NCDEX says guar trades above board

The National Commodity and Derivative Exchange of India (NCDEX) has stated that that there has been no circular trading triggering the volatility and phenomenal rise in volumes of guarseed and guar gum trading on the exchange.

PH Ravikumar, the managing director of NCDEX, said: "In circular trading, a group of traders keep selling and buying the contracts among themselves on the exchange continuously to create this volatility. This is as distinct from day trading where one unwinds one's position on the exchange by the end of the day without creating any open interest position."

He said that a set of rules are in place to ensure the integrity of the system. The exchange has an average of 1,500 participants trading in guar on a daily basis from over 150 centres through over 200 members.

It monitors trading patterns on a real-time basis to detect circular trading and appropriate actions are taken. There are position limits for both the members and clients to mitigate the concentration risk.

"Historically spot price volatility can be very high, as seen in September 2002 when guar had touched levels of 80-90 per cent. It should also be noted that guar seed prices have displayed high historical annualised price volatility of over 40 per cent." said Ravikumar.

Currently the price volatility for the contract of guar seed on NCDEX is 45 per cent. NCDEX witnessed deliveries of guar seed in the months of July and August and in guar gum in September.

"Notwithstanding such deliveries, it should be emphasised that commodity derivative exchanges are primarily platforms for hedging price risk," said Ravikumar.

While deliveries are also facilitated on the exchanges, globally deliveries are less than 1 per cent of the open interest.

"It must be remembered that very often the seller prefers to roll over the contracts since futures prices are higher than the spot price," he clarified.

The sudden growth in guar volumes, he said, has been inspired by a shift in trading from the unorganised to organised markets, a lower than expected production level and the inherent volatility in the nature of guar seed prices.

"There is no evidence of any concentration and the systems in NCDEX ensure that there are limits for both members and traders which cannot be breached," he said.