Sebi expands position limit base for farm commodity futures

Expanding the horizon for traders in agri commodity futures, market regulator Sebi has expanded position limits across all spectrums at the client, member and exchange levels.

In a circular dated July 25, Sebi said stakeholders' feedback shows the current numerical value of overall client level position limits for agricultural commodity derivatives is inadequate and not in consonance with the deliverable supply of commodities. After due consultation with various stakeholders on the basis of CDAC (Commodity Derivatives Advisory Committee), the regulator has divided the client-level position limit for agri commodities in three broad category -- sensitive, broad and narrow.

Defining sensitive commodities, the regulator said these are prone to frequent government / external intervention in the form of stock limits, import/export restrictions or any other trade-related barriers. Such commodities have had frequent cases of price manipulation during the past five years of derivatives trading. Hence, clients under this category are allowed to have a position limit of 0.25 per cent of deliverable supply (an average of last five years' average output and import).

The regulator defined "broad commodities" as those which are not sensitive in nature, but whose average deliverable supply for the last five years stood at one million tonne in quantitative term and at least Rs 5,000 crore in monetary term. Commodities falling under this category would attract a client level position limit of one per cent of the deliverable supply.

The third type, the "narrow category" consists of commodities that do not fall in other two categories. Such commodities would entail with a client level position limit of 0.5 per cent of the deliverable supply.

"This is a fair move by Sebi," said Shiv Kumar Goel, President, Commodity Participants Association of India (CPAI), the body representing all participants in commodity futures value chain.

Earlier, Sebi followed the move of the Forward Markets Commission (FMC), the erstwhile regulator of commodity futures that was merged with it in 2015, and fixed position limits on numerical value depending upon the size of the individual commodity and traders' interest in it.

The regulator directed comexes to jointly classify agricultural commodities into these three broad categories. The regulator, however, allowed re-classification from 'narrow' to 'broad', provided the concerned commodity's average deliverable supply and monetary value thereof exceeds 5 per cent.

The regulator has directed comexes to revise the position limit and notify such details by July 31 every year by incorporating sources of data procured. For agricultural commodities, Sebi asked comexes to avail data from concerned ministries. For every year, the revised position limit data will become applicable for all running contracts with effect from September 1. For the current year, however, exchanges are advised to complete the exercise within 20 days and make the revised position limit applicable effective from October 1.

For member level, however, the position limit in agricultural commodities across all the contracts would be 10 times the numerical value of client level position limit of 15 per cent of the market wide open interest, whichever is higher. Also exchange wise position limit shall be capped at 50 per cent of the annual estimated production and import of the commodity. There will be no change in norms with regard to near month position limits, computation of open positions, monitoring of position limits or any other norms prescribed by Sebi earlier.

With regard to clubbing of position limits, Sebi has directed comexes to jointly formulate a uniform guideline and disclose the same to the market within 30 days.