The Forward Markets Commission (FMC), the commodity derivatives markets regulator, is aggressively using margins as the tool for controlling a price spike in agricultural commodities. It had significantly raised margins on turmeric early this month; last week, it sharply raised margins on soybean to control prices.
The regulator on July 3 said, in a circular, that additional margins of 20 per cent on both sides in all running turmeric contracts and yet-to-be-launched contracts were being imposed with effect from July 6. However, the turmeric price for near-month delivery jumped 6.4 per cent in the period and continued to move upwards even after that, to trade currently at Rs 6,264 a quintal.
Similarly, the regulator also increased special margins on soybean to 20 per cent from the existing five per cent effective from July 18. The near-month contract of soybean, though it declined marginally the same day, recovered emphatically the next day to close at Rs 4,774 a quintal from Rs 4,575 a quintal on July 18.
Ramesh Abhishek, chairman of FMC, had recently said levying of margins helps control a client’s leverage on a specific counter which, they felt, would likely inflate in future. A margin in commodities trading is the amount of money clients have to deposit in their own brokerage account before trading a futures contract. The margin amount varies on each commodity and fluctuates with the volatility of the markets. There is an initial margin amount required when entering a contract and a ‘maintenance’ margin amount that must be kept in the account at all times during the contract holding period, typically lower than the initial margin. In case margins decline below the permissible limit, exchanges call for fresh money, for additional exposure.
Currently, the overall margin for turmeric works out to 31.22 per cent, while that of soybean stands at 29.44 per cent. In the case of guar seed and gum, the margins were raised in excess of 70 per cent early this year. But, the prices of both commodities till recently continued to move up till they set a new record, which forced the regulator to delist these for the current season.
Atul Shah, chief operating officer of Emkay Commotrade Ltd, said, “The regulator’s only options to curb excessive price spurt in futures exchange are, first, the regulator tries to reduce clients’ exposure by levying margins on either side and, second, it reduces position limits, so that clients would not be able to hedge a large quantity of any commodity.”
The idea is that clients leverage in a commodity where they feel there is high potential of earnings in the future. An increase in margins, coupled with a decline in position limit, raises potential to curb a price spike.
| CONTROLLING TOOLS Effective margins for near-month contract on NCDEX - buy side | |||||
| Commodity | Initial margin (%) | Exposure cash margin (%) | Special cash margin (%) | Total margin (%) | Total margin (Rs), each lot |
| Barley | 6.69 | 3.25 | 10 | 19.94 | 29775.25 |
| Chana | 8.98 | 1.00 | 20 | 29.98 | 145419.00 |
| Potato | 6.69 | 3.00 | 15 | 24.99 | 47198.00 |
| Pepper | 3.15 | 2.00 | 5 | 10.15 | 43928.50 |
| RM seed | 8.22 | 1.75 | 15 | 24.97 | 108501.75 |
| Soybean | 7.70 | 2.25 | 20 | 29.95 | 146719.50 |
| Turmeric | 7.72 | 3.50 | 20 | 31.22 | 90686.50 |
| Source: NCDEX | |||||
According to Shah, levying margins and position limits would help reduce prices only in case of speculative activities in futures markets. In case of a shortage of availability of a commodity, price moves up all around. In such cases, only supply of that commodity in adequate quantity could help reduce prices. No other formulae would work, he added.
“Imposition of special margin by FMC has, to some extent, helped curb excess volatility in the prices of some agri commodities. The regulator can also revise down the client-wise position limit to control the volatility in price. Nevertheless, to increase the participation of actual producers, processors, exporters, importers and industries associated with commodities, the contracts need to be more streamlined. The huge contract size in agricultural commodities, for instance, does not allow small producers to take the benefit of hedging their risks, thereby leading to lower participation of actual hedgers,” said Naveen Mathur, associate director (commodities and currencies), Angel Broking.