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Delivery must on futures contract

July 06, 2005 08:51 IST

The Coordination Committee of Exchanges that oversees commodities futures trading on Tuesday announced that deliveries would be made compulsory on the outstanding positions of all futures contracts that were about to expire. The committee wants the norms to be applicable to all new contracts.

S Sundareshan, chairman of commodity markets regulator Forward Markets Commission, said this would be implemented in a phased manner as the delivery mechanisms were not yet fully in place.

Commodity exchange sources said this would probably be applicable to all agriculture commodities. "The commodity market regulator is heading towards a regime of compulsory delivery and penalise those who are not complying with the norms," one exchange official said.

Market sources pointed out that compulsory delivery on outstanding positions would especially affect commodities like pepper, cardamom and guarseeds as they would face more price volatility in the last few days before the contract expires.

These were clocking large volumes on the exchanges and, if both buyers and sellers look for squaring off positions, a disparity between the futures and spot prices will be created. Earlier, the contracts offered only a sellers' option, which largely left buyers unable to take any deliveries.

"The exchange should not be in a hurry to push for compulsory delivery. It may create huge price distortions. So, it needs to move in that direction slowly with adequate caution," said one exchange official under condition of anonymity. The other two important issues that the committee dealt with were trade timings and the margin systems.

There was a consensus among the members of the committee that the ban on the evening session of trade for all agri-commodities should remain. The limits for hedging would also be higher than the normal limit. The FMC will take a final decision on the extent of higher limit after receiving suggestions from the exchanges.

Exchanges are demanding more open position limit for the hedges than the speculators. The limit could be as much as five times for the hedgers in certain commodities.

The committee also decided that once FMC imposes special margins, the exchange must implement this on a realtime basis on all contracts. Recently, one of the exchanges used its discretion while imposing additional margin on one of the agriculture commodities.

A risk management group has been put in place to decide on an effective margining system and the limit on open positions of members and clients. The group is expected to meet on July 21.

The committee consists of FMC, the three multi-commodity exchanges -- the National Commodities and Derivatives Exchange of India, the Multi Commodity Exchange and the National Multi Commodity Exchange -- and single commodity exchanges like the National Board of Trade, Ahmedabad Commodity Exchange, India Pepper and Spice Trade Association and the East India Cotton Association.

Cleaning up

  • Move towards compulsory delivery system
  • Hedgers to be separated from speculators
  • More open position limit for hedgers than speculators
  • The ban on evening trading in agri-commodities to continue
  • Special margins on all contracts to be implemented on a real-time basis
BS Commodities Bureau in Mumbai