FMC may remove daily price caps, widen position limits

At present there are daily price limits for all commodities and any price movement on either side beyond set limits not permitted

The Forward Markets Commission (FMC), the commodities futures market regulator, is considering several measures to improve risk management in the market and giving more depth and efficiency to price discovery. Based on the recommendations of the risk management group it had set up under Indian Institute of Management-Ahmedabad (IIM-A) professor and derivatives market expert Jayanth Varma, FMC is considering steps such as widening position limits for hedgers, removing daily price limits for ups and downs in commodities  and having a more effective margin system and surveillance mechanism.

Some of the recommendations of the Varma panel such as relaxation in margins for hedgers who have deposited stock with the exchange and have continuous approvals for liquid contracts, have been implemented.

According to a source, FMC has not set time limits for implementing the recommendations but has started discussions. Before taking a final call, the regulator will seek the views of exchanges and market participants. Those on the radar for implementation include wider position limits for genuine hedgers. Due to lower limits, several big companies are staying away from hedging their risk on the commodity futures platform. One of the purposes of developing this market was to provide opportunity to hedge to cut commodity price risks.

"For this, genuineness of the hedger has to be established and there should also be a proper audit of their positions, monitoring by exchanges and even random scrutiny by the FMC. Hedgers shall have to comply with certain globally established conditions to get the wider limits," said Varma.

Normally, genuine hedgers have to show the business in which they operate, the risk involved in that business and even disclose their cash market positions to the exchange. For example, a food processing company that consumes wheat can hedge in the buy contract of wheat. They don't need to sell wheat. All these shall be properly monitored by the exchange concerned and even the FMC shall randomly monitor it and even get audited the genuineness of hedging. In such a scenario, hedgers have to be registered as a separate category by the exchanges.

  At present, there are daily price limits for all commodities and any price movement on either side beyond the set limits are not permitted. Once the first limit is hit, there is a cooling-off period, but later when the second stage limit is hit, trading is frozen. "Such limits gives a sense of artificial stability in the market and to get a genuine price discovery, these limits should go, though the cooling-off period between two phases of price movements shall be retained," said Varma.

To get a sense of full risk, the commission is considering this for all agriculture and non-agri commodities.

Among the other recommendation of the Varma panel are improving the margin structure and systems and focusing on surveillance. As the market grows, surveillance has to be strengthened. "It will bring competency at both the exchange and the regulatory levels," said Varma.