Launch of delivery-based trading in the commodity segment in the first week of January on the MCX, the country’s leading commodity exchange, has turned out to be chaotic.

Just a day’s notice for the commencement of delivery-based trading in aluminium and zinc and non-conformity with circuit-filter rules caught many traders off-guard, who are now complaining of huge loses.

The price of aluminium for March series fell 12.73 per cent on January 4 without any major movement in international or domestic spot market price for the metal. Such a sharp swing in the price was due to the fact that traders were trying to get a grip of the new contract.

In a major policy shift, SEBI recently mandated both equity and commodity markets to move towards delivery-based contracts instead of the current cash settlement system. The MCX had informed market participants on December 31 that it would commence delivery settlement in aluminium and zinc from May month series.

But on January 2, the MCX put out a circular that aluminium and zinc contracts were being moved to delivery settlement from March and April series itself and trading in them will commence from January 3.

For a delivery-based contract, it is necessary for traders to understand the pricing mechanism as the price quote on the exchange may or may not involve tax and statutory levies or duties and a day’s notice was too short for this, commodity markets experts say.

So far, the MCX has been following the price of the London Metal Exchange, but with delivery settlement, traders have to incorporate domestic factors into pricing.

Varied tax structure of base metals

The MCX considered a base price of ₹150 for March and April aluminium contract, but on January 4, the price of aluminium for March delivery fell to ₹130.90. The exchange had mentioned in its circular that the price quote would be excluding the GST but there was no bifurcation of any other duty or levies or charges, which the exchange could have considered in setting the base price.

The base metals have a varied tax structure considering their import duty and such levies. The MCX has mentioned in its circular that the settlement price of metal contracts could be ex-warehouse.

“The MCX had mentioned that a 9 per cent fall in the price of the metal could trigger the final circuit-filter and will lead them to check if the price fall was in line with international or domestic market. But on January 4, no circuit-filter rules came into play, which was surprising,” a regulatory official said.

Those who sold March series aluminium thinking it was too high are now in a spot as they will have to make delivery.

The MCX did not respond to a query. A source close to the exchange said that March and April series had no open interest, and hence, they were chosen to launch delivery settlement as SEBI had permitted it in a series wherein there was no open interest. SEBI too did not reply to an email query but a source said the regulator will look into the issue.

In the coming months, the MCX has been asked to move all its metal contracts to physical delivery. Also, SEBI may ask the exchange to move the mini contracts from the main contracts to physical settlement to do away with the disparity. In equity, SEBI has mandated that the derivative contract size should not be less than ₹5 lakh, but in commodity, there is disparity in this rule too. For instance, the main crude and natural gas contract size on the MCX is less than ₹3 lakh. In fact, the value of mini contracts for crude is less than ₹1 lakh.

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