Position limits on commodity futures should be fixed using a framework based approach that considers the deliverable supply of a particular commodity.
The deliverable supply is the total production of a particular crop, imports and carry-forward stock.This was the nub of Wednesday’s recommendations by the Commodity Derivatives Advisory Committee (CDAC) to Sebi.
Interestingly, Sebi also asked the CDAC whether contracts less than monthly duration could be launched for better integration between futures and spot prices.
This is one of the Sebi’s prime objectives to ensure that price distortion does not happen. The two leading exchanges are metals and energy bourse MCX and agri bourse NCDEX.
Both the exchanges together account for daily turnover to the tune of Rs 25,000-30,000 crore.
A Sebi official was not available for comment.
The CDAC meeting held after a gap of more than six months assumed significance because it was the first one of new Sebi chief Ajay Tyagi.
The Sebi appointed CDAC was formed after the merger of Forward Markets Commission (FMC) with Sebi in 2015.
It comprises exchange chiefs, commodity market stakeholders, hedgers etc.
It can make recommendations to Sebi.
Position limits are positions that brokers and their clients can take in a commodity futures contract.
For eg, broker limits for wheat futures is the higher of 2 lakh tonnes or 15% market wide open positions (outstanding buy or sell contracts), and a client limit is 20000 tonnes.
Similarly for gold, a member can take the higher of 50 tonnes or 20 per cent marketwide open positions and a client can take 5 tonnes or 5 per cent of market-wide open positions.
A source present the meeting said the current setting of limits on an adhoc basis needed to be changed to a framework based approach.
Once this was decided, PLs can be fixed as a percentage of the deliverable supply .
Currently , PLs in certain commodities are as low as 0.1-0.2 per cent of the overall supply .
“A framework based approach would enhance participation and improve liquidity of the market,“ said another source present at the meet.
CDAC has also suggested that PL fixation could be conservative for sensitive commodities like pulses, sugar, etc and for narrow commodities like guar, mentha, jeera.