Answer:

♤ The National Spot Exchange Ltd. (NSEL)’s mandate is to offer a national electronic spot-trading platform for agricultural commodities and metals. But by deciding to go well beyond its brief into forward trading of commodities the exchange has run into a big crisis.

♤ Though it was founded mainly to offer a national spot market for commodities, the exchange secured specific approval from the government to offer one-day forward contracts.

♤ The conditions were that there would be no short-sales and that all outstanding positions will be settled by delivery. However, NSEL allowed forward contracts to be rolled over under the excuse that the FCRA does not prescribe a period for delivery. It also appears to have turned a blind eye to short-sales by traders speculating in the forward market.

♤ Spotting the opportunity, brokers and traders started offering “products” tailored for their clients with assured returns of 15 per cent and more for speculating in commodities on NSEL. And forward contracts became the mainstay of its business with spot trading being the poor sibling.

♤ The crisis began when recently, Ministry of Consumer Affairs (MCA), which oversees commodities bourses, and the FMC asked NSEL to stop launching new contracts until further orders. The FMC also sought an undertaking that all existing contracts will be settled on their due dates.

♤ Bowing to the directives, NSEL told its members that contracts have to be settled within 11 days and it would be on a trade-to-trade basis, that is, payment against delivery of the commodity. This lead to a fall in trading volumes as traders, who were active in forwards, lost interest in spot trading.

♤ As traders failed to roll-over their contracts and demanded settlement, the exchange ran into trouble. NSEL was also forced to down its shutters by suspending trading in order to counter speculation of a payments crisis.

♤ Crisis like these force us to rethink on the role of regulators. Most expert committees on finance have recommended that the system needs a ‘unified regulator’ for markets to plug such holes. The NSEL scam may give way to the merger of the FMC with the SEBI.

♤ The government should no longer allow the present regulatory structure to continue which provides opportunities for unscrupulous operators to escape regulation.