NCDEX suspends trading in castor seed futures after rumours of client level defaults

MUMBAI: In a move that took market participants by surprise, NCDEX, in consultation with Sebi, on Wednesday suspended trading in castorseed futures shortly after the market was rocked by unconfirmed rumours of client level defaults in the counter and its possible impact on a few brokers on the exchange.

Castor futures have plunged 10% over the past three days on trade expectations of a higher than anticipated crop.

Prices of all the running contracts through May 2016, including the mini contract, will be settled at Wednesday’s closing price.

“National Commodities and Derivatives Exchange Ltd. has suspended futures trading in all running castor seed contracts at close of business on January 27, 2016, under the provisions of its by-laws and regulations. The outstanding positions will be settled at the daily settlement price as at the end of January 27, 2016. The Exchange has taken this decision to maintain market equilibrium, safeguard market integrity and in the general interest of the commodities market”.

Many clients in castor had accumulated huge stocks on hopes a shortfall in production would boost prices. They had sought finance against the stocks at a 25-30% haircut from large financiers. However, estimates of supply well exceeding demand this year pressured prices downwards.

This led to financiers making margin calls on their borrowers, who, in turn, were forced to unwind their long positions on the exchange, causing prices to hit the lower circuit on Monday and Wednesday.

“The spiral of panic selling complicated matters further, resulting in talks of potential client level default,” said a broker. "But we are totally surprised at the suspension.

The exchange should have given more time for squaring off the contracts.” However, a senior Sebi official told ET that no issues existed at the broker level amid talks of fallout from client level default on a few exchange brokers.

But, physical market traders estimate that not only would production exceed last year’s 12 lakh tonnes by 10-15%, but carryforward stocks would add to supply, taking the year’s production to an estimated 19 lakh tonnes. This pushed prices down by 19% so far in the new year.