In a positive implication on commodities derivatives market, the Forward Markets Commission (FMC) has increased clients’ leverage in futures exchange through a massive cut in special margins in agri commodities.
While the commodity derivatives market regulator has decided to reduce special margins in rape / mustard seed to 5% in cash from the existing 15% in cash now, the same was halved in chana from 20% cash in long side contracts to 10% in all running contracts effective September 24.
Recently, the FMC had announced withdrawal of 20% margin in long side contract of cotton seed oil cake and 10% cash margin of long side barley contracts. Potato contract also faced a margin cut from 30% cash in long side contract to 20% earlier this month.
Margin, a prerogative to exchanges, is a blocked money component which exchanges keep from their members as safe money deposit on which members do not get any exposure. Hence, the reduction in margin would mean more hedging funds at the hands of clients for taking extensive exposure in these commodities.
The commodity exchanges levy initial margin at the time of registering a client for trading which varies between 5 - 7.5%. But, in case of high speculation and thereby abnormal price volatility, exchanges levy higher margins to cut clients’ exposure.
“Price is not the only criterion to determine revision in margins. When special cash margins were levied price volatility was abnormally high. Now, with the kharif sowing data coming in, estimates of this season’s crop size have become more or less clear. Also, there is no point in continuing with one type of levy for long time. Hence, we decided to cut special cash margins in a number of agri commodities,” said a senior FMC official.
A number of kharif sown agri commodities witnessed abnormally high volatility in the first week of June when the India Meteorological Department (IMD) forecast a deficit in the monsoon rainfall this year resulting into lower output. But, with the progress of monsoon coupled with FMC’s provision of high cash margins pulled down not only volatility but also the actual price of agri commodities.
RM seed contract, for example, on the National Commodity & Derivatives Exchange (NCDEX) slumped by 8.77% in the last two months to trade at Rs 4118 a quintal on Friday. Similarly, chana and barley contracts for delivery in near month fell by 9.92% and 24.72% to Rs 4520 a quintal and Rs 1191 a quintal on Friday respectively.
The official further said that overall market condition in agri commodities has improved significantly in the last two months. Near normal rainfall so far this season has changed sentiment from “negative” to “positive” leading to very limited possibility of high speculation in futures platforms.
| Price movement (Rs/quintal) | |||
| Commodity | 21-Jul | 21-Sep | Change (%) |
| RM seed | 4514 | 4118 | (-)8.77 |
| Chana | 5018 | 4520 | (-)9.92 |
| Cottonseed oil cake | 1592 | 1354 | (-)14.95 |
| Barley | 1582 | 1191 | (-)24.72 |
| Source : NCDEX |
An Angel Commodity research report said that the record high price of RM Seed led to a severe decline in daily trade volume in futures market. Currently, RM seed generates between 1.5-2 lakh tonnes of daily volume as compared to a staggering 4 lakh tonnes two months ago. Trade volume in chana, however, remained stagnant over the last two months.
Atul Shah, Chief Operating Officer of Emkay Commotrade Ltd, said, “The regulator has only two options to curb excessive price spurt in futures exchange. First, the regulator tries to reduce clients’ exposure by levying margins in either side, and second, it reduces position limit so that clients would not be able to hedge a large quantity of any commodity.”
Volatility in agri commodities have also reduced. Early July this year, a large number of commodities were hitting upper / lower circuit every alternate day. Nowadays, hardly any commodity hits circuit limit. Hence, the FMC has achieved both objectives and hence, a cut on margins.
