FMC may scrap trading in illiquid contracts

The Forward Markets Commission (FMC) may suspend or discontinue trading in illiquid commodities on national commodity exchanges.

"How long are you going to wait for a contract to attract traders, till maturity?" asked Anupam Mishra, director of FMC.

Some commodities have failed to do any trade at all since the day they were launched, while some have not been traded for the last one year after a flamboyant debut on the exchanges.

At present, the ratio of success to failure stands at 1:5 in India. "Traders perhaps do not deal with such commodities on the exchanges because of the difference in contract design or trading in grey markets. Permission for launching these contracts is granted on the basis of a feasibility study done by the exchanges. Now, that needs to be seriously looked into," Mishra said.

"One cannot anticipate the trade volume on the very first day. So, the commodity should be launched first and let it taste success or failure," Kewal Ram of FMC said, in a recent discussion.

Indeed, illiquid commodities have thrown a challenge to the regulator. Exchanges keep on launching some commodities or the other, irrespective of their availability or interests of traders and consumers, compelling the FMC to rethink its permission norms for such commodities.

Often, after a few days of their launch, these commodities either fail to attract traders completely or are traded in very small quantities, leaving the burden of price updates on the exchanges without generating any returns.

The regulator has been constantly advocating for the banning of these commodities, but in the absence of financial and functional autonomy, it perhaps cannot ban "� or may be it is hoping that trade orders will finally flow in some day.

Prices of illiquid commodities are also moving in tandem with their liquid partners or the movement in the spot market. Usually, even if there is no trading on a daily basis, prices of illiquid commodities take a direction depending upon the general market sentiment.

"We take poled prices in the spot market and add various costs to determine the closing prices of futures for academic interest," said Poonam Gupta of National Multi Commodity Exchange.

Despite no trade taking place in the July 2006 contract of Maharashtra lal tur in the last 15 days, its price shot up by Rs 61 to Rs 1,864 on the National Commodity & Derivatives Exchange (NCDEX).

In the spot market, it gained Rs 52 to close the first fortnight of the month at Rs 1,852 a quintal. Similar is the case with the July aluminium contract, which ended at Rs 118.30 a kg, after having remained rangebound "� attracting no trade at all "� in the first fortnight of this month.

The price of another illiquid commodity, RBD palmolein, perked up by Rs 23 to Rs 427 per 10 kg on the NCDEX. RM oil has not been traded for quite some time now; despite the binding on announcing the price, the exchange failed to do the same.

The soyameal July 2006 futures attracted only three lots of trade, valued at Rs 67.34 lakh, since the launch of the contract on March 10, 2006. But, the price kept varying, to Rs 8,503 from Rs 8,588 on July 1. Surprisingly, there has been no trade in the July contract since March 15.

"Prices of all commodities are peaking up irrespective of whether they are traded on NCDEX or not, and illiquid commodities are no exception," an NCDEX official said.

There is no question of adding administrative costs further to the costs comprising interest rate, warehouse costs and cost of carry, as all these costs are taken into account while delivering the goods, Gupta of NMCE said.

Although the FMC is currently silent on the issue, a source with the regulator said prices of illiquid commodities were fundamentally correlated to the spot prices.