FMC seeks comments on introducing liquidity enhancement scheme
Eligible members are free to participate in the scheme. They should have a net worth of at least Rs 1 crore and should deposit Rs 25 lakh towards margins.
By PTI | Updated:
NEW DELHI: Commodity markets regulator FMC has sought public comments on allowing commodity bourses to introduce incentive schemes to encourage participation in low-liquidity commodity futures.
Forward Markets Commission (FMC) has come out with broad guidelines to enable exchanges introduce Liquidity Enhancement Schemes (LES) and has sought public comments on the norms by January 21.
"Trading is a function of demand-supply and liquidity is generated by active participation of various market participants. However, to bring in initial liquidity, certain special efforts may be required by exchanges," FMC said.
Liquidity enhancers are also know as 'market-maker'. As per the guidelines, the commodity bourses should introduce 'liquidity enhancement schemes' on any commodity for a maximum period of two years.
Any eligible member of the exchange is free to participate in the scheme and should have a net worth of at least Rs 1 crore and should deposit Rs 25 lakh with the exchange as advance towards margins.
The exchanges should formulate their own benchmarks for selecting commodities for liquidity enhancement with the broad objective of enhancing liquidity in illiquid contracts.
At present, commodity futures in agri-commodities having a daily turnover of Rs 100 crore and non-agricultural commodities having turnover of Rs 500 crore at the exchange should be considered liquid for this purpose.
Once the scheme is discontinued, it can be re-introduced on the same commodity within three year period of the introduction of the earlier scheme.
However, the scheme should be discontinued as and when average daily turnover reaches Rs 500 crore in the case of non-agri commodities and Rs 100 crore in the case of agri-commodities during last 90 days or 3 years from introduction of the scheme, whichever is earlier.
There should be at least three 'Liquidity Enhancement Providers' for each commodity on which futures contracts are traded.
The list of commodities eligible for liquidity enhancement should be disseminated to the market. The scheme, including any modification therein or its discontinuation, should be disclosed to the market at least 30 days in advance.
FMC said the scheme should be "objective, transparent, non-discretionary and non-discriminatory".
Forward Markets Commission (FMC) has come out with broad guidelines to enable exchanges introduce Liquidity Enhancement Schemes (LES) and has sought public comments on the norms by January 21.
"Trading is a function of demand-supply and liquidity is generated by active participation of various market participants. However, to bring in initial liquidity, certain special efforts may be required by exchanges," FMC said.
Liquidity enhancers are also know as 'market-maker'. As per the guidelines, the commodity bourses should introduce 'liquidity enhancement schemes' on any commodity for a maximum period of two years.
Any eligible member of the exchange is free to participate in the scheme and should have a net worth of at least Rs 1 crore and should deposit Rs 25 lakh with the exchange as advance towards margins.
The exchanges should formulate their own benchmarks for selecting commodities for liquidity enhancement with the broad objective of enhancing liquidity in illiquid contracts.
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At present, commodity futures in agri-commodities having a daily turnover of Rs 100 crore and non-agricultural commodities having turnover of Rs 500 crore at the exchange should be considered liquid for this purpose.
Once the scheme is discontinued, it can be re-introduced on the same commodity within three year period of the introduction of the earlier scheme.
However, the scheme should be discontinued as and when average daily turnover reaches Rs 500 crore in the case of non-agri commodities and Rs 100 crore in the case of agri-commodities during last 90 days or 3 years from introduction of the scheme, whichever is earlier.
There should be at least three 'Liquidity Enhancement Providers' for each commodity on which futures contracts are traded.
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The list of commodities eligible for liquidity enhancement should be disseminated to the market. The scheme, including any modification therein or its discontinuation, should be disclosed to the market at least 30 days in advance.
FMC said the scheme should be "objective, transparent, non-discretionary and non-discriminatory".
The incentive under liquidity enhancement schemes should be transparent and measurable and may take either of the following two forms:
"Incentives can be given in the form of discounts/ adjustments in transaction fees, admission fees, other membership charges. The Exchanges may specify other types of incentives subject to the condition that there should be no compromise on Risk Management by the exchange," FMC said.
That apart, the total incentive provided by the exchange during a financial year shall not exceed 25 per cent of its net profit earned during the previous year, it added.
FMC also said that LES may be provided position limits as applicable for a trading member. There will be no relaxation in the levy of initial or mark-to-market margin.
However, the exchange may choose not to charge extra margin on trades.
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To ensure market integrity, FMC said commodity bourses should have systems and defined procedures in place to monitor any possible collusion between other commodity brokers indulging in trades solely for seeking incentives.Incentive should not be provided for trades where the counter-party itself has the same Unique Client Code (UCC) on both sides of the transaction or the other scheme provider.
The exchange should prescribe and monitor the obligation of liquidity enhancers both in quantitative and qualitative form.
The scheme should have the prior approval of the Board of the commodity exchanges. Its implementation and outcome should be monitored by the Board at quarterly intervals, within 15 days of the close of the quarter.
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The exchange should submit quarterly report to Board of Directors and half-yearly reports to the FMC on the effectiveness of the scheme. Too busy to trade in stocks? Invest in Mutual Funds with ET Money!
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