FMC seeks views on draft norms on introduction of call auction

Commodity markets regulator FMC has sought public comments on draft guidelines on introduction of 'call auction' in all agriculture commodities as it seeks to curtail manipulation and ensure efficient price discovery.
Call auction is prevalent in stock markets. It is being introduced in the commodity futures market as there were some complaints about the way final settlement price (FSP) of futures contracts were being determined.
"To bring in more transparency to the process of arriving at FSP, it is proposed to introduce a call auction session for 20 minutes post-closing of the market," Forward Markets Commission (FMC) said releasing draft norms on the same.

Public comments on the norms can be sent by January 15, 2015.
FMC said the call auction mechanism is proposed to arrive at the 'spot price' which in turn may be used for arriving at the FSP at the time of the expiry of the contract and/ or 'Daily Settlement Price' as the exchange may announce.
To ensure alignment of futures market settlement price with the spot market, all trades confirmed during 'call auction' should compulsorily result into deliver, it said.

According to the draft guidelines, to begin with 'call auction' will be allowed to conduct for all agri-commodities contracts traded on exchange platforms.

"For contracts other than compulsory delivery where deliveries do not happen, the current mechanism of spot price polling may continue to arrive at the FSP," it said.
The 'call auction' will be conducted for 20 minutes from 4.40 pm to 5 pm. In case of commodities which are traded till 11-30/11-59 pm, 'call auction' will also be conducted at the same time.
Any default in 'call auction' settlement will be closed-out with a penalty of 10 per cent on the auction trade price. Out of the penalty so levied, 90 per cent will passed on to the counter party and 10 per cent would be retained by the exchange towards administrative costs.

The exchanges should put in place the necessary systems to ensure the operationalisation of 'call auction' for futures contracts expiring in March 2015 onwards, it added.
Among other norms, FMC said that the exchange may conduct call auction during the life of contract every day as well as multiple times in a day to arrive at spot price.
There would be no minimum participation criteria as all interested parties are expected to trade in the 'call auction'. No option for polled prices will be available once 'call auction' is introduced, it said, adding that deliveries will be permitted only from exchange-accredited warehouses.

To arrive at FSP, the regulator said, "Volume weighted average price in last at least three days of 'call auction' shall be considered."
The exchanges should put in place necessary systems to ensure the operationalisation of 'call auction' so as to implement the same for futures contracts expiring in March 2015 onwards, it added.
There are four national and six regional level commodity exchanges in the country.