The Forward Markets Commission (FMC) is planning to introduce a minimum daily average turnover criterion for illiquid contracts for all commodity exchanges. The criterion would come into effect in a month.
Contracts for commodities that record no trade for years are categorised as illiquid contracts. For a number of commodities, after the initial euphoria, contracts turn illiquid. This has been a concern for FMC.
Today, commodity exchanges submitted renewal requests for illiquid contracts, along with detailed plans of action for these.
In most cases, exchanges do not try and ensure their plans are executed. Also, they record negative results. In the absence of mandatory guidelines, exchanges’ efforts hardly yield any result. However, a couple of illiquid commodities like cotton contracts on the Multi Commodity Exchange (MCX) have seen major success.
“We are planning to frame a mandatory daily average turnover criterion for illiquid contracts to encourage exchanges to make positive efforts. Currently, the guidelines are being prepared, and these would be introduced in a month,” said FMC Chairman Ramesh Abhishek. The commodity derivatives markets regulator has also asked exchanges to review illiquid contracts before sending renewal proposals. According to the FMC website, the regulator has granted approvals for forward trading in 113 commodities, of which 25 are highly liquid, while 25-30 are semi-liquid. About 10-15 commodities record opportunistic trade; the remaining commodities (about 43) are categorised as illiquid contracts.
Under the new guidelines, exchanges would have six months to attract participation. During this period, exchanges can organise brokers’ meetings (in production and consumer segments) and enroll members from across the country.
“While urging for renewal of these contracts, commodity exchanges send us detailed plans of action they would take to make these contracts liquid. But between two annual renewals, hardly any participation is noticed---no new member for a specific illiquid contract is added and no transaction is executed. The minimum daily average turnover criterion, however, would make exchanges more punctual and worried — they would opt out of contracts that attract no participation,” Abhishek added.
The criterion, however, would differ based on the nature of commodities. Contracts on commodities such as almonds would have a minimum daily average turnover target of about Rs 10 crore, while small and regional commodities may have lower targets. This would not affect new launches, as exchanges would carry out stringent due diligence before sending proposals to FMC. Also, the proposed criterion would not be applicable on new exchanges.
In 2011-12, of the 21 recognised exchanges, the Multi Commodity Exchange, the National Commodity and Derivatives Exchange, the National Board of Trade, the National Multi Commodities Exchange and the ACE Derivatives & Commodity Exchange contributed 99 per cent to the total value of the commodities traded.
Of the 113 commodities, regulated by the FMC, in terms of trade value, gold, silver, copper, zinc, guar seed, soy oil, jeera, pepper and chana are the commodities traded prominently. The total volume of trade across all exchanges in 2011-12 stood at 1,402.57 million tonnes, worth about Rs 181 lakh crore. In 2011-12, deliveries of all commodities on exchange platforms were reported at 8,88,250 tonnes.
FMC has asked commodity exchanges to prepare a justification note before submitting a proposal for renewal of illiquid contracts. In case a commodity offered for trading fails to attract participation and exchanges renewed it for years, the exchange would need justification for another renewal. Exchanges would also have to submit the details of efforts made by them to attract participation in that commodity.
