External auditor to probe brokers, clients’ role in castor trade fiasco

MUMBAI: Commodity exchange NCDEX has appointed an external auditor to look into the role of clients and brokers who traded castor futures, which the bourse suspended last week after a few members long the commodity faltered in meeting their mark-tomarket obligations. It also placed the trading terminals of its brokers Investsmart Commodities, Leo Global Commodities, Neer-Ocean Multitrade and Mid India Commodities on square off mode until further notice.

The announcement of an investigation comes close on the heels of Sebi having asked the bourse for an explanation on the circumstances leading to an overnight ban on castor futures last Wednesday.

“The Exchange has initiated investigation into the role of members and their clients through External Audit firm/s. The exchange has also placed the trading terminals of some of its members, namely, Mid India Commodities P Ltd, Investsmart Commodities Ltd, Neer–Ocean Multitrade Private Ltd and Leo Global Commodities P Ltd in ‘square-off mode’ until further notice,” an NCDEX press statement on Monday said.

The suspension of trading after prices hit the 10% lower circuit on two straight sessions through January 27 shocked the market and caused panic among those who initiated sell positions on castor as the exchange said all contracts would be settled at closing price of January 27. Sellers make money when the price of a contract falls from the rate they shorted it since they can sell the same to the buyer at a higher rate.

Had the contract been put on square off mode, buyers would have bled but since the bourse feared this could result in defaults and upset market integrity it closed all contract at January 27’s rate.

The suspension has impacted volumes on NCDEX with provisional turnover on Monday at Rs 2,512 crore having slipped by 17% from its daily average in January. This is not the first time that castor futures has been in the news. Forward Markets Commission, the erstwhile regulator of commodity exchanges like NCDEX, under its chairman Ramesh Abhishek, had in December last year extended delivery period of castor to three weeks from 10 days and successively raised the risk margin resulting in delivery of Rs 900 crore worth on NCDEX. This had dealt a big blow to parties trying to corner the market and raise prices back then.