The Forward Markets Commission (FMC) has increased clients’ leverage in futures exchanges through a massive cut in special margins on agri commodities.
The commodity derivatives market regulator decided to reduce special margins on rape/mustard seed from 15 per cent to five per cent in cash. For chana, this was cut from 20 per cent cash in long-side contracts to 10 per cent for all running contracts, effective September 24.
Recently, FMC had announced withdrawal of the 20 per cent margin on long-side cotton seed oil cake contracts and the 10 per cent cash margin on long-side barley contracts. Early this month, long-side potato contracts also saw margins reduced from 30 per cent in cash to 20 per cent.
| CREATING MORE ELBOW ROOM Price movement (Rs /quintal) | |||
| Commodity | 21-Jul | 21-Sep | Change (%) |
| RM seed | 4,514 | 4,118 | -8.77 |
| Chana | 5,018 | 4,520 | -9.92 |
| Cottonseed oil cake | 1,592 | 1,354 | -14.95 |
| Barley | 1,582 | 1,191 | -24.72 |
| Source: NCDEX | |||
Margins, the prerogative of exchanges, is a blocked money component exchanges keep from their members as a safe money deposit on which members do not get any exposure. Therefore, reduction in margins would mean more hedging funds at the hands of clients for extensive exposure in these commodities. Commodity exchanges levy an initial margin while registering a client for trading. This varies from five to 7.5 per cent. However, in case of high speculation and, subsequently, abnormal price volatility, exchanges levy higher margins to cut clients’ exposure.
“Price is not the only criterion to determine a 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 a long time. Hence, we decided to cut special cash margins for a number of agri commodities,” said a senior FMC official.
A number of kharif-sown agri commodities saw abnormally high volatility in the first week of June, when the India Meteorological Department forecast a deficit monsoon this year would lead to lower output. However, the progress of the monsoon and the FMC’s provision of high cash margins pulled down not just volatility, but also actual prices of agri commodities.
For instance, RM seed contracts on the National Commodity & Derivatives Exchange slumped 8.77 per cent in the last two months to trade at Rs 4,118 a quintal on Friday. Similarly, chana and barley contracts for delivery in the near month fell 9.92 per cent and 24.72 per cent to Rs 4,520 a quintal and Rs 1,191 a quintal on Friday, respectively.
The FMC official added overall, market conditions for agri commodities had improved significantly in the last two months. Near-normal rainfall so far this season has changed the sentiment from ‘negative’ to ‘positive’, making high speculation in futures unlikely.
An Angel Commodities research report stated the record high price of RM seed had led to a severe decline in daily trade volume in the futures market. Currently, RM seed accounts for 1,50,000-2,00,000 tonnes of daily volume, compared with a staggering 4,00,000 tonnes two months earlier. Trade volume in chana, however, remained flat through the last two months.
Atul Shah, chief operating officer of Emkay Commotrade, said, “The regulator has only two options to curb excessive price spurt in futures exchanges. First, try to reduce clients’ exposure by levying margins on either side. Second, reduce the position limit so that clients wouldn’t be able to hedge a large quantity of any commodity.”
Volatility in agri commodities has also declined. In July, a large number of commodities were hitting the upper/lower circuit every alternate day. Nowadays, hardly any commodity hits the circuit limit. The FMC has, therefore, achieved both objectives and, therefore, cut margins.
