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    FMC mulls centre-specific commodity forward trades

    Synopsis

    These contracts will allow traders to buy commodities like chana, rapeseed mustard, castorseed, etc, on commodity exchanges, where currently they can’t do so.

    ET Bureau
    MUMBAI: The Forward Markets Commission (FMC) is considering permitting bourses to offer centre-specific, short-term forward trades in highly traded farm products as the regulator aims to increase delivery in the Rs 101- lakh crore commodity futures market, which is dominated by speculation and hedging.

    Termed a "game changer" by Ramesh Abhishek, chairman, FMC, these contracts will allow traders to buy commodities like chana, rapeseed mustard, castorseed, etc, on commodity exchanges, where currently they can’t do so. This, Abhishek feels, could increase delivery by physical market traders on the six national bourses, which posted volumes ofRs 101-lakh crore in the fiscal year through March.

    Market estimation of delivery on the bourses is just 2-3% of annual volumes, with a larger portion being because of speculation and hedging.

    "The contracts will be centre-based," said Abhishek. "Modalities of the contracts are being worked out by the exchanges. We are encouraging them to launch products that result in greater proportion of delivery."

    Currently, on the futures market, say a chana trader who wants delivery of the pulse at Bikaner, places an order to buy. However, at the contract expiry, which usually happens on the 20th of a month, he realises the chana delivered is from another centre, say, Delhi. The quality and price of this chana differs from that in Bikaner. This may dissuade a trader from buying or selling on the futures market.

    FMC and the exchanges feel centre-specific forward contracts could address the demand from such market constituents.

    Atul Chaturvedi, CEO, Adani Wilmar, which handles 2.5-million tonnes of edible oils across the country and is known for the Fortune brand of cooking oil, agreed that such contracts could "facilitate" and "improve" deliveries on the bourses. "Traders such as ourselves would get to know how much of a commodity is dematerialised (held in electronic form) and that would help," Chaturvedi said.

    However, Pukhraj Chopra, a grain merchant at Bikaner, said success of the proposed contracts would depend on their cost competitiveness to forwards executed between traders outside the exchange infrastructure. "I pay just a brokerage cost for such a trade outside of the bourses.

    If I have to pay warehouse and grading and assaying charges, I would not use such contracts," Chopra said.

    Dilip Bhatia, MD & CEO, Kotak Mahindra Bank-promoted Ace Commodity Exchange said the finer points were being thrashed out by the exchanges.

    However, FMC’s Abhishek feels traders would be assured of reliability, quality of produce and assured delivery that would negate concerns of traders like Chopra in the long run.

    A futures and forwards contract are similar to the extent that both allow a buyer or a seller to buy/sell a commodity at a predetermined price at a future date. However, a few differences exist. For instance, in a futures market, the counterparty is anonymous, while a forwards contract is struck between two parties known to each other. But, unlike in an OTC forwards contract, in the futures market, the counterparty default risk is borne by the exchange, a plus point when forwards are launched on the exchanges.

    Financial Technologies promoted-MCX, Renuka Sugars and LIC-held NCDEX, CWC-promoted NMCE, Ace, RADA-anchored ICEX and UCX are the six national commodity bourses.



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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

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