Trading limit taking market backward

NEW DELHI: Despite the frenzied activity in the markets, commodity brokers are bearing the brunt of a new kind of rationing. They cannot expand their business.

After the commodity regulator, Forward Markets Commission, clamped down on punters by imposing trading limits, each brokerage firm is left with hardly three or four clients in most contracts.

Take current hot favourite refined soya oil. With a near month client limit of 6,000 tonnes and a member limit of 18,000 tonnes, an average brokerage hits the ceiling with just three big accounts.

The worst affected are the large cooking oil companies who badly need to hedge their risk but left with no cover. In desperation, many of them have shifted to kerb trading in Indore, which has seen a sharp rise in the last 10 days.

“It is a peculiar position that has arisen because the oils market is today one-sided. There are a large number of buyers and very few sellers. Such a sustained one-way rally is rare in the sector,” said Rajesh Aggarwal, spokesman of industry body SOPA.

India imports nearly 2 million tonnes of soya oil annually and as it is a highly volatile oil, importers, traders and processors always prefer to hedge their cargo. “The entire edible oil trade in India is done basis soya oil. All oils, including palm, groundnut, and mustard, are pegged to soya oil.

Soya itself is a highly volatile oil because of the Argentina and Brazilian markets. The freight market too fluctuates rapidly. As ships carrying soya take more than a month to reach India, companies need to get a fix on price in the local exchanges. This is not being allowed right now,” said a broker in Mumbai.

“Each ship itself carries more than 6,000 tonnes. We are turning away clients everyday because we have reached our limit already. We even ask our existing clients to cut their positions. No one wants to pay a fine by breaching it. But it is impacting our business majorly,” said the head of the commodity trading desk in a large brokerage firm.

Companies are wary of floating multiple companies to get past this ceiling because the presence of the same director in two companies can trigger alarm bells and penalties. “Even if this option was available, only the speculators would be using it. No large corporate refiner or importer can think of using these methods. So that immediately skews the market further in favour of small punters,” said the finance director in a south India-based cooking oil brand.

“There are around 850 commodity brokers here. This kind of public distribution system ensures that they all end up getting a share of the business. Some of the smaller brokers now have a larger number of clients than the big houses,” said a trader in Delhi.

So should the limits be changed? SOPA advises caution. “The member limit should certainly be raised so that more clients can trade. But except for a handful of large companies, with around 15% market share in all, the current limit is more than adequate for most players. In fact, a small limit ensures that two-three big players don’t swing the market,” said Mr Aggaral.

From August 1, exchanges have been asked by the FMC to become more strict with erring brokers and their clients who violate their trading limits. Exceeding the limit by 2% attracts a minimum fine of Rs 10,000 per day. Frequent violations will now lead to suspension of the broker as well. The move is welcome as it weeds out habitually errant brokers and traders. Unfortunately, it is also having a significant impact on price discovery in commodities.