Castor seed futures in spotlight again as traders, buyers default on NCDEX

Within two years after their re-launch, castor seed contracts on the National Commodity and Derivatives Exchange (NCDEX) are once again in the spotlight. This is because of default by dozens of clients, and due to some brokers following a continuous downward circuit in oilseed prices.

Castor seed prices have hit the lower price circuit every day over the past six sessions on the NCDEX. The falling price attracted short sellers, which resulted in a huge bump-up in open positions on selling side.

“Unfortunately, there were no buyers at any price on the exchange. As prices fell, many trading clients on the NCDEX failed to pay mark to market (MTM) margins to their brokers resulting into default by both client and broker,” said a senior official of a broking firm which defaulted on the NCDEX.

Traders said they were reminded of the situation in 2016 when castor seed contracts were banned because of irregularities, allegedly due to cartelisation. 

The official quoted above said, “This has become a big problem and could lead to temporary suspension in trading if authorities suspect cartelisation.” 

In such situations, National Commodity Clearing (NCCL), a the NCDEX subsidiary responsible for risk management imposes measures such as additional margins. “The same principle was followed in this case,” said NCCL. 

NCCL also advanced the staggered delivery period to bring in market equilibrium while however, but reversed the decision after market feedback. 

Regulator Securities and Exchange Board of India (Sebi) has kept a close watch on the developments but has not taken any action yet.

The confusion erupted after the NCDEX on September 24 levied additional and pre-expiry margins of 5 per cent on both long and short sides effective September 27. 

Additionally, pre-expiry margins of 2 per cent was increased to 3 per cent per trading day incrementally during the last 11 days and were levied till the expiry day of the contract through a circular date September 26. On September 26, the NCDEX advanced staggered delivery period to make it effective from October 3 which was originally set to start from October 11, and withdrew the additional margins levied two day ago. 

“Considering the increase in total VaR (value at risk) based initial margin, it has been decided to withdraw the imposition of additional margin of 5 per cent on both long and short sides as proposed in the said circular,” the NCDEX said while referring to its circular date September 24.

Again on September 27, the NCDEX levied special cash margins of 20 per cent on short side in all running and new contracts effective September 30, to prevent castor seed selling on the exchange platform. Changing its decision again and restoring its earlier position, NCDEX revised the commencement of staggered period from October 11 to October 3 and also pre-expiry margin from 3 per cent to 2 per cent.

Now, faced with lack of buyers on the exchange platform, the NCDEX on October 1 decided to relax daily price limit by 2 per cent to about 6 per cent from about 4 per cent for just one day on Tuesday. 

“Castor seed traders are worried due to frequent change in decisions,” said another commodity broker.

NCCL maintains that there has not been any panic and that it has dealt with the risk deftly.

The exchange has now decided to auction the current open position in castor seeds from the sellers’ side. While initial attempts for liquidating the stock failed with no buyers participating in the auction process, the exchange plans to liquidate the stock again. 

With a revision in decision again, the exchange has urged members to submit their bids for partial tear-up of defaulted clients’ positions.

“Before the trading problems started, NCDEX was generating around 15 per cent of its cumulative overall daily average turnover from this commodity,” said yet another broker.

With the harvesting season approaching, castor seed prices are set to decline in about four-six weeks. During the last six sessions, however, castor seed prices have fallen by over 22 per cent.