Futures delivery norms to pull down volumes: Traders

Market apprehensive of mandatory physical settlement

Forward Markets Commission's (FMC) proposal to make physical settlement of outstanding positions mandatory on the expiry of a futures contract on commodities exchanges may drastically pull trading volumes down and push prices up, traders and analysts said Wednesday.

The FMC has decided to introduce mandatory physical delivery in phased manner.

"We believe just before the expiry of the contract, prices on the exchanges as well as the physical markets will shoot up," said Si Kannan, an analyst with Sharekhan Commodities, a Mumbai brokerage.

Kannan expected prices would be volatile as sellers would start buying the commodity to make physical deliveries.

"The move, which is aimed at curbing speculation, will result in more price volatility," he said. The new norm will increase prices in the spot market on higher purchases to meet the demand for delivery at the expiry of futures, said

While Kishore Narne, an analyst with Anand Rathi Securities, also saw prices rising because of the new norm, in the long run he said the move would curb short selling and would also lead to spot and future prices moving in tandem.

However, some saw volumes in futures falling. "The decision will be detrimental for volume. In my view, trading volume will come down in a major way, as dealers will be wary of the trade," said Ketan Joshi, who traders on the National Multi Commodity Exchange.

Joshi said the commodity futures market is in a nascent stage and volumes are picking up gradually. But with compulsory physical settlement, trading volumes can decline by 70 per cent. However, Kannan said volumes will rise in short term as there will be lot of buying and selling in order to make physical deliveries.

A pulse trader from Satara in Maharashtra said if the commodities market regulator makes physical deliveries mandatory, people who trade in imported commodities would find it difficult to adhere to the norm.

---

Fear factors

• Traders fear prices would be volatile as sellers would start buying the commodity to make physical deliveries
• They also saw prices rising because of the new norm, in the long run. They claimed that the move would curb short selling and would also lead to spot and future prices moving in tandem