NSEL cuts delivery, payment and settlement period

In response to ministry & regulator's objections, time reduced to 11 days in 40 live contracts in various commodities

National Spot Exchange Ltd (NSEL) has reduced delivery, payment and settlement period in 40 live contracts in various commodities to less than 11 (T+10 or less) days, wherever the settlement schedule was extending beyond 11 days.

The move is in response to a letter two weeks earlier from the Union ministry of consumer affairs. It had sought an undertaking from Financial Technologies-promoted NSEL that the latter would not launch any fresh contracts and existing contracts would be settled on due dates.

“NSEL had 40 such live contracts out of 86 launched in various commodities that had over 11 days of settlement period. In these contracts, the settlement period has been brought down to 11 days,” said Anjani Sinha, managing director.

The Forwards Markets Commission (FMC) had given exemption to spot exchanges like NSEL and NCDEX Spot for a one-day carry forward facility under which traders were allowed to square off transactions intra-day.

The point of contention of FMC and the ministry was the delivery period, despite it being not specified in the law. The rule says the contract should not surpass a 11-day limit for settlement without specifying a delivery period. “We resolved the issue without going into legal confrontation with the FMC or ministry. Through this, we ensured smooth functioning of our online spot exchange,” said Sinha.

NSEL has modified its circulars dealing with trading, delivery and settlement procedures. All trades executed till this Monday are to be settled in line with their scheduled delivery and settlement day. However, with effect from Tuesday, there will be no contract available for trading where delivery and settlement goes beyond a 11-day period.

The exchange has also decided to reduce the cost of transaction in respect of all these contacts by 80 per cent. The cumulative cost of transaction, delivery and warehouse receipt transfer was earlier Rs 100 per Rs 100,000 of turnover. This has been brought down to Rs 20 per Rs 100,000 of turnover. The objective is to make the market more cost-efficient, so as to incentivise a large number of physical market players to avail of the services of NSEL in respect of commodities procurement or disposal.

Further, it decided to convert all the existing contracts into a ‘trade for trade basis’, meaning every trade must result in delivery. In other words, intra-day trading in any of the contracts will not be allowed.

In any case, the exchange ensures all open positions at the end of day must result in delivery. The exchange has also prohibited short sale. However, prevention of intra-day trading by converting all existing contracts on ‘trade for trade’ implies even intra-day squaring is ruled out and a sale transaction has to result in delivery.

The exchange says it has implemented all these modifications with immediate effect “in the best interests of the market participants, so that the market can function without any disruption”.