FMC cracks the whip on open interest defaulters

MUMBAI: In a move to curb speculation and volatility in the fiercely growing commodity futures market, regulator Forward Markets Commission (FMC) has decided to impose stringent financial penalties on members of national commodity exchanges who violate client-level open interest limits - the outstanding futures contracts, either buy or sell, which are not offset.

Habitual violators face the prospect of suspension from trading for one week.

After noticing cases wherein members repeatedly, either on their own account violate the client-level open interests limits or allow violation of such limits by their client(s), while executing orders on their behalf, the FMC has decided to slap tighter penalties on such ‘erring’ members.

Accordingly, if the position taken by any member exceeds the open interest limits by more than 2%, the penalty will be equal to 2% of the value of the violation, calculated on the basis of closing price, or Rs 10,000, whichever is higher.

For instance, if the value of the violation is Rs 1 crore (the quantum of excess position multiplied by closing price of the commodity on that day), the penalty will be Rs 2 lakh. In case this violation is observed for more than three times in a month across the market, the exchange has been directed to suspend the concerned member for a period of one week.

“Smaller penalties, however, have been contemplated for minor violations, which may sometimes take place because of inadvertence like switchover from one contract to next,” says an official from the FMC .

Here, if the position exceeds the prescribed open interest limits by less than or up to 2%, the penalty will be 2% of the value of the violation or Rs 10,000, whichever is lower.

Also, in such cases, the FMC has left it to the exchanges to devise their own norms to deal with habitual defaulters.

In either case, the monetary penalty will be credited to the Investors Protection Fund of the exchange. In case repeated violations are observed by FMC, the commission may consider taking action against the concerned exchanges, says the FMC press note.

The exchanges have been directed to implement the directive at the earliest and compliance be informed to the commission by month-end.

“The exchanges have also been directed to include these provisions in bye-laws/rules and send us the details of such violations, along with penal action, taken against the defaulting members on a monthly basis,” reads the FMC release.
“The open position limits are prescribed by the regulator to avoid concentration of positions in few hands, which may lead to price manipulation and disturb the market integrity,” said Rajeev Agarwal, member, FMC.

“Members need to monitor the positions taken by their clients. Our risk management cell enables us to monitor positions of our clients on a real-time basis, and if the position limits have been reached a client simply cannot take a fresh position,” said Priti Gupta, director, Anand Rathi group, and head of commodities desk. “It is very critical and it’s not difficult to monitor positions.”

“This is the first step towards curbing speculation. These stiff penalties will ensure that no single member can squeeze the market,” says a commodity head from a member broker.

Bhashyam Seshan, chief compliance officer at NCDEX, says that while the exchange welcomes the FMC directive on stiffer penalties, the exchange may consider making a request to the FMC for substituting suspension of a member with imposing a higher penalty in the interests of avoiding a systemic risk.