NCDEX seeks to nip urad volatility

Proposal with FMC aims to further bring down open limit.

The National Commodity and Derivatives Exchange (NCDEX) has sent a proposal to the Forward Market Commission (FMC) to curb undue speculation in urad contracts.

According to the proposal, the near-month contract's membership open limit will come down to 4,800 from the current 24,000 and client open limit will come down to 1,200 from the current 6,000, said a source with the regulator.

FMC officials said the proposal was under consideration.

A senior NCDEX official said, "This proposal is in tandem with prevailing international practices and will help market evolve into a stable platform. At present, urad is witnessing undue speculation and cartelisation."

Further, commenting on the exchange's proposal, the official said, "We have asked the FMC to implement this proposal from March 2006 contract onwards itself. The regulator had in its guidelines stated April contract onwards".

Market players, however, feel if the proposal is implemented, liquidity will be cut short immensely. The proposal follows instances of undue speculation and volatility - such as an intra-day movement of Rs 200 per 100 kilograms "" seen in the last five days of the NCDEX February contract.

Further increasing the speculation were rumours that Burmese urad crop was adversely hit and, thus, could impact India's imports. This was despite the fact that the Burmese government or industry would issue their estimates by February-end.

The Burmese urad contracts on NCDEX and MCX have an annual volume of 4 lakh tonne when the actual imports are just about 1.5-1.8 lakh tonnes. India produces about 12-14 lakh tonne urad annually but it is not traded on domestic exchanges.

To sort out this big anomaly, the FMC is also working on changing contract design in a bid to remove the narrowness in contract specifications and inclusion of more varieties, a senior FMC official said.

On February 2, FMC had issued a set of guidelines for open interest following charges of undue speculation in the NCDEX's January urad contract.

Keeping this in mind, the exchange had changed contract specifications just a day before the contract expiry (that is, January 19), and without informing the regulator.

Following this, the regulator directed the NCDEX's official heading the committee, which took the controversial January 19 decision, to be removed from core functions and has sought an independent enquiry into the whole issue.

On Wednesday, NCDEX March urad contract ended at Rs 2,937 per 100 kg compared with Rs 2,885 yesterday. The contract's open interest at the end of the day was 126,350 tonne compared with yesterday's 118,700 tonne.