Derivatives

The rationale behind castor seed suspension

| Updated on January 19, 2018

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NCDEX explains its reasons for the move in an FAQ

The National Commodities and Derivatives Exchange (NCDEX) last week announced the suspension of futures trading in all running castor seed contracts. This suspension has taken the market by surprise.

In a press release, NCDEX said, “The Exchange has taken this decision to maintain market equilibrium, safeguard market integrity and in the general interest of commodities market.”

This has been the first time a contract has been suspended from trading since May 2008 when chana, soyaoil, potato and rubber were suspended.

The trading ban on these commodities was lifted in December 2008. Also, after that, commodities like sugar, pepper, guar seed and guar gum had witnessed discontinuation in trading for some time and were then reintroduced again.

Only pepper is not yet available for trading on the NCDEX.

The castor seed futures contract was on a free fall since mid-November last year.

It plummeted 30 per cent from the November high of ₹4,376 to close at ₹3,051 on January 27, the day on which the trading was suspended.

The contract fell over 9 per cent on the last day of its trading. Trading volume in the NCDEX has also dropped sharply after this. FAQ from Exchange

Here is an FAQ from the exchange on suspension of the contract and reasons for it:

What was the threat perceived by the Exchange and how is suspension of trading a solution?

The Exchange plays the role of a first-level regulator and its role is to maintain market equilibrium and also safeguard market integrity. The measure to suspend trading in castor seed contracts was taken to ensure that market equilibrium is maintained.

The price discovery process was getting affected and with the new arrival season, any disturbance in efficient price discovery in these contracts could have had adverse impact on the orderly functioning of the market. This could also have impacted thousands of farmers.

How many members have defaulted or are at risk of default?

Some of the members were expressing difficulty in meeting their mark to market obligations.

Under what powers has the suspension of the contracts been done?

The Exchange Byelaws and Regulations enable the Exchange to intervene and take required measures in the interest of the market.

What will happen to goods deposited in exchange warehouses? How will the Exchange compensate for depositor losses?

The Exchange does not guarantee financial gains to participants. They may opt to withdraw their goods and sell their stocks in the physical market to realise value.

Did you explore other risk management solutions such as raising margins before suspension?

The castor contract has been under Exchange surveillance for some time now.

In the past too, the Exchange took several regulatory measures in the interest of the market.

Effective November 23, 2015, the Exchange has imposed additional margins of 5 per cent on both sides in view of increased volatility.

Starting January 25, 2016, the Exchange has increased the Extreme Loss Margin from 1.5 per cent to 2 per cent and from 2 per cent to 2.5 per cent on January 27, 2016. The Exchange observed that despite these measures the efficient price discovery process was getting affected and therefore decided to take necessary steps to protect market interest.

By when do you expect to resume castor trading?

The Exchange shall launch further contracts in the commodity after careful consideration of all aspects.

What steps are you taking to prevent similar concentration of positions in other commodities?

The Exchange is closely monitoring trading in all contracts and any abnormal activities will be dealt with sternly to protect market integrity and maintain investor confidence.

Published on January 31, 2016

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