BackNCDEX eyes castor seed contracts relaunch, product diversification
Agri-commodity-focused exchange also aims to increase its share in metal commodities trading
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Mumbai: The National Commodity and Derivatives Exchange (NCDEX) is preparing to approach the capital markets regulator for permission to relaunch its castor seed contracts suspended five months ago, a top executive said.
The agri-commodity-focused exchange is also planning to increase its share in metal commodities trading.
In January, NCDEX suspended castor seed contracts expiring in February and beyond, suspecting manipulation and concentration of trades. The Securities and Exchange Board of India (Sebi) demanded an explanation and in a 2 March interim order, barred 16 entities—including four trading members and their defaulting clients—from accessing markets for suspected fraudulent and unfair trade practices.
It also ordered a forensic audit and an examination of NCDEX’s management role in the crisis.
The issue has been largely resolved, Samir Shah, managing director and chief executive, NCDEX said in an interview. “With learnings from the castor incident, the exchange took a variety of measures and enhanced the risk management and surveillance capabilities. We have tightened our internal risk management tools and also effectively addressed the grievances of genuine investors," Shah said.
“We are hoping that in the next few months, we can request Sebi for a re-launch of castor contracts," Shah added.
Mint reported on 23 May that NCDEX had hired chartered accountants Mukund M. Chitale and Co. to conduct the forensic audit.
“The forensic audit has been concluded and the final report has been submitted to the board of directors at NCDEX," two people familiar with the development said, requesting anonymity.
According to Rajini Panicker, head of research, commodities at PhillipCapital, it will be the regulator that decides when NCDEX can restart castor contracts.
“The exchange has been talking to members that the risk surveillance has been increased and they are ready to launch castor contracts. As an exchange, it is their prerogative to think about a re-launch of castor contracts which did bring in volumes to the exchange," she said.
NCDEX is one of the two leading national commodity exchanges in India. However, it has just around 10.61% of average monthly turnover, dominated by larger rival Multi Commodity Exchange Ltd (MCX).
Sebi’s April 2016 bulletin said that the total turnover in the commodities segment for MCX was ₹ 5.09 trillion in March 2016; at NCDEX it was ₹ 60,417 crore.
Agricultural commodities fetch 98.6% of NCDEX turnover; bullion brings 1.4%. The exchange now wants more of the metals market.
“Gold is an important area for us. We have focused on offering innovative products to the market and had seen a great deal of interest, with the open interest market share rising up to 15% in the recent past. We are very keen to build the bullion space. While we are small in that area and will need some time to develop, it remains an important part of our overall business," Shah said.
“NCDEX did launch some well-designed and thought-out contracts in the past couple of years, but they did not work without any fault of the exchange. Sometimes, it is very difficult to pinpoint why a contract works and why it doesn’t," Panicker of Phillip Capital said.
“MCX always had the first mover advantage; so, liquidity was never a concern at its platform. This helped MCX in maintaining its position in terms of market share. With the possibility of stock exchanges starting commodities trading, the dynamics could change," added Panicker.
Following the merger of Forward Markets Commission (FMC) with Sebi in September last year, the commodity market is hopeful of seeing new products such as options and indices.
The Union budget said Sebi will allow new products in the commodity markets in the current fiscal year, and exchanges including NCDEX could benefit from the development.
“We will be ready to launch options in commodities as and when they are allowed by the market regulator," said Shah.
“The market regulator is mulling to allow options in commodities such as gold, silver, guar gum, and RM seed," said one of the two people cited earlier who is familiar with the regulator’s thinking.
“There have been three meetings of the sub-committee of the Sebi’s commodity derivatives advisory committee, which is advising the regulator on launching new products," said the second person.
Shah said NCDEX has the necessary technology and infrastructure to meet the regulator’s requirements. NCDEX also has the capability to handle the influx of new participants and surge in volume when options contracts are launched.
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