Ncdex's revised penalty may lead to defaults

The reduction in penalty to 2.5 per cent from 5 per cent for failing to meet delivery obligations of National Commodity and Derivatives Exchange Limited (Ncdex) may lead to more defaults in the futures trade, market analysts have said.

"The defaults on the commodity exchanges, which are estimated to be about 5 per cent of the total exchange turnover, are likely to increase with the slashing of penalty," commodity brokerage firm SMC Comtrade Chairman and Managing Director D K Aggarwal said.

"The percentage of defaults has so far been low due to stringent penalty, though deliveries on the exchange platforms are negligible to the tune of 1-2 per cent of the total trade," he said.

Last week, Ncdex and MCX reduced the penalty provision on all "running and future" contracts following a direction by the commodity market regulator Forward Markets Commission.

Earlier, the buyer or seller used to receive 4.5 per cent of the contract value if the other party defaulted on delivery while 0.5 per cent went to the Investor Protection Fund (IPF).

Now, a buyer or seller will receive 0.5 per cent of the contract value if the other party defaults on delivery while 2 per cent will go to IPF.

"The penalty revision will affect mostly compulsory delivery contracts," Karvy Comtrade analyst Harish G said, adding the penalty charges will be same for different delivery logics both compulsory and seller option.

There are, however, certain advantages of the new guidelines, as earlier, penalty was decided without considering spot prices on the day of delivery. "But with the new system, spot price on the day of delivery will have major impact," he added.