The Hindu Business Line : Seeking safe haven in US commodity futures

THREE weeks ago, when Hurricane Ivan hit Florida in the US, a top executive of a bank in Chennai earned a little over Rs 20,000 by trading in commodity futures market there. He made the money by buying December wheat contract at $3.21 a bushel (27.2 kg) and selling it at $3.30.

The executive, who does not want to be identified, had invested with a US broking firm and sought a portfolio manager to take care of the investment. "He allowed us to take a 10 per cent risk and we invested in wheat futures, which is generally seen as less risky. As Hurricane Ivan neared the US shores, the panic of destruction pushed the wheat market higher and we were able to book profit on the trade and ensure a small gain for our client," says Mr J. Richard, a trading advisor and portfolio manager of IDO Investor Services.

Mr Richard is also the Foreign Introducing Broker (FIB) for a registered US Futures Commission Merchant (FCM) — a clearing member of The Chicago Board of Trade and The Chicago Mercantile Exchange. Besides, the FCM is a participant in New York Board of Trade and New York Mercantile Exchange.

High networth individuals such as the bank executive have begun to invest in commodity futures in the US, thanks to the permission given by the Government to individuals to remit up to $25,000 a year abroad for any purpose. "Earlier, NRIs used to invest in commodity futures in Chicago and New York. Now, with this provision, Indian residents have begun to invest," says Mr Richard, who has witnessed a 50 per cent rise in clients since April.

To trade in commodity futures abroad, one has to approach an FIB. Then, a client account agreement and a risk disclosure statement have to be signed by the applicant and sent across to the FCM in the US for opening an account in the client's own name.

Once the account is set up, the client will have to wire funds to his "Customer Segregated Account".

No deposits are collected from the client by FIBs, who, if the client wishes, act solely in the capacity of a portfolio manager.

The minimum amount to be invested is $5,000 (about Rs 2.3 lakh) and the client himself has control over the deposit and withdrawal of the funds. There is no lock-in period for the margin deposit.

The investment is only towards margin money for the futures contract the client enters into. "If the amount falls to approximately less than $1,000, the client is given three days time to top up. Investors can also take part in options in these futures and these are, in fact, perceived as less risky," he says.

The client can allow a portfolio manager to handle the investment by nominating the latter as a third party controller of the account.

"The brokerage charged depends on the investment made, its size and number of trades done. While nominating a portfolio manager, the client indicates the percentage of risk that can be taken. Most of the clients start by offering a 10 per cent risk. As they gain confidence, they permit risk up to 20 per cent. In casethe portfolio manager exceeds the limit of risk allowed by the client, then it is the client's discretion to withdraw his funds," he says.

The portfolio manager here basically trades in softs, grains, metals (precious and non-ferrous) and currencies. A keen investor can follow the traded prices online from various sites on the futures market.

The investment managed by a portfolio manager is fully transparent and the FCM sends statements on a daily basis to the client. The client is also free to withdraw his profits every month.

"There is substantial risk of loss involved in trading in commodity futures as in any other financial derivatives. This investment is not meant for all investors. The investor should only trade his surplus funds in the futures market. The commodity futures in the US offer the client an option to explore price risk and diversify his portfolio. With a $3-trillion-a-day turnover, the commodities market is better organised and a mature ground for investors," he says.

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