FMC slams shut arbitrage in commodities
The same trading limits have been imposed on all exchanges in the contracts of 50 commodities.
By Nidhi Nath Srinivas, TNN |
NEW DELHI: In a significant move, the FMC has got rid of regulatory arbitrage between futures exchanges. The same trading limits have been imposed on all exchanges in the contracts of 50 commodities. Commodity exchanges will thus have no opportunity to indulge in one-upmanship by offering higher trading limits in money-spinners like mentha, jeera and guar to attract speculators. Brokers will now have to quickly liquidate their positions in several commodities to fall in line with the new cap on trading limits that comes into force on September 1.
| TRADE-OFF Exchanges can’t offer higher trading limits for hot commodities No broker can trade over 15% of the open interest in any contract |
From next month, no broker can trade more than 15% of the open interest in any contract on any exchange. In the near or delivery month, one-fifth of that has been imposed as the client limit. This removes the delivery pressure from working its way into the price discovery. The FMC has written to all exchanges, asking them to align all their contracts with the new limits, including those already being traded. ET had reported on June 15 that such a move was in the offing.
The regulation means brokers will be able to trade less overall in several farm commodities. In many commodities, there was no near-month limit till now. Now, once a brokerage hits the ceiling in a contract, it will have to simply let new clients for that contract walk away. Earlier, it could switch to an exchange with higher trading limits. Moreover, in commodities with more short positions, there may be a rise in prices, while in those with more long positions, there may be a downward pressure on prices.
In seven closely-monitored contracts — chana, sugar, urad, tuvar, guar gum, guar seed and mentha oil — FMC has fixed an even lower limit of one-tenth of open interest. This limit is the same for all exchanges. In politically sensitive wheat, FMC has imposed a specific quantity limit of 10,000 tonne for clients and 30,000 tonne for brokers.
The further decrease in near-month contract limits means that exchanges will now have less physical quantities of these commodities delivered to their warehouses. FMC has been concerned about contract differences because there is always a likelihood that a trader may hold higher positions on one exchange and distort prices across both. However, since then, it has realised that without alignment, punters can hop between them in search of a quick buck.
“Once all contracts are aligned, it would also be easier for FMC to regulate the market in future. The same open interest limits can be applied on all exchanges. All new contracts launched henceforth will be permitted only after existing contracts in that commodity on other exchanges are fully examined,’’ officials said.
FMC officials said as there was ample time provided, brokers can easily liquidate their positions accordingly. FMC had earlier imposed uniform position limits on 24 commodities to minimise differences in the contracts offered by both exchanges. The number has now been raised to 50.
Till now, there were significant differences in the contracts designed by MCX and Ncdex. But they were permitted as FMC approved them at different times.
For instance, in mentha oil, one client can hold up to 540 t on MCX but only 85 t on Ncdex. A broker can hold up to 25% of the open interest on MCX while on Ncdex he can hold up to 340 t only. In jeera, a client can hold up to 2500 t on MCX and only 200 t on Ncdex.
A broker can hold up to 12.5% of the open interest on MCX while he is limited to 1,000 t. In mustard seed, Ncdex has placed a 11,000-t limit on individual clients while MCX allows up to 20,000 t.
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