New FMC's regulation may push forth kerb trading

The Forward Market Commission's (FMC) proposed regulation of making deliveries compulsory on the outstanding positions of all futures may further kerb trading in the market, traders and analysts said on Wednesday.

"Making deliveries on all outstanding positions compulsory will push out a lot of traders from the market," said Nathulal, a Mumbai-based soyoil trader.

Kailash Gupta, managing director of the Ahmedabad-based National Multi-Commodity Exchange of India (NMCE), said, "While initially the regulation may cut down volumes, overall it is likely to keep the hedgers away from the market."

Gupta added that in current market scenario, while the volumes are good, these are not showing price discovery as it should rather it is just speculation.

Some traders also said that while regulation may help curb speculation in commodities such as pulses, guar complex that remain quite volatile, it may not be able to curb volatility just before the expiry of the contract.

Another section of traders added that this (regulation) may just push traders' attention to kerb trading. "After all, who are traders if they do not speculate," quipped another Mumbai-based trader.

Further, the decision creates confusion about the fate of contracts such as crude oil where delivery option is seemingly non-existent, said a crude oil analyst.

This will also lead to confusion over the fate of proposed futures trading in other options in the energy sector such as electricity.

Also, there is concern over the fate of futures trading of imported commodities such as pulses, said a Satara-based trader.

When contacted, Jignesh Shah, managing director at the Multi-Commodity Exchange of India said, "The decision was taken in consensus and the sellers' right to delivery is only a directional order."

Alex Matthews, an analyst with Kollam-based Geojit Securities said, "The new rule will be beneficial for farmers." But are the farmers really trading on the exchanges?, asked a trader.

Traders are also confused as no such regulation exists even in experienced futures markets of the US or UK. However, Gupta says, "It would be wrong to compare India with the US or UK as the former is still a stagnant market and quite different in behaviour from the latter."

However, as it will be quite a while before the exchanges are able to put the proposed mechanism in place, there is "lots of time for the market to access exact impact," a Mumbai-based analyst said.

"The regulator has said the order will be issued in a phased manner. Though there is no specific time frame for it, we will be designing new contracts keeping it in mind," said Madan Sabnavis, head-knowledge management at the National Commodities and Derivatives Exchange.

The decision on the proposed regulation was taken at the coordination committee of exchanges earlier this week.

The committee consists of FMC, the three multi-commodity exchanges--NCDEX, MCX and NMCE--and regional commodity exchanges including the National Board of Trade, Ahmedabad Commodity Exchange, India Pepper and Spice Trade Association and the East India Cotton Association.

Confusion galore

• The proposed regulation has led to confusion over the future of spread contracts that were recently issued by two national commodity exchanges, NCDEX and MCX
• Spread contracts allow traders to rollover their positions from one contract to the subsequent one. A member thus, is allowed to execute two trades simultaneously in two different maturity contracts of the same commodity, by entering a single order