FMC relaxes daily price limit for agro commodities to 6%

Commodity markets regulator FMC has relaxed daily price limits for agricultural commodities in order to ensure fair price discovery and curb price manipulation on the exchanges platform.

The national level commodity bourses have been asked to implement the revised daily price limits at the earliest but not later than January 1, 2015.

Currently, agricultural commodity have a maximum daily price limit (DPL) of four percent on both the upper and lower sides. Any price movement on either side beyond the set limits are not permitted.

As per the revised policy, FMC said that the DPL for agri-futures has been kept at 4 percent. After the breach of 4 percent DPL on a day, trading should be stopped for the day in all the futures contracts of that underlying commodity.

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On the subsequent second day, the DPL will be 4 percent and if it is breached, the DPL will be further relaxed by 2 percent with cooling off period of 15 minutes in between.

“If 4 plus 2 percent DPL is also breached on the second day, then the trading shall be stopped for that day,” FMC said in its latest circular.

FMC further said on the subsequent third day, the DPL will be 4 percent and if it is breached, the DPL will be further relaxed by 2 percent with cooling off period of 15 minutes in between. “Once the 4 plus 2 percent DPL is not breached on the subsequent day/s then the DPL shall be 4 percent,” it said.

Trading will not be allowed during the cooling off period. The revised DPL will be applicable for all the contracts of the same underlying commodity, it said.

The DPL will be reviewed twice in a year to make their applicability more market-oriented, it added.

FMC has relaxed the daily price limit norms because “once DPL is hit, trading comes to a halt and members/clients are unable to square off their position. This problem is aggravated, if DPL is breached continuously for days. Thus, members/ clients cannot exit their open position for days
together incurring huge losses.”

In case of some agricultural futures contracts, large number of instances of DPL being hit had been observed which distort the price discovery mechanism and also the volatility in price is not reflected in the daily VaR (value at risk) resulting into lower margins being charged by the Exchange affecting its risk management system, it added.

FMC also said that DPL in agri-futures contracts keeps exuberance of the market in check but also impedes the basic objectives of price discovery in the market. However, the narrow daily price limits may also be used as the source of price manipulation.

There are four national and six regional exchanges operating in the country.

PTI