National Spot Exchange Ltd (NSEL) had suspended trading in all contracts except “e-series” following a government order. Last month,the Consumer Affairs Ministry had asked the NSEL not to launch any new contracts till further instructions and also sought undertaking from the NSEL in this regard.
We explain what National Spot Exchange Ltd is all about:
About National Spot Exchange Ltd: The exchange provides a platform for trading commodities on the spot market (immediate delivery). A trade position here is settled within 11 days,failing which,it becomes a futures contract. NSEL is not regulated by the Forward Markets Commission as it is not a futures exchange.
What National Spot Exchange Ltd Did: While spot transaction was settled on T+2 basis (within two days of trade),NSEL was revolving forward positions till up to T+35 days. By this,the exchange was unofficially guaranteeing a return of up to 2 per cent in 35 days,or 20 per cent on an annualised basis. Brokers say that the assured annual yield was 16-17 per cent. This brought in portfolio managers and brokers clients,lured by high returns. This scheme was in violation of the rules under the Forward Contracts (Regulation) Act as it was exceeding the T+11 settlement time frame.
Ministry Intervenes: In July,the consumer affairs ministry asked NSEL not to issue fresh contracts that cross the 11 days timeline,once they came to know of the violations. NSEL then brought down the cycle to 10 days from 35 days. On Wednesday,it issued a release that stated it is suspending trades in all contracts,except e-contracts. Further,the settlement was deferred for 15 days,leaving investors and brokers with only the warehouse receipts.
Panic Sets In: The decision meant that that traders whose positions expired from Thursday onwards,and who were eligible to receive their money,would not get their payments for the next 15 days. The worry is that the exchange could default. There are also doubts on the physical existence of the commodity.