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Emerging Challenges of Commodity Trading in India

Jun 18, 2019

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.

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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 the capital market regulator 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, the capital market regulator 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, the capital market regulator 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

Vijay Bhambwani

Vijay L Bhambwani, is the editor of Weekly Cash Alerts. He is a professional trader, author, trading mentor, and lifelong student of the markets. He has been an active trader since 1986. Financial markets are his life and passion. Everything else in his life revolves around his main objective - trading. Vijay believes that no matter how much a trader has lost in the market, it is possible with hard work and smart work to get it all back over time. Understanding the method behind the madness of the markets interests him more than the profits. He specialises in predictive style of technical analysis, in the commodity, currency, and equity markets. That is the foundation stone of his style of trading - Neuro Behavioural Technical Analysis. Vijay trains other professional traders. He is empaneled with the BSE & NSE as a visiting faculty for various finance market courses. He created the early course content for the Diploma in Commodity Markets (DICM), certified by the Forward Markets Commission. He was a training mentor at the MCX between 2005-2009. He is the first author to have his book - A Traders Guide to Indian Commodity Markets published by CNBC Publishing 18, in 2009 - approved and sponsored by the NCDEX. Vijay has done over 8,000 TV shows in the last 17 years and has written over 4,000 columns/articles in the print and electronic media. He is one of the first columnists to write a weekly column in the English language print media after the commissioning of the MCX, via his columns in the DNA Money, Business Standard and others. Vijay lives with his family in the posh Breach Candy area in Mumbai.

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Oct 16, 2019 03:37 PM