New FMC norms put sugar operators in a fix

Smarting under the new Forward Market Commission (FMC) norms for sugar futures, market players are looking at loopholes in the guidelines to keep the volatility in the market going.

Under the new norms, position limit for members has been revised to 100,000 tonne or 20 per cent of open market interest, whichever is higher, against 50,000 tonne earlier and that of clients has been increased to 25,000 tonne from 10,000 tonne.

While some players see the new norms as a means to curb speculation, others feel that a market cannot work without it. According to trade estimates, 90 per cent of sugar futures volumes was speculative.

"There can be various ways and means which has help us take positions such as taking in more members and asking the exchange to introduce a new contract with Kolkata as the delivery centre," said an official with a leading institutional player.

Sugar futures are, at present, trading at a premium vis-à-vis spot market and thus, most market players are keen to find some way out. The regulator is, however, sticking to its decision.

D S Kolamkar, director, FMC, said, "Various suggestions including a new ex-Kolkata contract have come to us. We are considering all of them at the moment and such talk is of no consequence. We will decide on these in due course".

The earlier order limiting open position of near month to one-tenth is expected to hit volumes. Further, institutional players such as Balrampur Chini, Shree Renuka Sugars will be hit severely following this as gains achieved will be much lower than the delivery cost itself.

"As a way out, the number of memberships at the exchange can be increased. This can still allow market players to increase their positions in near-month contracts," said an analyst with a Mumbai-based brokerage.

With the new norms allowing no-delivery centres outside a 300 km radius of the main centre, FMC has stopped sugar delivery at Kolkata and Kanpur. This will push most trade seeking premiums to Delhi (compared with Muzzaffarnagar) and restrict institutional players in other states, especially southern India and Maharashtra, to hedging only.

Kolkata market being a consumption centre and not a production one, has always attracted premiums and large number of deliveries in the recently expired contracts. Traders are planning to approach the exchange to introduce an ex-Kolkata contract.

"Many members and clients had taken position on April contract with ex-Kolkata delivery on mind. They will try to ask the NCDEX if the new norms can be introduced on new contracts, from May," said a market source.

The new norms have raised the daily price limit to 6 per cent from 5.5 per cent. Once the prescribed daily price limit is hit, it will be followed by a 15-minute cooling period.

"Thereafter, the price band shall be raised by 50 per cent of the existing limit and trade will be resumed. If the price hits the revised price band again during the day, no trade/order shall be permitted beyond the revised limit during the day," the circular said.

Earlier, the daily price limit was 5.5 per cent, which was to be raised to 8.25 per cent after a 15-minute break. This, the analyst said, will restrict speculation.

Since August last, spot and futures prices are on the rise in domestic and overseas markets following a tight global demand-supply scenario, a recent WTO ruling restricting European Union subsidies to the sugar sector and increasing importance of ethanol.