Emerging Challenges of Commodity Trading in India.

A few days ago, the multi commodity exchange announced the modification of the copper contracts traded on its exchange. From the earlier 1 ton, the lot size is now being modified to 2.5 tons. Naturally, the margin deposit amount will also go up 2.5x. The other significant development is the copper contract will be compulsory delivery settled. While the exchange's fact file is still not clear on the tenure of the contract (which is currently a 60 day contract) one thing is sure, the due date rate (DDR) regime will also kick in. Which simply means that the last five trading sessions of the contract expiry will see a telescopic rise in the margin deposit, as the exchange assumes that you are intending to take delivery of the copper contract. And if the tenure of the contract is shortened to 30 days, you will get only 25 days to trade, realistically. Your capital involvement just shot up considerably. Secondly, the traders will have to shift their focus to the next month contract and the price discovery process in the current contract will become uneven, and therefore inefficient. This means your take home profits will be lower, as will the intraday price movements. Making trading profits just got a little more challenging in the commodity exchanges.

Why is this happening? Because the initial "trial period" of commodity trading in India is over. Just like a new product launch offers incentives to try that product or service, commodity trade in India was marked by smaller lot sizes, very small span margins, and no delivery based commitments. Now that commodity markets are being opened to banks mutual funds and institutions, the lot sizes are being scaled up. It's now going to become a big boys' game. The other aspect to note is the media statements, that seem to indicate a change in the margining regime may also be on the cards. Just as the margins in equity futures and options space has been revised upwards, there are source based indications that SEBI might want a raise in margin deposits in commodity trading as well. The move is understandable. After the crash in the Chinese capital markets in 2015, it became amply clear how vulnerable a rank-and-file trader is to adverse price movements. Thereafter, SEBI increased the lot sizes in equity futures and options from Rs two lacs to Rs five lacs, and had also raised the margin slabs gradually. After taking commodity markets under its purview as a regulator, SEBI was expected to increase lot sizes and margins in this asset class too. This is expected to keep small retail traders away from risky trades that they do not understand much about. In the near term, markets will react in a knee-jerk fashion, volumes will fall, open interest will get shredded and the domestic INR based prices may not move in lock step with the dollar-denominated prices on the COMEX, adjusted for the currency peg of course. That leaves Nickel as the only base metal to be cash settled. I expect this to change in due course also.

So is it the end of the road? No! Far from it. Think of it as a comma rather than a full stop. Veteran traders will remember the period of 2001, when the current style derivatives were ushered into the country. There was a pall of gloom, fear of the unknown, and worries over adapting to this "foreign system." Yet here we are, doing well for ourselves. Thank you. We Indians are innovative and flexible, we have a keen nose for money. Over time, we will get by just fine, the initial feeling of shock notwithstanding. Time as they say, is the biggest healer. And over time, traders' nerves will settle down too.

Have a profitable day.

Warm regards,

Vijay L Bhambwani
Editor and Research Analyst, Weekly Cash Alerts