Guar seed back in volatile trading controversy

NCDEX delays imposing margin money.

Brokers in guar seed trading might have made a killing in the market as a result of a delay by the Mumbai-based National Commodity and Derivative Exchange of India (NCDEX) in imposing an additional 20 per cent margin to check volatile trading volumes in this commodity, industry sources here claimed today.

The Forward Markets Commission (FMC), which regulates commodity exchanges, imposed the margin on Saturday "before the commencement" of trading. However, the NCDEX made the announcement after trading hours.

But the NCDEX refuted these allegations and pointed out that it had actually imposed an additional margin covering all big brokers ahead of the FMC directive and that it did not make any material difference that it announced the FMC decision after trading hours on Saturday.

It also said the directive was received after trading started on Saturday and could be announced only after trading hours as otherwise this would have disrupted the market.

Trading volumes on the NCDEX shot up on March 30 to 1.64 million tonnes from the previous day's 767,000 tonnes. The trading volume then dipped the next day to 675,000 tonnes.

By April 1, the volume dipped further to 447,000 tonnes, before rising marginally on Saturday to 454,000 tonnes. On Monday, 1.05 million tonnes were traded.

According to exchange data, guar seed opened at Rs 1,714 per quintal and closed at Rs 1,677 on the NCDEX on Saturday, losing Rs 37 on the most active May contract per quintal of guar seed. On Monday, guar seed opened at Rs 1,680 and closed at Rs 1,681.

But the price dropped by Rs 120 in the first half an hour of trading. Industry sources alleged that brokers who sold large quantities on Saturday bought them back on Monday when prices crashed. Essentially, short sellers took advantage of the situation.

NCDEX Managing Director PH Ravikumar refuted these allegations and said the exchange had imposed the 20 per cent margin on all long positions in excess of 2 per cent of the open interest well ahead of the FMC directive and hence no broker could have used the information for any purpose.

He admitted that the exchange did not announce the margin imposition before market hours on Saturday as the FMC fax was found around 10.30 am. The exchange's compliance officer said a phone call came from the FMC at 10.28 am and immediately the fax was seen, but the exchange normally did not make such announcements during trading hours.

"Had we made the announcement during trading hours, it would have created more volatility. We made the announcement after market hours. The margin was collected on Monday. Anyway, it did not make any material difference as all brokers who mattered were already covered by the additional margin, which the exchange had imposed on its own," Ravikumar told Business Standard.

FMC Chairman S Sundareshan was not available for comment but Commission sources said it had sent a fax and physically delivered a copy of the directive to the NCDEX at around 9.20 am, before trading hours, besides making phone calls on this.

FMC sources also pointed out that even though the NCDEX imposed the additional margin well in advance, it did not cover the "entire position".

Ravikumar pointed out that on observing a sudden rise in both spot and futures prices in the last week of March, the exchange increased its margins on guar seed contracts on March 30 from 6.2 per cent to 9.09 per cent.

Apart from this, to counter concentration of positions in the commodity, the exchange decided to impose additional concentration margins of 20 per cent on all long positions in excess of 2 per cent of the open interest. This was in addition to the prevailing intra-day margins of 9.09 per cent.

"Such imposition of additional margins was at the exchange's initiative and we were the only exchange to have imposed the concentration margin proactively," he said.

These additional margins covered 47 per cent of the total open interest of 118,020 tonnes, covering all contract months of the commodity. "The regulators have also been kept informed of the exchange's steps in this regard," he said.

"The FMC came out with a directive imposing an additional margin on all long positions on April 2. By that time, the exchange had already imposed additional margins on all members with big buy positions. The FMC directive, therefore, effectively covered only the remaining smaller members. The larger members, who were covered by the exchange's additional margin stipulations, were by that time already winding down/had already wound down their positions and/or were in the process of bringing in additional margins. For them, the FMC directive did not effectively make any additional impact," Ravikumar said.

According to him, in exchanges, the imposition of margins is a two-step process -- intimation to members and actual recovery of the amount from members.

Since margin amounts have to flow into the exchange's account in Mumbai from across the country (over 460 towns and cities) through the banking system, for any exchange the actual margin collection in this instance would in any case have been completed the latest on Monday (April 4). Commodity exchanges operate on a T+1 (transaction plus one day) settlement system.

The FMC directive on Saturday said, "The exchange shall ensure that this decision regarding the imposition of margin is broadcast to all the members simultaneously before commencement of trade today, so that nobody should have unfair advantage of prior information."