The capital and commodities market regulator Securities and Exchanges Board of India (Sebi) is in discussion with exchanges whether to continue market operations without the underlying spot market.

Sebi and exchanges on March 23 are holding talks to tackle the situation. A source told Moneycontrol: “Sebi is currently in discussion with exchanges; but we should stop trading without spot because, without it, there is no relevance of derivatives market or longer contract expiry timeline.”

As key states such as Maharashtra, Gujarat, Rajasthan and Punjab have been placed under lockdown until March 31 to check the spread of the novel coronavirus, many commodity traders have raised concerns over the derivatives market operations.

A spot commodity is a commodity up for immediate trade, as opposed to a commodity under contract for trade at a future date. Spot commodities must be ready for immediate sale and delivery, as most trades typically settle within two days.

Though central and state governments have announced the lockdown in various states which is hampering spot market trading, ‘mandis’ are allowed to remain open for essential items.

In non-agri segment, contracts are expiring in the last week of March. In Gold, contracts which will expire between March 31 and April 3 are on the basis of spot prices in Mumbai and Ahmedabad gold markets. Both markets are now closed because of COVID-19 fears. Similarly, with base metals like aluminium and copper contracts which will expire on March 31, prices depend on ex-Thane prices, which is also under lockdown.

A similar situation prevails in the agri segment also where prices are determined by the local mandi. A senior official of NCDEX, the market leader in agriculture segment, told Moneycontrol: “Our contract will expire around April 20 and the state governments have cleared the transport of essential goods and trading at mandis. So I don’t think there is any problem in derivatives trading of agri commodities.”

However, Sanjay Padiwal, a trader of chana (chickpea) at Bikaner in Rajasthan said: “The state government has allowed us to open the mandi between 12 PM and 5 PM. But nobody is coming to sell their commodities here, one of the biggest chana markets in India. How do we decide the derivatives price when the spot market is not functional?” he asks.

The situation is the same at Sriganganagar in Rajasthan. “There is no trading of essential commodities at the mandi. Workers are afraid to come and farmers are not coming to sell their crop. So, it is impossible to determine the price of derivatives without the spot market,” Manoj Gupta, a mandi trader, observed.

According to a Mumbai-based broker, charges in exchange warehouses are higher compared to other warehouses. “In this situation, exchanges should waive off warehouse charges,” he stated.

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