete the exercise as early as possible,” the official said.
FMC has decided to introduce staggered delivery on the National Commodities and Derivatives Exchange (NCDEX) in four agri commodities - chana, pepper, potato and RM seed - in the first phase. In the next phase, this will be extended to all other agri commodities , effective June 2012 expiry. According to this mechanism, the seller of a commodity will have an option to give deliver 15 days before expiry of the contract. Buyers will be obliged to take delivery. If there are not enough standing buyers who have declared their intention to take delivery, then all buyers will have to take proportionate deliveries. NCDEX responded to FMC’s decision on Thursday by announcing that the staggered delivery system, instead of the compulsory delivery, will come into effect from June.
This option is being offered to ensure speculators cannot hold naked positions when the contract comes up for expiry and will have to be prepared to accept delivery. The proposal was mooted by NCDEX as there were an unusual number of speculators on its platform.
On Monday, FMC had asked NCDEX to slash penalties for delivery default in four agri commodities. There were complains that speculators were squeezing sellers to give delivery and as a result sellers were geting desperate to cover their positions in the spot market. This is how speculation in futures market was resulting in steep rise in prices in the physical market. Several agri commodities, including guar seed and gum have seen prices doubling in six months on NCDEX platform. This was also recommended by NCDEX to FMC.
NCDEX on Thursday also announced reduction in the validity period of mustard seed, pepper, soybean and chana. Validity period is one within which the commodity has to be delivered on the exchange platform and is determined by the self life of that commodity. The reduction implies that the commodity will move out of warehouse at a shorter period and higher and quicker deliveries on the NCDEX platform.