The Forward Markets Commission (FMC) has had a busy year as it has been resorting to sustained regulatory measures to contain volatility and reduce “excessive” speculation in some of the farm commodities.

Much of the action was focussed on the guar complex, in which a series of trading curbs were imposed as prices continued their upward spiral.

Eventually, the FMC disallowed launch of new contracts in guar. Futures trade in other farm commodities also witnessed regulatory action such as increase in margin hikes, reduction of positions.

Staggered delivery system

What made the difference in bringing down the volatility is staggered delivery system, said Ramesh Abhishek, Chairman, FMC.

“We introduced the concept of staggered delivery in the near-month contract of some of the farm commodities. This reduced the leverage, bringing down excessive speculation,” he said.

Staggered delivery system requires traders to report their delivery intention 15 days before close of the near-month contract.

“This measure contributed very strongly in bringing down volatility,” Abhishek said adding that when this was introduced volumes in some of the far month contracts increased indicating that some traders may have squared off their positions and moved on to the next.

Abhishek believes that regulatory actions by the FMC and the recent arrival of rain in some of the monsoon deficient areas have helped reduce volatility in prices but the commodities regulator’s vigil on futures trade has not dropped.

In some cases the direct impact of regulatory action especially staggered delivery system has resulted in fall in prices, though not always.

“We are not taking a price view with our regulatory action. We want to make sure that prices only move on fundamentals especially in the near-month contracts,” he said.

Guar futures

In guar futures, which saw the most regulatory action, prices continued to rise even after all the existing contracts had been squared up.

The FMC has not taken any decision regarding allowing fresh contracts in guar. July was the last contract traded. The regulator has not allowed subsequent contracts.

“We are watching the situation with regard to guar supplies, rainfall and acreage. Supplies must be adequate otherwise, there will be cornering of stocks,” said Abhishek.

FMC had submitted its report on guar price rally to the government a couple of months ago but Abhishek was not willing to talk about its details. However, there are indications that the unprecedented rally in guar futures was mainly due to a severe supply-demand mismatch in the spot market.

Narrow commodities

But the guar rally story has thrown up a question before FMC. Is it prudent to allow futures trade in narrow commodities?

“We are examining this point within the Commission. In a large commodity it is difficult to corner stocks,” Abhishek said. He pointed out that commodities such as guar, cardamom and mentha oil would probably be narrow commodities but added that the definition of narrowness is yet to be decided.

Other actions

The FMC is also in the process of studying the volume-open interest ratio.

“There are no standard benchmarks in this but we must make a roadmap on this,” he said. In international exchanges, volumes account for one-third of open interest in farm commodities and half in non-farm commodities, he said.

The regulator has also started a vigil on day trading asking exchanges to keep an eye on margins , he said.

(This article was published on August 15, 2012)
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