FMC may allow exchanges to start mini contracts to boost retail participation.
The retail participation in the commodity exchanges may get a boost with market regulator, the Forward Markets Commission (FMC), mulling mini contracts in agri commodities.
“This would help small farmers to enter commodity exchanges and take advantage of the infrastructure, both for price discovery and planning sale of their commodities, thus securing higher gains which is the ultimate objective of commodity exchanges,” said a senior FMC official. By definition, mini commodity contracts are smaller fractionally sized versions of full futures contracts. They may be one-third, one-fifth or even one-tenth of the size of a regular sized commodity contract, depending on the commodity. The cost to purchase mini commodity contracts and get into a trade is also proportionately smaller than the original contract of the same commodity.
Meanwhile, the Multi Commodity Exchange and National Multi Commodity Exchange have already launched mini contracts in precious metals and base metals. While MCX brought down the denomination of gold contract from 1 kg to 10 gms, NMCE's’ gold contracts are now available in 100 gms as against 1 kg earlier. These mini contracts were launched at a time when prices of both base metals and precious metals started rallying.
“It becomes difficult for a retail buyer to trade and take delivery of 1 kg of gold. Thus, smaller denominations will increase participation at retail level and it gives an opportunity not only to high networth individuals but small retail traders and buyers/sellers, to ride the price rally,” said official sources In agri commodities, while not many commodities are currently available in smaller denominations, National Commodity and Derivatives Exchange brought down the turmeric contract specification for delivery from 10 tonnes to 5 tonnes. Official sources say they are also looking at oilseed complex to bring out contracts of smaller delivery units since prices of oilseeds are rising. Oilseeds traded on NCDEX are castor seeds, cottonseed, oil cake, soybean, refined soyoil, soybean meal, mustard seed. MCX has also launched mini contracts in zinc, lead, aluminium by reducing the trading units from five tonnes to one tonne.
Explaining the benefits of mini contract trading, a commodity broker explained that it is especially effective for new or less experienced futures traders with a relatively small trading stake to risk or an aversion to larger risk. They can get started in futures trading in a far more economical fashion and at the same time could dramatically cut losses in trading a mini contract.