NCDEX orders forensic audit of castor crisis

Report expected next month, exchange beefing up systems, plans to re-launch contract

Almost a month after having suspended derivatives trading in castor, the National Commodity and Derivatives Exchange (NCDEX) wishes to re-launch it. Before doing so, it has decided to review the systems for surveillance and risk management, with a comprehensive audit of what had gone wrong, internal audits of four members who were put on square off mode and forensic audit of whole episode what went wrong.

A forensic audit (forensic here means the results are suitable to be used in a court of law) began last week and its report is expected next month. It will look into all aspects of castor seed futures, including the trading pattern, whether there was an earlies use of proxies to build positions and so on.

“Timing of the re-launch depends upon how investigations are completed in the episode that forced the exchange to suspend the contracts and the required actions taken,” said Sameer Shah, managing director.

NCDEX suspended castor seed futures on January 27. The decision met with several complaints of favouring the long side players, as castor prices were falling and some big position holders were not able to pay the margin money. The exchange after suspending all castor contracts, which were contributing a fifth of its volumes, also put four members’ under 'compulsory square off mode'; they were not allowed to enter any new positions in any commodity. “We are investigating if any of them were acting proxy or acting in concert...if anything is found that violates exchange norms, we will not hesitate to take action against them,” said Shah.  

NCDEX says it is also strengthening its surveillance systems and has asked its people to track developments in the physical market, as “that is much bigger than futures and developments there impact derivatives”. Also, "we are continuously discussing with the regulator regarding risk management”, said Shah.

The exchange was observing position build-up two weeks before the suspension. The February contract was trading at a discount and the March and April ones at a premium. However, traders were seen selling February futures.

The exchange has also set up a grievance redressal cell on complaints relating to castor seed futures. Also, NCDEX eMarkets Ltd, a subsidiary for spot market trading, has offered its platform for sale and delivery of castor seed stocks held in exchange-approved warehouses.