Bringing illiquid contracts to life: Have Commexes moved forward?

Back in December 2009, FMC (Forward Markets Commission) had asked commodity exchanges to work extensively on illiquid commodities to attract participation from traders, speculators and hedgers.

Then, the media reports hinted on a way the FMC adopted to bring liquidity to illiquid contracts.

“We convene periodical meeting with exchanges to assess the progress made on illiquid contracts. They (exchanges) also engage market participants in seminars, conferences, etc, and educate them about the benefits of trading on the exchange platform. But, the progress is very slow,” then, D S Kolamkar, member, FMC was quoted by Business Standard as saying.

Roughly, two years later, India commodity exchanges seem to remain where they have started off:

“We talk with stake holders and build awareness regarding illiquid commodity contracts. Seasonal interest in a commodity is also cashed-in on. There are instances of contracts where liquidity was set in by efforts.” said Anil Mishra, CEO, NMCE when asked about the measures the NMCE adopted to bring liquidity to contracts; without citing any examples.

Isn’t it very much an echo of what the FMC member said, back in 2009?

Illiquid contracts

“A commodity futures contract can be termed as an illiquid contract when there is no participation in the contract over a sustained period of time.” said a reply from NCDEX regarding the question of what an illiquid contract is.

Of course, liquidity is a relative term as argued by Anil Mishra when the same question was shot at him. He argues that there are no criteria to identify an illiquid contract as liquidity is a relative term:

“Suppose there is a contract trading at Rs.500 crores. Then a liquidity crunch comes in and the contract is traded at Rs.20 crore. Then it can be termed illiquid. If no trade takes place in a particular commodity for over a year, the contract can be termed dead.”

Bringing in liquidity

Now, regarding the measures one can take to bring liquidity to illiquid contracts and the past experiences in this regard, NCDEX said in a reply,

“Commodity futures contracts are designed for price discovery as well as price risk management. In order to ensure that the futures contract performs its main objectives, it is necessary that the contract designed (contract specifications) relates to the physical market realities...the Exchange, on a continuous basis, endeavors to bring the contract specifications to align with the physical market practice.”

However it admits, “...There are other factors which relate to the commodity such as fundamentals or to the overall market/liquidity conditions, macroeconomic picture, etc., which are not measurable but are important for the success of contracts.”

This may be true...but does it offer a solution?

In trying to offer a solution the communiqué elaborates:

“... NCDEX has been a catalyst in creating significant infrastructure of warehouses and assaying agencies to enable participation by the market value chain participants. Exchange also, on an ongoing basis, makes efforts to create awareness among the various participants about the economic uses of futures trading. We have achieved significant results in respect of several commodities.”

Still, it is a vague sound and reflects the 2009 plight of exchanges in attracting liquidity to illiquid contracts.

Sustaining the momentum

If at all the exchange brings in liquidity to an illiquid contract, how would they sustain the momentum?

“Such momentum will be the result of continued interest of market participants. Exchange should be ready with its responses for any felt market need, be it for the provision of delivery infrastructure, or for calibrating the contract specifications.

Feedback is sought from the market on a continuous basis for this purpose. Beyond this, it is for the market to continue the momentum if it feels that the contract is serving a useful economic purpose.” says the NCDEX.

“There is no formula to ensure that momentum in a particular contract remains sustained.” Anil Mishra sums up.

MCX CEO was not immediately available for comments.

FMC’s role

Presumably in 2009, FMC was quoted by The Business Standard as saying, “The commodity futures markets opened after 60 years of ban and are now hardly six years old. Therefore, comexes require more time to work on the newly launched contracts to attract trades. We are surely going to enhance testing time for comexes and therefore have no plan to de-list illiquid products.”

Later, in December 2009, an FMC member D S Kolamkar acknowledged that the FMC cannot allow illiquid contracts to remain listed on the exchange platform for ever.

“They should be time-bound,” Kolamkar had said.

May be it is an old thing: But have we moved forward? Do we have a solution? Or are the markets simply immature?

As published in: http://www.commodityonline.com/news/Bringing-illiquid-contracts-to-life-Have-Commexes-moved-forward-40241-3-1.html