Delivery Compulsory

The Forward Markets Commission8217;s plan to make deliveries compulsory on outstanding positions of all futures contracts is expected to br...

The Forward Markets Commission8217;s plan to make deliveries compulsory on outstanding positions of all futures contracts is expected to bring in major changes in the way business is done on the commodity markets.

After the move becomes functional, both the buyers and sellers will have to either square off before the maturity of the contract or pick up physical delivery from a faraway warehouse.

Though the concept gives buyers a say in the delivery of goods, it was not preferred in the country due to lack of supply chain facilities. Market sources point out that compulsory delivery would affect commodities like pepper, cardamom and guar seeds as they would face more price volatility before the contract expires.

8216;8216;If the buyers and sellers are real, why they shouldn8217;t go for delivery? Real transactions should always end in delivery. I will square off my position before the contract expires and make some profit. If the commodities are not delivered, then it is not good practice,8217;8217; says Sushil Sinha of Geojit Securities.

The current apprehension doing the round is that if the buyers are allowed to press for delivery, they could squeeze the market by keeping huge positions outstanding, that is when sellers wouldn8217;t be able to deliver the huge amounts of the required commodity.

But the problem will remain even after the introduction of compulsory delivery, argue some traders. 8216;8216;If buyers with lot of financial muscle get together and keep huge positions outstanding at the time of expiry, sellers may have to scamper to find enough quantities of the commodity that too, the exact grade specified by the respective exchange,8217;8217; says a trader.

8216;8216;The fact that both buyers and sellers would have to compulsorily take or give delivery of the underlying commodity means that speculators would be less likely to influence price by keeping huge positions outstanding. This is reason why the shift to compulsory delivery has been proposed,8217;8217; a trader adds.

Story continues below this ad

On the other side, traders argue that it will stop them from realising the full potential of the futures market. Those who prefer to take delivery from a convenient spot market not listed in an exchange contract note, usually settle the contracts financially. Now they have to either square off or take physical delivery. The shift to physical delivery would also bring to the fore problems of increased cost.

Compulsory delivery in commodities exposes the shortage of quality warehouses in the country too. 8216;8216;Actually, this is the main reason for not opting for compulsory delivery. The role of private quality warehouses could be crucial for the smooth transition to mandatory delivery system,8217;8217; says Sinha.

FMC chief S. Sundareshan said this would be implemented in a phased manner as the delivery mechanisms were not yet fully in place. Both NCDEX and MCX prefer a gradual shift to the mandatory delivery system.