Changes in Contract Designs/Regulatory Measures

Sharp volatility as well as divergence with the spot price was observed in futures prices of some of the narrow commodities like Chana, Tur, Urad, Guarseed, Guargum, Mentha Oil and Sugar towards expiry of contract. The major reasons, some general and some applicable to external agencies appointed by the exchanges, for this price behaviour appears to be:

Ø      Short supply of deliverable quantity of goods at the specified delivery centres.

Ø      The cumbersome, lengthy and time consuming process of getting the goods warehoused in accredited warehouses after the assaying by the notified assayers.

Ø       The possibility of delivery being imposed at a distant delivery centre, that too by paying a premium, which may not be justified in the context of the actual price differential between the two delivery centres.

Ø      Small sample size taken by polling agencies for arriving at spot prices. 

Ø      Many of the participants in polling prices may have interest in the derivative contracts.  The external agencies have no means to identify the interested polling participants.

Ø      Final Settlement Price (at one of the exchanges) is fixed on the basis of single spot price announced by the external agencies polled from the main delivery centres.  This makes it vulnerable to manipulation in the spot price at main delivery centres.

After taking into account views of the various stakeholders, the FMC has decided to introduce the following changes to the regulatory measures and contract designs for the above commodities.

(a)  The limit on open position may be restricted to 1/10^th of the existing limit on open position for the near month contract.  This reduction would be consistent with the international practices.   This would be applicable for all contracts of above commodities from March 2006 onwards.

(b) With introduction of this measure, earlier direction of not permitting additional open position by operators stands withdrawn in respect of contracts in above commodities from March, 2006 onwards.

(c)  The exchange shall require sellers to give their intention /notice at least   5 days before the expiry of the contract.  The delivery centre-wise quantities intended to be delivered by the sellers should be disseminated by the exchanges at least 4 days before the expiry of the contract.  These changes come into force with immediate effect.

(d)  The exchanges shall also ensure wide publicity/dissemination of quantity of goods of deliverable grades lying in the accredited warehouses on a daily basis at least for the last 15 days of the contract.

(e)  Penalties collected from the defaulting participants would not be passed on to the opposite parties.  The exchange would set up an “Investor Protection Fund” for meeting the pre-specified liabilities including liabilities arising out of defaults by members.  The penalty amount would be deposited to this fund after deducting a maximum of 5% of the penalty amount towards the administrative expenses incurred by the exchanges.   These measures come into force with immediate effect.

(f)  The exchanges shall delete the delivery centres which are outside the radius of 300 kms. from the main delivery centres.  This would apply to all contracts maturing after March, 2006.

(g)  The exchanges shall review on a monthly basis the prices polled by the participants to identify participants habitually polling extreme/unrealistic prices.  These participants could be put under watch, and deleted from the panel if such instances recur despite suitable communications by exchanges/agencies.  This should be got implemented with immediate effect.

(h)  Exchanges/external agencies would also double the sample size presently used for fixing the daily spot prices, during the last 15 days of the contract.  This should be got implemented with immediate effect

(i)    The external agencies would also be advised to fix the spot prices after taking into account the normal variations in the spot prices of different delivery centres.  The exchange would also give a formula/procedure to be followed by the polling agencies for fixing the spot prices which would be based on the normal parities between the spot price at the main delivery centres and spot prices at other deliver centres.  This process should invariably be adopted for at least 15 days prior to the expiry of the contract.  This becomes applicable with immediate effect.

These instructions were conveyed to the three National Exchanges. The Exchanges were advised to take suitable action to amend the contract designs, rules, regulations, etc. byelaws so as to introduce the above changes. FMC also advised the exchanges to intimate the compliance within ten days. 

                                                                   Press Release issued by Forward Markets Commission on 2nd February, 2006

                                                                                                                    Forward Markets Commission

                                                                                                                       ‘Everest’, 3^rd Floor,

                                                                                                                       100, Marine Drive,

                                                                                                                        Mumbai-400 002.