To be discussed next week, as part of reforms to attract more confidence among participants, widen scope of operations.
For the first time, the Forward Markets Commission, regulator for the commodity futures market, is considering levy of an a exposure-free minimum deposit criterion for members. The capital market exchanges have such a requirement.
The FMC agenda for its December 9 meeting has not outlined any figure but market participants believe it may begin with Rs 5 lakh, extendable with more market depth. The Bombay Stock Exchange (BSE) has a Rs 10 lakh minimum deposit on which no exposure is granted.
Welcoming the move, a senior exchange official said, “This will strengthen the risk management system and attract more confidence among participants in commodity futures trading. It will have, however, no impact on broker levels, as the minimum deposit amount (contemplated) is very low. On a deposit of Rs 5 lakh, a member gets exposure of Rs 1 crore. Members’ business depth is too huge (to be affected by this).”
Today, the minimum deposit for a member is Rs 30 lakh on the Multi Commodity Exchange and Rs 15 lakh on the National Commodity & Derivatives Exchange (NCDEX). Members get full exposure for trade on these deposits.
The purpose of this minimum deposit is to settle the account of traders in case of member default. Although many funds like the Settlement Guarantee Fund (SGF) and Investor Protection Fund (IPF) exist to compensate for loss incurred due to defaulting members, the money in these accounts is too little to compensate traders’ loss.
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“Many fly-by-night operators take deposits from traders and run away. With a bare minimum amount in the SGF and IPF, claims worth crores are not settled fully, as the exchanges deduct their own margin before settling the account. Consequently, traders do not have any option but to face the loss,” said Naveen Mathur, associate director, Angel Broking.
Jayant Manglik, president (retail distribution), Religare Securities Ltd, said, “This is a very good proposal. Once implemented, it will limit the entry to only those members with sound financial health and keen on commodity trading.”
This is one of several measures the FMC has planned to strengthen the risk management system, to attract wider participation on the exchange platform. Not all agree with the move. Ashok Mittal, CEO of Emkay Commotrade Ltd, feels, “The commodity futures trading market is not fully mature. Any increase in deposits, even in the exposure-free form, would discourage participants and this would not be a healthy sign for overall commodity trade.”
The FMC is also considering uniform net worth criteria for different categories of members. On September 28, it had asked commodity exchanges to consider depositing all types of penalty levied on traders and members in the IPF. Sources say the Indian Commodity Exchange, NCDEX and Ace Derivatives and Commodity Exchange have agreed.
FMC has prepared rules on uniform audit and inspection criteria for members, for discussion in the coming meeting, apart from progress in high-frequency commodity trading. The participants will also discuss ways to increase hedgers’ participation and reduce speculation on commodity exchanges.