Exchange ready for new products; prices impacting volumes: NCDEX

With regards to new product launches, he said SEBI has constituted a panel to look into it, adding that the Exchange is ready to handle new product launches. Below is the verbatim transcript of Samir Shah’s interview with Manisha Gupta on CNBC-TV18. Q: Securities and Exchange Board of India (SEBI) has asked NCDEX to come out with an audit report as well as an action plan on castor seed issue. What is the status on that as of now? A: If you are referring to forensic audit report, basically the Exchange had commissioned forensic audit straight after the castor episode happened. However, subsequently SEBI had directed the Board of the Exchange to insulate the management of the exchange from forensic audit as has been covered in media quite widely. So, it is now for the board to share the report with SEBI and the exchange and its management is not involved in that process at the moment. Q: The volumes also have taken a hit in the agriculture space you see castor seed is one and due to of course government coming down heavily on the price rise in the food commodities. How are you looking into it how are you tackling that? A: There are two separate and slightly disconnected things that are going on. One of the major reasons for drop in volumes in our contracts mainly in agricultural contracts has largely been because of the price rise and the sensitivity of these commodities to consumers and things like these Essential Commodities Act that has been invoked for pulses as well as most recently in sugar has sort of created a bit of a concern in minds of the value chain participants and the members. That accompanied by rise in prices has led to drop in volumes, so it not necessarily as a result of the castor episode. The going away of the castor contract or the suspension of the castor contract has also resulted partially in drop in volumes but towards April, towards sort of the mid to end April we were able to recover most of that volume through the performance of other contracts during that period. So, largely it is whenever prices go up in a situation like ours which is two consecutive droughts and a poor monsoons there is always a little bit of cautioned that is exercised by participants because they recognise the sensitivity associated with these commodities by the government and the participation is generally very cautious. That is really the main reason.Q: How do you also see the working relation with the SEBI and government as of now as we see a lot of news flow and action, there have been in various statements from government and SEBI also wants roll out new products this year and they seem to be working on margins, positions and delivery here? A: The working relationship has become much more stronger. The information sharing and the rigour with regulator and the government has become much more stronger since the castor episode. I think there has been a big learning for the exchange to get used to working with a new regulator. The processes and the practices that are followed by the new regulator, SEBI as you know has a very rigorous surveillance mechanism which it has sort of replicated with some adjustments. The same surveillance mechanism that it follows for the securities market has now being implemented with the same level of rigour for the commodities market. Of course recognising and nuancing it with the modification that are necessary recognising that the markets are slightly different. So, the commodity exchanges have had to go through that steep learning curve in working with the new regulator around its expectations around its monitoring levels and around the information sharing. That has been going on for the last ever since the merger, but obviously after a castor episode the information sharing and the rigour of interaction with the regulators and the government has increased and has gone to another level. This we believe gives us and the market a far higher level of confidence that the tighter surveillance measures will give the right priority to market integrity and keep market abuse in check. Q: Just a follow up on that question yet again and the space seems ready to grow more with more products and indices as promised by the regulator how ready as an exchange are you and how do you see a participation coming in? We already talked about the volumes going down do you see the market is ready good with the new products now? A: That is a very good point and an extremely important one for this financial year which is 16-17 as we know the honourable Finance Minister had made a comment of new products in his Budget speech so that has cleared set the tone for discussion and review of that to happen. SEBI has constituted and advisory committee called the Commodity Derivative Advisory Committee (CDAC) and we believe that CDAC would consider the tone that has been set by the honourable Finance Minister and take that forward in the form of reviewing what kind of new products would be permitted in the market place. We definitely believe that the exchange is, at least I can speak for NCDEX is definitely ready for new products which could include options and or indices. So, we are certainly very ready. Options specifically would be very important in the context of offering a more relevant risk management solutions for the market. We have talked extensively and written extensively in the past about how options for farmers for example would be a fantastic way of them accessing the markets in a more seamless manner. NCDEX in the last of 12-18 months has been working with bringing on board farmers and connecting farmers directly to the exchange in a very big way. In the year 15-16 we had managed to get 5,100 farmers across the country to hedge directly their produce on the exchange. So, that effort of connecting farmers directly is progressing quite well. We are quite satisfied with that progress. We believe that by introduction of products like options it would go a long way in giving framers the right insurance mechanism to protect themselves against the vagaries of the market place. Q: Agri trading has been a pain point, I mean there are just so many stakeholders there from government to framers to consumers what is the road going forward for this one now? A: There is no question that we have to work in an environment where we need to be able to manage diverse interest of stakeholders. Secondly, futures have not led to inflation; they are merely a mirror reflecting the imbalances of physical market place. They do in fact give extremely positive market driven signals to policy makers and regulators to look at what steps they need to take in order to remove these imbalances in the physical markets.