Sebi asks NCDEX why it suspended castor seeds futures

Trading in coriander and other commodities also being investigated

The Securities and Exchange Board of India (Sebi) has asked National Commodity & Derivatives Exchange (NCDEX) for a full report explaining why it suspended futures in castor seed, one of the agriculture-centric exchange’s most liquid contracts. Sebi has asked the exchange to explain what had happened in castor seed segment and what actions are being taken.

Sebi is also investigating trading in other agricultural commodities including coriander, said a source.

Castor seed volumes used to be around Rs 450-500 crore on most days, nearly 15 per cent of exchange’s total volume. NCDEX has said it was unable to pay mark-to-market margins when prices started falling from beginning of this month. In January, prices fell by 20 per cent. In the last one week, prices fell by some 12 per cent.

The decision to suspend futures led to a controversy because last year 100 per cent margin was imposed on the castor seed futures. The margin has been increased frequently in the past few months even after regulations came under the Sebi.

Brokers have protested the NCDEX decision saying those who wanted to give delivery should have been given time for that. “If a few participants couldn’t pay margin, exchange should have declared them defaulters,” a trader told Business Standard.

According to sources, NCDEX decided to suspend the commodity as raising margin would not have helped if some players were not in a position to pay at current rate. “To avoid defaults, the ultimate decision has been taken,” said an official close to the development.

The exchange is also investigating the reasons behind such high margins. The sebi, however, has taken the matter seriously and “will take actions against those who flouted the norms. The regulator has warned the exchanges that strict actions can be taken against anybody, including the management, if found guilty,” the source added.

Issues like castor seed suspension and measures announced by the Sebi last week (reduction in position limits for near-month contracts and capping daily circuit limits) arising after market failed to judiciously utilise liberalisation of position limits implemented by the Forward Markets Commission (FMC) a year ago. “Market has misused that,” said the official. “Even exchange’s more vigilant on surveillance,” he added.

Liberalisation in positions limits one-and-a-half year ago by the Forward Markets Commission was aimed at allowing big players like corporate/producers to hedge the requirement or output. The liberalisation was done after detailed consultation with stakeholders which followed recommendation by the risk management group headed by IIM-A professor Jayant Verma.

After that, FMC also took measures in castor seed futures like increasing margins. A year ago, 2 lakh tonnes seeds were delivered in a month, reflecting usefulness. Market participants are surprised. “How come contract again lost sight of exchange where individual clients which were allowed to hold only 1,600 tonnes two year ago were having open positions of 24,000 tonnes?” said one of them.

Even netting of margin was allowed to traders having different side positions in two different maturity contracts of same commodity. Which a corporate house is understood to have used to hold highly leveraged position in castor.

“When prices started falling contrary to their expectations, they got trapped… Sebi has cut near-month positions beginning March contracts only to avoid castor like situation. However, the peculiar situation were developed in castor seed and positions were being built,” he explained.