Sebi changes comex rules for safer trades

MUMBAI: Market regulator Sebi on Friday reduced position limits in the agri commodities derivatives trading segment which, market players said, would make the segment safer and reduce volatility. But the move may also hit all those participants who want to hedge their risks through commodity exchanges (comexes).

The decision follows National Commodity & Derivatives Exchange (NCDEX) on Wednesday suspending trading in castor seeds futures as it feared concentration of positions among a handful of participants and chances of default by a few members. The new rules will be effective March 1, a release from the regulator said.

On Friday, TOI had reported that Sebi was looking at a slew of measures in the light of NCDEX's decision to stop trading in castor seeds futures.

The regulator on Friday imposed fresh limits at two different levels of participants on comexes. It lowered the limit up to which a broker, on behalf of its clients as well as on its own books, can buy or sell a particular agri commodity. In addition, it also imposed separate limits on each client of every broker who trade on these exchanges.

One of the rule changes was that it stopped the earlier practice of netting out of near month contract with off-setting positions in far months' contracts for the purpose of computation of near month position of any client. It means if a trader has bought 100 kg of a product for taking delivery in February (near month) and at the same time sold 80 kg of the same product for giving delivery in April (far month), then his net position in that commodity will be only 20 kg. Under the changed rules this netting off will not be allowed, which in turn will reflect a total position of 180 kg against that trader's name.

Market players said that in case of castor seeds trading on NCDEX, since this net off was allowed, the exchange's surveillance failed to detect huge build-up of positions in the near month contracts since some of those positions were being net off with offsetting far month contracts. By the time the exchange realized this huge build-up and concentration in a few hands, the situation had turned dangerous for the market. And, hence, NCDEX decided to suspend trading in castor seeds and forced settlement of all contracts on Thursday.

Market players said since the position limits for each of the agri commodities have been reduced, large players in the commodities space may not be able to trade in the market since they stand to exhaust their positions quickly.