FMC's new norms evoke mixed response

The recent directives of the Forward Markets Commission to curb volatility is seen as a mixed bag for the commodity derivatives sector, industry watchers said Tuesday.

Market participants said while certain guidelines would help trade mature, others could impede growth of the segment""which is still in a nascent stage.

On Monday, the market regulator issued new norms for existing as well as new medium-grade sugar contracts on the National Commodity and Derivatives Exchange.

Under the new norms, the position limit for clients was increased to 25,000 tonne from 10,000 tonne. The price limit was also revised upwards.

The Forward Markets Commission had Thursday announced changes in contracts of chana, tur, urad, guar seed, guar gum, mentha oil, and sugar following high volatility in these commodities.

"The measures announced are aimed at curbing speculation and price volatility. However, they are still guidelines and have not been implemented yet," said Kishore Narne, head-research Anand Rathi.

According to an industry official, the guidelines would pose a problem for commodities trade as it would largely lower volumes of the commodity on which the measure is implemented.

The open position limit in these contracts may be restricted to one-tenth of the existing limit for the near-month contract.

This would be applicable to all contracts of sugar, tur, chana, guar gum and seed, and mentha oil from March. The measures may later be implemented for other commodities and will further affect the volumes and the liquidity.

"Limiting the open interest will bring down volumes. Commodities is a leverage game and volumes are very important," Narne said.

Arbitragers and hedgers will be major losers as it is proposed that the hedge limit would not be applicable in near-month, said another analyst with a Mumbai-based brokerage.

The regulator also issued guidelines that market participants would need to give detailed information and deposit the required quantities with the exchange warehouses a fortnight before the contract expiry.

Though the measure would ensure quality control, depositing stocks in advance with the exchange warehouses will also pose a problem as most corporate houses would prefer to use the raw materials immediately, said an official with a domestic sugar company.

However, dealers and analysts agree that dissemination of spot prices after polling will boost commodities trade in the country and bring at par with international standards.

"Measures like deleting delivery centres outside the radius 300 kilometres is good because the exchanges could start a new contract for the particular delivery centre," Narne said.

The new contracts for the new delivery centres would take care of quality concerns, said Si Kannan, analyst with Sharekhan Commodities Pvt Ltd.