Commodity futures delivery period

Ram Sahgal, ET Bureau

(FMC has reduced the staggered…)

MUMBAI: A rule that has nearly driven out punters from the most active farm futures contracts and is partly responsible for reducing volumes has been tweaked by commodity futures regulator Forward Markets Commission (FMC). The move, brokers feel, may also help in partly offsetting the impact of the new commodity transaction tax (CTT).

FMC has reduced the staggered delivery period, introduced last June to prevent excessive speculation in near-month farm contracts, to 10 days from 15 presently from the August contract onwards.

The move will benefit 18 agri commodities including soya oil, sugar, and guar gum, whose turnover has been hit by the 10 per-lakh CTT levy which became effective from Monday. CTT has raised the cost of trading by about 35-40% as it has been imposed on the seller.

Before staggered delivery kicked in, sellers in the commodity markets were often left to the mercy of speculators who would artificially rig up prices in near- month contracts knowing well that delivery would happen only on the last day of a contract.

This not only prevented the seller from providing delivery prior to contract expiry but also exposed him to mark-to-market losses as prices were jacked up. To correct the skew, FMC last June allowed sellers to give delivery during a 15-day window up to the expiry of a near-month contract on the 20th of the month.

Though this reduced excess speculation it drove away punters to far month contracts which led to a substantial fall in volumes in near-month contracts. Punters perform a useful role by acting as counterparties to hedgers and provide liquidity to markets.

Agri futures turnover was just 12.6% of overall commodity futures turnover in FY13 and in the first two months of the current fiscal year has fallen more to just 8%.

"We have reviewed the staggered delivery mechanism after a year and have, in consultation with the exchanges, decided to cut the period to 10 days as we feel this will boost agri volumes while maintaining the robustness and balance in the system, " said Ramesh Abhishek, chairman, FMC.

Suresh Nair, director, Admisi Commodities, said the move will not just help boost agri volumes, but will also be beneficial in light of the recently introduced CTT, which has hit a turnover of processed commodities like soya oil and sugar.

"It will offset the impact of CTT to some extent, " said Nair.

In other important developments, FMC will introduce a uniform net worth criteria for brokers across all commexes and link that to the exposure members can avail of from exchanges.

Presently, minimum net worth - equity plus reserves - is different across different exchanges and all brokers enjoy similar exposure - five times that of clients.

FMC's move will allow brokers with higher capital to get more exposure from exchanges. The exact details will be announced shortly, said Abhishek.

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Popular Q&A

Why don't futures traders take delivery of the commodity?

Futures traders are just trading contracts. They are in it for the immediate income that they will earn by trading in futures. If they want to take delivery then they have to be prepared to take delivery which means they have to have some place to put it. Most contracts are just for trading. Many of them expire worthless.
A conrtract has two types of value. One is the time value. Time is worth something even if the contract is at the present moment trading out of the money. The other thing of value is that spread between the contract price and the actual purchase price, so long as the…

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