Checking excessive speculation

This is for the first time that the FMC has slapped special margins on commodity trading after they kicked off trading three years ago. Stock exchanges have been imposing special margins on shares whenever excessive speculation is noticed.

The FMC has stepped in at the right time 8212; especially at a time when volumes on commodity exchanges are going through the roof.

Generally, special margin is imposed only when a commodity or share witnesses excessive volatility. But FMC now says whenever special margin is imposed it will be applicable on all the contracts of the commodity at a particular time.

The big question is: Will the FMC lead to a decline in the volume of commodities traded on the exchanges and shoo away small traders? No, say trading experts. 8216;8216;In the short run, may be yes. Since the client has to give more money to have all the positions8230; but gradually it is better for the market itself and a good step for such product, which is speculative in nature,8217;8217; says Sushil Sinha of Geojit Securities.

It seems commodity traders are willing to bear minor erosion in their profits as long as the markets grow. 8216;8216;It won8217;t lead to any decline in volumes. Volume is decided by trade considerations and not by margins,8217;8217; says Madan Sabnavis, chief economist, NCDEX, the largest commodity exchange in the country.

Sinha says special margin is product-specific and is of short duration. Though investors may feel the heat initially, they would go for those commodities which would not have margins per se, opine the traders.

Is this the first step in allowing FIIs in the commodity segment? Though traders are apprehensive about the entry of FIIs in commodity futures, they term the issue as a matter of policy.

8216;8216;This may or may not be correct. Allowing FIIs in commodity futures is a policy matter. Definitely the market should mature enough to get itself ready for any upheaval. The market may not be ready to withstand such sudden entry and exit and therefore could hurt the normal price behaviour,8217;8217; Sinha said.

The FII entry will give more depth and liquidity to the market. 8216;8216;At present, FIIs are not trading in commodities. Anyhow, they will be governed by Sebi and Ministry of Finance guidelines,8217;8217; Sabnavis said.

Traders also negate any significant impact of special margin in the spot market, unless the volume is large. 8216;8216;Generally, future market volumes are 100 times larger than spot market volumes in the case of certain commodities. So the impact of special margin is not that significant,8217;8217; Sinha said.