The Forward Markets Commission (FMC), the commodity derivatives markets regulator, is considering to allow two days of margin funding.
Margin funding, a stretched leverage by member brokers to clients, is currently not allowed under the Forward Contracts (Regulation) Act (FCRA). The regulator wrote on Monday to commodity exchanges in this regard, seeking their views.
FMC Chairman Ramesh Abhishek, said, “Despite not being allowed under FCRA, members have been extending additional leverage to clients due to the high price volatility in commodities in the evening. Hence, it is advisable to give clients two days to compensate the margin difference to members.”
Indian markets close at 5:30 pm and the price volatility in global commodities is reflected in the domestic market only after the US markets open, by when markets here have closed.
Most clients face margin calls between 8 pm and 8.30 pm in India. Clients do not know how much money they have to pour in the first hour of the following day, by when the broker’s money gets locked in.
“This creates additional burden on member-brokers. Hence, it is fair to give some time to clients, so they do not (have to) square off their positions in a hurry and with losses. The Commission believes two days is enough for a client to take a decision on margin money,” said Abhishek.
Globally, referenceable commodities such as gold, silver and crude oil are traded in big lots. Being closely linked with the Comex, the commodity trading arm of the New York Mercantile Exchange (Nymex), the price volatility in the US market reflects in these commodities on the Multi Commodity Exchange (MCX), the National Commodity & Derivatives Exchange (NCDEX), the National Multi Commodity Exchange (NMCE) and all other futures platforms in the country. Commodities, such as soybean and sugar, are affected similarly.
FMC has not set any time frame for a response from the exchanges but there is a belief that it would take some favourable decisions in this regard soon. If allowed, it would be a big change in the commodity derivatives market, providing more depth in the futures market.
“From an intermediary point of view, the proposal is okay. But, it would create a problem for a broker, as they will have to organise funding when the price volatility is high,” said a senior commodity analyst.
Presently, the additional leverage through margin funding is provided to a select class of clients with good repayment history. But, if FMC makes margin funding official, it would be mandatory for brokers to ensure extra funds to all clients. Hence, chances are that a large sum of money of member-brokers would be block-ed for clients’ sake.
Also, if a client opts for squaring off the position, the margin call automatically goes off. If the price of the underlying commodity goes up, then the client would earn a profit with the broker’s money, with the member getting nothing.
FMC, therefore, may allow members to charge interest on the funds provided to clients for trading. The final decision would be made in consultation with the exchanges.
