FMC to revise decision on default penalty

The Forward Markets Commission (FMC), the commodity markets regulator, is reviewing its decision to reduce the penalty on delivery defaults to 2.5 per cent from 5 per cent issued last week.

The futures market regulator, which received many representations both welcoming and criticising the decision to reduce the penalty, had asked exchanges to give their views on the decision. It has, according to a FMC spokesperson, received all the required inputs. "We will decide and issue a revised circular on the penalty in a day or two," he said.

According to a directive issued by the FMC, the total amount of the penalty to be imposed was fixed at 2.5 per cent plus the difference between the final settlement price (FSP) and the spot price prevailing on the last day of the pay-in/pay-out of the expired contract, if the said spot price is higher than the FSP. Otherwise this component will remain zero.

Earlier, the penalty was five per cent, with three per cent earmarked for compensating the party which has suffered the loss. The FMC decision followed after many traders, especially short sellers, were charged with manipulating the futures market by keeping it lower than the final settlement price.

This had happened when the contracts were not liquid. With the futures prices failing to converge with the physical market, a proper price discovery was also not possible.

By reducing the penalty, the FMC was looking to discourage such manipulation. But the decision has faced strong resistance from buyers, who complained that they may actually have to pay higher prices at the spot/physical market as the traders, expecting sudden demand, may quote higher prices. The FMC source said that this grievance would be addressed in the revised circular.