 "Maintaining market integrity and trust of participants is top priority: Samir Shah")
Commodity Exchange NCDEX has been plagued by quality issues and suspension of contracts. The exchange has worked on improving surveillance and risk management systems during the past six months, following suspension of castor contracts. Samir Shah, Managing Director, NCDEX, talks to Vimukt Dave on the steps the exchange is taking to regain the trust of market participants after complaints of poor quality cotton seed oil cake (cocud), coriander and jeera, and its plans of foraying into options in certain agri-commodities. Excerpts:
NCDEX is facing various issues including quality and suspension of contract (castor). Are all these hurting the credibility of NCDEX among market participants?
While the suspension of castor seed and chana has been rather unfortunate, it has not impacted the credibility of NCDEX. The exchange has, over the past decade, played a stellar role in the development of the physical ecosystem around agricultural commodities and continues to enjoy the trust of the market participants. The trust of our participants and the safety and quality of our deposits is our foremost priority and we stand committed behind the quality of commodities delivered on the exchange platform. We would like to assure the market that we will do everything it takes to allay this environment of confusion.
Each of the recent incidents is very different in nature. The castor incident was one of market integrity. They indicate that the commodity markets are still in their early phase of development where market surveillance, risk management and physical spot markets and physical infrastructure needs more strengthening. It is important to treat each incident as an opportunity to learn and strengthen and that is the focus of NCDEX. We have significantly improved our surveillance and risk management systems in the last 6 months following the learnings from the castor incident. The castor incident also gave the exchange an opportunity to demonstrate its commitment to protect investor interests. Guided by Sebi, NCDEXs investor protection steps were very well appreciated by market participants. With Sebi as our new regulator, we are very confident that these systems and processes will strengthen significantly and commodity markets will see its second phase of development and growth.
Sebi also doing inspections of your warehouse. Your comments on it.
It is the regulators prerogative to regularly conduct its independent inspections. The earlier regulator also did this, however in the past it was less frequent. The new regulator has far more resources and systems to do this regularly. We welcome this as an independent oversight on a very important part of the commodity market ecosystem i.e. the physical side. Their inputs will also help strengthen the process.
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What steps has NCDEX taken to resolve quality issues and what is the future plan?
First and foremost, would like to reiterate that NCDEX is committed to ensuring good delivery of commodities during settlement of futures contracts. The Exchange provides a facility for remat sampling of goods at the time of taking delivery and this can be used by the participants to reassure themselves of the quality of their delivery. There is absolutely nothing to worry for the buyer on the quality front.
The exchange has mandated a stringent process for accepting deposits by its empanelled Warehouse Service Providers (WSPs) at the exchange approved warehouses. We have also put in place suitable controls to ensure that the WSPs continually adhere to the norms. Surprise checks and audits are regularly conducted to ensure the WSPs are conforming to the guidelines. The Exchange has also implemented an independent assaying process to conduct quality audits of stocks in approved warehouses and any deviation is dealt with strictly. We are continuously looking at ways and means to further enhance these processes.
Has it affected NCDEX's volumes? If yes, by how much and if no then why not?
It has often been witnessed that derivative contracts which are traded with high volume and liquidity suddenly lose their depth and liquidity after strong regulatory measures, as happened in the case of Chana in the last quarter of 2015 as well as in the first quarter of 2016 and sugar as well. At NCDEX, it is our topmost priority to maintain market integrity and trust of the market participants. We strongly support regulatory measures that that assist us in this effort. Volume reduction in the short term is part of being in a market driven industry.
NCDEX is an institution that has been built by high quality shareholders and a high quality board and continues to be that way. NCDEX is committed to build high quality market infrastructure in commodity markets for the long term and is not unduly concerned about reduced volumes in the short term. The focus remains to enhance processes and systems in order to maintain market integrity and trust and attract new participants with that foundation.
One very positive development in the last 6 months or so has been the growing participation of farmers on our platform. In this financial year, we have seen over 16,000 farmers directly participating on the exchange. This is a new development that the entire commodity derivatives markets have not seen before. We see this as a very positive sign of helping farmers connect with well-regulated and transparent markets for better price discovery, price realisation and risk management. We see this as a sign of growth and shows how much more potential there is in commodity derivative markets in India. Going from our current base of 16,000-plus farmers to several million farmers in the next few years is a journey we are very excited about.
Have you found anything wrong in your internal inspection over quality issues?
Responding to the recent concerns around COCUD and coriander, the exchange has conducted extensive inspection and audit of the deposits. Our initial reports have found the stocks to be in conformity of the contract specifications. For COCUD, an additional audit on 5,500 MT deposited at warehouses located at Akola and Kadi, was tested at First Source Lab, Hyderabad. The test results indicate that the protein content in COCUD deposits is well within the contract specifications.
I would like to assure market participants that we are on top of this and we don’t see any quality issue and they should feel safe to take positions on the exchange.
How many approved warehouses does NCDEX have across India and how many more will you set up, and by when?
The Exchange has 316 approved warehouses across the country and we will continue to add to them based on requirement. We have stipulated norms for the Warehouse Service providers (WSPs), which are comprehensive and stringent.
The exchange, along with Sebi, is also working on further tightening of these norms, which will definitely help in strengthening the warehousing infrastructure for the commodity markets. Sebi has recently published a consultative Paper on Warehousing Norms and has sought market feedback. These new norms when published by Sebi will increase confidence of the market participants in the commodity exchange ecosystem
What are your future plans? How much do you intend to invest in the next couple of years?
We keenly await the regulatory nod for Options, which will help expand the product basket and make it attractive for new participants, thereby significantly helping in deepening the commodities market. It would allow farmers to fix selling prices by selling their products in the futures market. They would then get the benefit of price protection in case the price falls below their cost of production, as well as derive the benefit of any rise in price. Options are also a much better hedging instrument as compared to futures for hedgers.
Bringing more marketable surplus in commodity markets to our platform for price discovery and hedging through more innovative and end user driven products, world class technology, strong and robust surveillance and risk management have been and will continue to be the key focus areas for us going forward.
We have invested significantly in next generation trading technology, gearing towards providing unrivaled levels of performance. Highly optimised processing techniques enable the system to handle very large order rates with ultra-low latencies. Our investment budgets will focus significantly focus on technology, risk management, surveillance, farmer outreach, hedging solutions, world class clearing systems and a vastly improved price polling infrastructure.
Will you introduce new contracts? When will castor seed contracts start?
The exchange has, as a member of Sebi’s CDAC, recommended some agricultural commodities to be considered for options given the size of the commodity and the underlying physical trade as well as new commodities to be permitted for futures trading. We also continue to evaluate our existing futures product basket and will add on products which we believe will bring significant value to the industry.
The castor incident has been largely resolved. All the admissible castor claims as per close out have now been settled. We are hoping that in the next few months, we can request Sebi for re-launch of castor contract.