A trading that is carried out illegally outside the purview of the market regulator is Dabba trading.
The difference between an official and a dabba trading is that the legal one gets executed on the exchanges, whereas the illegal one exists only on the books of the dabba or the trader.
Also called off-exchange trading, dabba transactions are risky and illegal.
The Forward Markets Commission, which supervises the functioning of commodity exchanges in the country, says that according to the Forward Contracts (Regulation) Act, 1953, such trading is illegal.
This is because it does not provide protection against counter-party default or default by one of the parties involved in the transaction. Such counter-party default risks are guaranteed protection by commodity exchanges.
In dabba trading, there is neither written contracts nor are bills issued. The settlement cycles are authorised by the dabba operator himself.
There is no daily mark-to-market settlement if the trade is in client’s favour, whereas margins are collected on losses regularly from clients. There is no redress to disputes arising of dabba trading. On the other hand, any dispute on commodity exchanges can be settled, including through arbitration, according to rules and regulations.
Sometimes, dabba trading is done by those who are members of the commodity exchanges. But alert investors can avoid such developments by insisting on and verifying all records of their commodity futures trades.
Investors can also insist on keeping all records including contract notes relating to trades and verify their authenticity with information available on the exchange’s website.