Minutes of the Conference of the Members of the Southern Region held at Kochi on 08

Minutes of the Conference of the Members of the Southern Region held at Kochi on 08.12.2006.

A Conference of the members of the Exchange of Southern India was held at Kochi on 8.12.2006 under the Chairmanship of Shri S. Sundareshan, Chairman, FMC at Kochi. The conference was attended by Shri Rajeev Kumar Agarwal, Member, FMC and other senior officers from FMC. The list of participants is given at Annex-I.

Shri S. Sundareshan, Chairman, FMC in his inaugural address complimented the national exchanges and the members for the phenomenal growth of the markets and observed that but for the efforts made by these institutions, the phenomenal growth of these markets would not have been possible. The meeting with the Members of the ‘National’ Exchanges were initiated with the objective of obtaining feed back of the Members who are important constituent of the ecosystem. In the past these meeting were held at Mumbai (for members of the Western Region) at Jaipur (for Member of Northern Region) at Kolkata (for the Members of Eastern Region). Chairman observed the feed back obtained during such interactions have provided useful inputs in the policy making process and the fact that Members have been advocating a conservative approach with regard to margining, price bands, limits on open positions views sometimes at variance with the feed back given by the Exchanges on these issues. The Chairman assured that in the future more such interactions shall be organized.

The Commodity Derivative market in the country have to address the concerns of various segments of the society such as farmers, consumers, processors, stockists, etc. having contradiction expectations. The futures markets provide an advanced forecast of the likely expected price at a future point of time and as such work as a messenger. It is essential to create awareness about the functioning of these markets amongst various sections of the society so that various misconceptions about the functioning of these markets could be removed. The Forward Markets Commission along with the Exchange has organized various awareness programmes and the Members of the National Exchanges can play a pivotal role towards achieving this objective. The fact that most of the complaints are from traders or the groups representing the trade interests (and non of the farmers or farmers groups have complained against these markets) underscores the fact that there complaints are motivated by those who were direct/indirect beneficiaries of the opacity in the system. Chairman highlighted some of the recent policy decision taken by the Commission which would be of special interest to the members.

· The zero tolerance policy with regard to violation on the limit on open position. The limit on open position are sacrosanct and their violations shall be viewed very seriously.

· The Compliance Audit of the Members initiated through independent auditors.

· The margin limit on open position, price bands being monitored regularly so that the interest of the market is not adversely affected.

· The Members who trade at the Exchange have to be compulsorily registered by FMC. A member who is not registered cannot trade at the Commodity Exchange.

Some of the issues which are under consideration of the Commission were highlighted by the Chairman which are as follows:

· The issue of permitting foreign entities in Indian Commodity Derivative Market. Guidelines for permitting foreign entities to invest in Indian Commodity Exchanged shall be finalized.

· Allowing foreign brokers in the Indian Commodity Exchanges. The FMC has already recommended to the Government that all the facilities that are being extended to foreign brokers for participation in Securities Market should also be extended for their participation in Commodity Derivatives Markets.

· FMC has formulated guidelines for permitting Indian Brokers to set up offices/subsidiaries abroad subject to the approval of RBI.

· The Price Collection mechanism and the procedure adopted for dissemination of spot prices.

· The delivery related issues which leads to constant bickering among the Members and the Exchanges.

· The participation of Banks, MFs and FIIs are in advanced stages of finalisation.

· The proposed amendments to F.C (R) Act, 1952, which would empower the FMC to regulate the market in a more effective manner.

While concluding the speech, Chairman observed that the policy of the Commission would be of zero tolerance towards market misdemeanors.

The Conference was chaired by Shri Rajeev Kumar Agarwal, Member, FMC. Shri Agarwal thanked the Chairman for aptly setting the tone of the meeting in his introductory address. He observed that the regulation has to address the concerns of different segments of the society (growers, consumers, etc) which at times are contradictory and makes the regulator’s job difficult. The futures market have to meet the broad objectives of price discovery and price risk management in the absence of which these markets would be discredited. He requested the members to raise the issues not from the narrow trade interest but from the macro point which address the broader concerns and objectives for which the markets have been set up. After the introduction, the members expressed their views.

Some of the major suggestions made by the Members are highlighted below:

1. Appollo Sindhuri Commodities Pvt. Limited

The representatives of Appollo Sindhuri Commodities Pvt. Ltd. observed that-

The Government warehouses offer a better service as compared to private wareshouses.
Inter depository transfers between CSDL and NSDL to be allowed.

It was clarified that –

Warehousing requirement is at present very huge and likely to grow in future and the Government warehouses do not have the requisite infrastructure to support the same. Moreover with the enactment of the Warehousing Development and Regulation Act even the private warehouses shall be governed under the appropriate regulations.
As regards the inter depository transfer CSDL and NSDL are covered under the SEBI Act and even in case of securities to facilitate inter depository transfer of securities SEBI had to issue directions to NSDL. The matter has been taken up by the Exchanges / Regulator at appropriate level.

2. Bhas Commodities Private Limited

The representatives of the Bhas Commodities Private Limited observed that-

Ø Price ceiling and flooring rate to be one for a single day.

Ø Government agency should take a more proactive role towards smoothening the price movements.

Citing the examples of developed markets and securities market it was clarified that the suggestions are not practical / implement able.

3. Geojit Commodities Private Limited

The representatives of Geojit Commodities Private Limited observed that-

Ø There is a need for uniformity in settlement procedures across exchanges. Differences in settlement procedures across exchanges create confusion among the participants. A specific example of chilly was cited where MCX has a seller’s option whereas NCDEX has a compulsory delivery.

Ø Need for permitting inter depository (NSDL and CDSL) in the commodities market.

