Despite strong surveillance and monitoring mechanism, prices of minor commodities have shot up sharply on both spot and futures markets. Ramalinga Ramaseshan, managing director of the National Commodity & Derivatives Exchange (NCDEX), defends actions taken by it, in an interview with Dilip Kumar Jha. Edited excerpts:
What measures are you taking to curb speculation in minor commodities?
Almost all agri commodity contracts available for trading on NCDEX are compulsorily deliverable. That is, on expiry of contract, all open positions have to be settled by giving physical delivery. This is a major factor that keeps prices of forward contracts grounded to the underlying spot physical market of the commodity. According to records, defaults in compulsory delivery contracts on NCDEX are minuscule. Thus, due to the requirement of compulsory delivery, the market mechanics keep the futures market anchored to the developments in the spot market and that is one of the main functions of the futures market. The Forward Markets Commission (FMC) has also taken many steps in this direction, like (i) position limits as prescribed in the contracts are at optimum level, which facilitates depth in the market, but restricts powers of traders; (ii) clubbing positions of related entities to check if traders join with the intention to manipulate the prices and (iii) collection of margin funds by members from clients. Harsh penalties have been imposed by the exchange and FMC for violation of directives. Besides, NCDEX gets continuous feedback from the spot physical market of underlying commodities, to verify prices.
There are reports that algorithm trading and some excessive speculation is rigging prices. What is your plan?
The contracts traded in the exchange are anchored to the physical market and, therefore, prices are determined by demand and supply. The futures market has to be seen in conjunction with the spot market. In case of futures contracts, there is no evidence to support the allegation that algo trading is resulting in excessive speculation.
Do you see a possibility of the FCRA Bill getting affected due to the current situation?
No. In any case, the FCRA Bill is required for further development of the futures markets. In our view, the said Bill should be passed as early as possible.
Will deepening the market help avoid fluctuations?
Deepening of markets is always welcome, as this will confer enormous benefits on the participants, such as lower volatility and lower impact costs.
Will participation from corporates resolve the problem of narrow commodities being confined to certain traders?
Participation from all parts of the value chain, including corporates, will ensure a deep market . It is well known that market dynamics function better with large number of participation and a wider value chain. This results in better price discovery, the primary function of a futures market.
Is it the right time for government to expand participation and allow banks and domestic institutional investors in agri commodities?
We believe this is the right time to allow banks and domestic institutional investors to trade in agri futures, as this will contribute significantly to widening and deepening the market, besides ensuring entry of more professional players.
