Comexes tighten noose around errant traders; penalty for non-genuine deals

Tightening the noose on errant traders, commodity exchanges (comexes) have levied a 100 per cent penalty on members facilitating non-genuine trades.

While comexes had already issued guidelines to identify non-genuine or errant traders, a circular issued by both national platform— Multi Commodity Exchange of India (MCX) and National Commodity and Derivatives Exchange (NCDEX)—dated August 20 made members responsible for such trades. Earlier, comexes used to issue only warnings to the concerned members. 

“Non-genuine trades are executed by market participants primarily with the objective of transferring profit/loss between the concerned entities. In view of this, penalty up to 100% of the profit made/ loss incurred/ transferred as a result of non-genuine trades will be levied on the members,” NCDEX said in a circular. 

A circular issued by the MCX said, “The decision on whether a trade or trades is/are abnormal or non-genuine would be of the exchange, which would be final and binding.” There have been instances wherein the buy and sell transactions have been executed in/by the same sets of parties, on the exchange, at abnormally high price differences that are not correlated to the spot/futures price movement in the underlying commodity. This is particularly true with illiquid contracts. Such trades, may take place between different entities (client/own account) of the same member, or different members.

Normally, comexes strengthen compliance with approval from markets regulator Securities and Exchange Board of India. 

“The regulator’s decision will certainly act as a deterrent towards such malpractices and safeguard the interests of genuine investors,” said Nirmal Pareek, director and head (operations), IndiaNivesh.

Echoing a similar response, Ravi Kumar, co-founder and chief executive officer of Upstox, said, “A 100 per cent penalty on non-genuine trades will help in curbing ill-intended moves by members and safeguard investors.” Traders execute non-genuine trades to square off profit or loss in illiquid and far-month contracts, in which traders’ entry is limited. 

“They can easily square off or build their positions in the same or different names to balance out their genuine traders,” said Kishore Narne, associate director, Motilal Oswal Financial Services. 

Meanwhile, comexes have also recommended appropriate disciplinary actions against the concerned member for multiple instances of such abnormal/non-genuine trades, according to exchange guidelines.