The Commodity Futures Trading Commission (CFTC) of the US releases a Commitments of Traders (CoT) report every week on Friday showing a breakdown of previous Tuesday’s open interest in derivatives (futures and options) contracts of various commodities across different exchanges in US.

The report gives details of open interest of traders categorised as: commercial traders, non-commercial traders and non-reportable traders. The report includes derivatives (futures and options) of US origin of various commodities such as various agriculture, petroleum, energy and metals across exchanges viz. CME group exchanges, ICE, NYMEX, NYSE Liffe etc. It also covers currency futures and equity indices.

Commercial traders include processors, physical traders, hedgers or end-users who use the derivative contracts for risk management. Non-commercial traders (also called “speculators”) include large speculators, commodity funds, managed funds, pension funds, index funds, etc. Trading entities which do not fall in either “commercial” or “non-commercial” traders are categorised as non-reportable. Non-reportable positions are derived from subtracting commercial and non-commercial positions from total net open positions. Non-reportable traders are usually small speculators.

A trader may be classified as a commercial trader in some commodities and as a non-commercial trader in other commodities. A single trading entity cannot be classified as both a commercial and non-commercial trader in the same commodity.

The CoT report is keenly awaited by traders to gauge the trend in the market by analysing the changes in the positions of large speculators and/or commercial traders (hedgers).

Many traders use the CoT report to bet in the direction of non-commercial traders, as it found in the last many years that this category of traders is usually on the right side of market. Some track non-reportable (small speculators) positions, as they believe that this category of traders is on the wrong side of the price direction.

Data from the last 15 years show that increase or decrease in net non-commercial positions usually has a good direct correlation with the price movements of the commodity.

This can be partly attributed to financialisation of commodities in the last 15 years. Large speculators and funds are also considered to be ‘smart money’ having the best and the earliest knowledge of changes in fundamentals of the commodity. On the other hand, commercial traders are usually found on the opposite side of the price direction, as they – being actual users of the commodity– prefer to sell in a rising market and buy in a falling market.

Traders analyse the CoT data in different ways. Some traders look for a large change in net non-commercial positions coinciding with significant change in prices. This may indicate a sustainable trend in prices of the commodity prices. Traders also look for extreme positions in net non-commercial positions for a possible top or bottom in prices of the commodity. The CoT report data is generally used by traders to gauge the longer-term trend of the markets as there is a gap of three days between the date of the CoT data (Tuesday) and the release date (Friday). In India, such a system of categorisation of traders does not exist. There have been demands from some quarters in the Indian derivatives industry to adopt this system in the Indian context for greater transparency into the fund flows in commodity derivatives markets. Some experts believe that Indian commodity derivatives markets are still not mature enough to have a CoT-like system.

However, such a mechanism is desirable on a bigger horizon to study prices movements of key commodities, to bring in greater transparency in policy formulations and also to set limits for different trading categories.

(The writer is Executive Director, ADMISI Commodities Pvt. Ltd. Views expressed are personal)

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