NCDEX modifies guar contract to curb speculation

Last Updated: Sat, Mar 10, 2012 18:41 hrs

In a move aimed at reducing speculation, the National Commodity & Derivatives Exchange (NCDEX) has modified all key provisions in the existing contracts of guar seed and gum. The changes have been made effective from March 12 in all running and new contracts.

The most significant of the changes is the nature of contract itself. From the existing 'intention matching' category contract, both commodities have now become a 'compulsory delivery' contract. That is, all open positions on the date of expiry will now be automatically converted into delivery from a situation where both parties to settle the contract at an amicable price earlier. According to Ajay Kedia, managing director of Kedia Commodity, a Mumbai-based broking firm, the move is a step towards trade-to-trade (T2T) system where buyers and sellers need to settle every time they punch their orders.

Also, the exchange has cut the trade size and delivery unit to one tonne from the existing 10 tonnes and five tonnes in guar seed and gum, respectively.

The move assumes significance, especially for small traders who exited from commodity exchanges due to massive speculation in the last one year. Rising prices of the commodity had made small traders redundant from the exchange platform, providing opportunity for large traders to manipulate prices further. Now, with the reduction in trade and delivery size, small traders can get back into the ring. Also, the change in the nature of trade would restrict the commodity to actual users only."This is an effort to bring these commodities in tune with the market requirements after due permission from the commodity markets regulator, the Forward Markets Commission," said Ananda Kumar, chief of corporate services at NCDEX.

According to Naveen Mathur, associate director, Angel Broking, "The decision will broaden participation of small traders on the exchange platform due to a decline in the cost of trading."

The FMC's efforts of raising overall margins by 60-70 per cent and suspending three Rajasthan-based traders for margin funding and related issues, have so far had little impact on curbing the price rise. Hence, analysts view this as the last resort to control rising prices.

Earlier, a sudden spurt in demand had pushed up sharply the prices of guar seed and gum. On the NCDEX, the guar seed contract for near-month delivery shot up by over seven times (716 per cent) in the last one year to currently trade at Rs 22,270 a quintal from the level of Rs 2,728 a quintal a year ago.

Particulars Guar seed Guar gum
Existing New Existing New
Unit of trading 10 tonnes 1 tonne 5 tonnes 1 tonne
Unit of delivery 10 tonnes 1 tonne 5 tonnes 1 tonne
Tick size Rs 1 / quintal Rs 10/ quintal Rs  2 / quintal Rs 10 / quintal
Tender period 14 days 5 days 14 days 5 days
Nature of contract Intention
Source: NCDEX

Similarly, guar gum contract for near month delivery jumped around eight times (799.82 per cent) to Rs 68,700 a quintal on Friday, compared to Rs 7,746 a quintal a year ago.

"The regulator's role is to ensure participants do not face any difficulty. The modifications in the contract note are to smoothen delivery and other trade-related issues, if any," said an FMC official.

Meanwhile, fundamentals remain supportive for guar prices. The overall output of guar seed is estimated to decline by around 20 per cent to 12.5 lakh tonnes this year, compared to 15 lakh tonnes during the previous season.

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