NCDEX's turnover halved in two weeks over castor seed futures default

Exchange says it's strengthening risk management, seeking feedback

The turnover at National Commodity & Derivatives Exchange (NCDEX), the country’s largest futures trading platform in agricultural commodities, has declined by 52.5 per cent in the past two weeks.

This follows dozens of client defaults in castor seed contracts. Total turnover fell below Rs 1,000 crore on Tuesday, from the Rs 2,179 crore recorded on September 30 but recovered a little on Wednesday and in day session it was Rs 1,035 crore. The share of castor seeds was a fourth of the total at end-September, or Rs 538 crore; it was Rs 75 crore on Tuesday or 8.9 per cent in total volume.

“The decline in turnover is because of the elimination of defaulting clients. Brokers are strengthening their risk management to avoid such defaults. With the risk management in place, new clients and members would join the trade,” assures Vijay Kumar, managing director at the bourse. 

“Dozens of commodity traders (clients) defaulted, following the huge losses in castor seed futures which turned very volatile; this created panic in futures trading on agricultural commodities. The continuous change in regulations, with levy of margins and others following their withdrawal thereafter, left many brokers high and dry. A dozen have either decided to stop trading in agri commodities or are reassessing the risk in this business,” said a sector expert.

An official from Motilal Oswal Financial Services confirmed they were reassessing the business, having stopped taking fresh positions in agri futures. A senior official at another large broking entity from Mumbai said they had disallowed new client orders in agri commodities. Some brokers claim have lost their entire working capital in castor seed trade. 

An NCDEX spokesperson said: “Recently, the exchange issued two circulars with regard to castor seed futures contracts, wherein it revised the concentration margin and gave details of applicability of ASM margin. The exchange has started further strengthening the risk management framework to avoid any such instances in future. It is also interacting with the various stakeholders to understand their views on various steps initiated by the exchange.” 

A fortnight earlier, NCDEX had increased margins to stop selling of castor seed on its platform; the latter was hitting the lower circuit every day for six days. The absence of buyers raised apprehension of a bears’ cartel. The exchange has put client inventory on sale.

A half dozen brokers and their clients met Securities and Exchange Board of India (Sebi) officials recently, on ways to restore trader confidence in agri commodities. A broker who was in the delegation said, on condition of anonymity: “Sebi did not favour a ban on castor seed contracts, saying this would send a wrong signal to the agri commodity futures market. The regulator is considering allowing mutual funds in agri commodities, to deepen the market further.”

Exchanges were trying to start indices' trading by the end of this year and a suspension of contracts would have a negative effect, was another point made by Sebi officials.