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What is the Position Limit For Agricultural Commodities

03 Jul 2023

Introduction

  • Position limits impose maximum restrictions on the number of futures or options contracts that market players can hold.
  • They are essential for managing the commodities markets. They also contribute to maintaining market integrity, avoiding excessive speculation, and ensuring fair pricing in agricultural commodities trading in India. 
  • The Securities and Exchange Board of India (SEBI) has established position limit rules for agricultural commodities to regulate India's securities and commodities markets. 
  • Before we understand the position limit for agricultural commodities, let's first understand their meaning, categorization, and other important details.

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What Are Agricultural Commodities?

  • The term 'agricultural commodities' refers to the raw or basic items from farming and raising livestock.
  • The most popular agricultural products include wheat, soybeans, corn, coffee, sugar, and cotton. These goods, along with many others, are traded in futures markets.
  • In these markets, buyers and sellers enter into a contract to exchange a specified quantity of goods at a predetermined price with a delivery date in the future.
  • It's necessary to have in-depth knowledge of the market and the variables affecting commodity pricing before investing in agricultural commodities.
  • Weather, agrarian yields, economic and political situations, and the supply and demand for the product are some of the significant variables that affect commodity pricing.

What is the Categorisation of Agricultural Commodities and the Position Limits?

Circular No. SEBI/HO/CDMRD/DMP/CIR/P/2017/84, dated July 25, 2017, lists the categorization of commodities. Agricultural commodities fall into three categories: sensitive, broad, and narrow. This depends on the rolling average of production data, the last five-year import data, and various additional factors that influence the trading of derivatives.

The categorization is as follows:

Sensitive commodities

An agricultural commodity is considered a sensitive commodity under two conditions:

  1. The commodity is vulnerable to frequent government or outside interference. These interferences can take the form of import or export restrictions, stock limitations, or other trade-related impediments.
  2. The commodity has undergone a lot of price manipulation during the last five years of trading derivatives.

Broad commodities

If, over the last five years, a commodity's average deliverable supply has been at least 10 lakh metric tonnes and at least INR 5,000 crore, respectively, and it's not a sensitive commodity, it will be categorized as a broad commodity.

Narrow commodities

An agricultural product that does not fall under any of the two categories mentioned above, namely sensitive or broad, should be classified as a narrow commodity.

What Are the Position Limits?

The total client-level open position restrictions for each commodity derivation use the deliverable supply accessible in a given year according to the categories listed below:

Category of commodity Position limits
Broad  Deliverable supply’s 1%
Narrow  Deliverable supply’s 0.5%
Sensitive  Deliverable supply’s 0.25%

Conclusion

  • To sum up, position limits are extremely important for the trading of agricultural commodities.
  • They restrict the inappropriate concentration of holdings held by specific traders or entities. This helps them preserve the integrity and stability of agricultural commodity markets.
  • It also prevents market manipulation and guarantees open and truthful trade.
  • Position limits help establish fair competition and guarantee that various market participants, like both big and small companies, have a presence in agricultural commodities markets
  • Therefore, the significance of position limits in agricultural commodities trading cannot be understated.

 

Related Articles: All about options trading in commodities | There is more to commodities than meets the eye | Types of commodities traded in India

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