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

FMC keeping close watch on India pepper futures

Last Updated : 23 June 2011 at 13:50 IST
KOCHI (Commodity Online): The continued volatility in India pepper futures despite the recent margin hikes have forced the market regulator to keep a close watch on the speculative activity in this hotly traded spice.

The imposition of 19% margin effected in various episodes has failed to curb speculative activity causing concern to a large section of investors.

Subsequent to margin impositions, the prices dipped for a while only to pick up later on.

FMC(Forward Markets Commission) is having the regulatory right to intervene in the pepper futures if it feels that excessive speculation is onboard. It can ask the exchanges to hike margins further if excessive trade detrimental to investor interests occurs.

When asked if it is time for intervention in the pepper futures, FMC Director V.C. Chaturvedi said,”We are keeping a close watch of the markets...if warranted we may intervene.”

Pepper futures have been ruling high for a while and black pepper futures on NCDEX touched the first upper circuit in the afternoon trading session on Wednesday. This was subsequent to witnessing high volatility in the early trading session for the day.

On Thursday, pepper November contract was the top gainer in the morning session on NCDEX at Rs.30326; a gain of 1.1%. The July contract came down later on to Rs.29730, a loss of 2.3%.

Pepper futures have been trading high and certain sources are suggestive of a dominant player buying around 4700 tons of pepper falling under May and June contracts. But there are other players who want pepper futures to turn bearish and NCDEX has become a battleground of top guns, certain sources informed.

“But it is only the market dynamics working out...” said Jojan Malayil, CEO of Bafna Enterprises, Kochi. “Markets are open...” he said.

According to the International Pepper Community, world pepper output this year will fall by about 6,500 tonnes against 2010 to 310,000 tonnes due to unfavorable weather conditions.

Supplies from India have been poor in spot because of almost stagnant production in the last two-three years. Unseasonal rain in October-December affected the yield of pepper vines and is likely to slash output this year.

During April-March 2010-11, total quantity of 18,850 MT of pepper valued Rs.38318.50 Lakhs ($84.13million) was exported as against 19,750 MT valued Rs.31392.50 lakhs of last year. The unit value of pepper has increased from Rs.158.95 per kg in 2009-10 to Rs.203.28 per kg during 2010-11.

As per the IPCs 2011 projection, India is expected to produce 48,000 tonnes, followed by Indonesia (37,000 tonnes), Brazil (35,000 tonnes), Malaysia (25,672 tonnes), China (23,300 tonnes), Sri Lanka (17,102 tonnes) and Thailand (9,750 tonnes).

As published in: http://www.commodityonline.com/news/FMC-keeping-close-watch-on-India-pepper-futures-40220-3-1.html