Ø While appreciating the client level open position it was observed that member-wise limits in the commodities particularly in jeera, cardamom, pepper is a constraint on the large members.

Ø In case of violation of limit on open position rather than disabling the terminal in trading in all the commodities only the commodity in which violation has taken place should be disabled from futures trading.

Ø There is a need for clarification on NRI / NRO issue. NCDEX and MCX have being giving diametrically opposite views to the members. NCDEX has taken a stand that these investments are not permitted where an MCX has taken a stand that the same are permitted.

Ø A separate depository for commodity market to be regulated by FMC.

4. JRG Wealth Management Limited

The representatives of the JRG Wealth Management Limited observed that-

The quality issues are very sacrosanct in the commodities markets and those who ‘play’ with the quality should be strictly penalized. All penal actions taken in this regard should be highly publicized.

Ø The quality specification should be uniform across exchanges for the same contract / commodity.

Ø The FMC should distinguish the violations based on their intentions

- Violation because of excess trade by the member/ client.

- Violation which is the result of fall in the market wide open position. These violations are more of a technical nature and the member even though has not added to his open position violation tend to take place because the market open position comes down on account of operations by other members.

Ø The brokers should be allowed to advise their clients and an informed client would be in a position to take a better decision.

Ø The commodity brokers have been subjected to Central Excise and Service Tax. These issues need to be urgently resolved and legal clarification in the matter may be provided.

Ø Suspending futures trading on Saturdays would adversely affect the price discovery process in agri commodities as these markets are open on Saturdays.

Ø On a specific issue of quality it was observed that as commodities tend to decay over a period of time however, good the storage facilities, quality issue would always remain a contentious issue and the participants in the commodities market should accept the same.

5. Karvy Comtrade Limited

The representative of Karvy Comtrade Limited observed that -

Ø As banking facilities are not available during night hours futures trading in commodity should not be permitted during late sessions.

Ø The Exchange should devise a software where alerts are received when an open position of group (clubbed positions) are violated.

Ø The trading volumes on Saturdays are very low and therefore the FMC could consider closing the Exchanges on Saturdays.

Ø Need for rationalization of stamp duty across States.

Ø Certain wrong practices to be handled strictly.

- Sub-brokers / members accepting cash as margin and not insisting on clients own cheques. Accepting DDs / Third party cheques, etc.

- Some members / sub brokers not insisting on full margin (initial margin , additional margin) on client basis. Allowing clients to take positions without margin or with lesser margin.

- Not recovering and settling the daily MTM loss from the clients on a weekly / periodical basis.

6. Peninsular Multi Commodities Limited

The representative of Peninsular Multi Commodities Limited observed that -

Ø The service tax department in Cochin is pressing for payment of service tax for the Exchange transaction charges. The Exchange transaction charges are the revenue of the Exchanges, and as such Exchanges are liable to pay the service tax. The members collect the transaction charges on behalf of the Exchanges and in turn remit the full amount to the Exchange. This is not an income of the Members. And therefore there is no logic in asking the members to pay service tax for the transaction charges. The members charge brokerage as the fee of their service and they pay the service tax for this brokerage. The transaction charges are the fee for services rendered by the Exchange and it is their revenue and therefore service tax on this amount should be paid by the Exchange or the Exchange should give the members the credit. The representatives requested FMC to intervene in the matter.

Ø Contract expiry date to be uniform in all the Exchanges, so that healthier trading would be facilitated.

Ø Price band should be adhered to strictly and should not be released as was done recently in case of Gold, Silver and Natural gas.

Ø Trading holidays to be made uniform in all the Exchanges. Since clients are doing arbitrage trading between exchanges especially in agro commodities. All the Exchanges should work uniformly.

Ø Delivery should be made compulsory. Since delivery is not compulsory in many products, genuine buyers and sellers are afraid to participate. To help the farmers, delivery should be made compulsory in all agro products.

Ø FMC should frame steps to control market manipulations by cartels or groups with vested interest.

7. RBC Commodities Private Limited

The representative of RBC Commodities Private Limited observed that -

Ø They are promptly receiving replies to the representations made to FMC.

Ø The minutes of the present meeting to be put on the Website.

Ø Quality issues in warehouses

Ø Legal charges levied by Exchanges – eg. Audit fees, shareholding pattern, etc. to be uniform. It was observed that while MCX is charging an audit fee of Rs.10,000/-, NCDEX is not charging anything.

Ø The representative clarified the areas and issues for which a member can approach FMC.

Ø To maintain transparency in billing details to members, Exchanges may issue member-wise delivery charts at the end of settlement as is done by BSE and NSE.

Ø ISIN wise details on stocks in warehouses may be made available.

Ø Exchanges should have offices in major centres, so that various issues could be tackled expeditiously.

8. India Pepper and Spice Trade Association

The representative of the India Pepper and Spice Trade Association raised the issue of the capacity constraints at warehouses, quality issues pertaining to the goods delivered by the Exchange, logistics problems for materialization/re-materialization of goods, etc. It was also observed that Exchanges do not follow stringent quality norms for storing the goods in the warehouses.

9. Anagram Comtrade Limited

The representative of the Anagram Comtrade Limited observed that the views of their organization have already being expressed in the Members Conference earlier held at Jaipur by their senior representatives.

10. Some of the other issues raised by the Members

· Wrong display of prices on the ticker boards of CNBC on 5^th and 6^th December 2006.

· Any decision on fixing minimum brokerage should also prohibit reversal of brokerage charges. The Brokers would in the absence of such a policy tend to give reversal on brokerage charges and negate the objectives of prescribing minimum brokerage charges (floor brokerage charges).

· Different trade timings for different commodities say internationally traded commodities may synchronize with New York timings and Agricultural Commodities trade timings may be in synchronization with the Indian Spot markets.