SEBI Bars Fresh Contracts on Most Agri Commodities

In a rather swift move, SEBI (which currently regulates the commodity derivatives markets) suspended futures and options trading in a slew of agricultural commodities for a period of 1 year. These agri contracts include chana, mustard-seed, crude palm oil, moong, paddy, wheat and soyabean (along with its derivatives). This ban is effective from 20-Dec.

The ban on these agri commodities was based on a communication from the Department of Economic Affairs, regarding the likely impact that the F&O trading in food based commodities was having on inflation. This communication was in the light of wholesale inflation coming in at an extremely steep level of 14.23%

What exactly does this suspension mean? It means 3 things. Firstly, no fresh monthly contracts can be introduced in these agri commodities for a period of 1 year. Secondly, even in the existing contracts, fresh positions are not permitted. Thirdly, traders will only be allowed to close out or wind down their existing open positions in these contracts.

For many traders, hedgers and arbitrage players in the commodity market, this could be a major setback as their medium term plans are going to be impacted. For example, MCX has already banned fresh positions in crude palm oil and allowed only squaring-off. 

India’s leading agri commodity exchange, NCDEX has barred fresh positions in wheat, chana, mustard-seed, soyabean, refined soya oil, soymeal, crude palm oil and moong, including intraday positions. NCDEX also barred trades in the Soydex.

What would be the outcome of this move. The commodity exchanges will only be left with its 3 core segments of precious metals, energy and base metals for trading now. The combined average daily turnover of soya oil, soyabean, rapeseed and chana on NCDEX was Rs.12,700 crore in 2021. Soyabean is among the most liquid of these agri contracts.

Veteran commodity traders have pointed out that such ad-hoc suspensions have never served the purpose. That is because, the commodity market is just an advance indicator or warning system of demand supply mismatches. Therefore, this would only shoot the messenger and not address the core issue, which is supply side constraints.

There were several instances of such ad-hoc bans when the FMC was regulating the commodity markets, prior to 2015. The problem is that once such commodities are suspended, they do not attract investor interest even when these commodity contracts are reintroduced. That is because, traders continue to be wary of future suspension and bans.