The Hindu Business Line : `Sugar futures aligned to realities of physical trade'

THE National Commodities and Derivatives Exchange (NCDEX) on Monday clarified that trading in sugar futures on the exchange "is not mere paper trading but aligned to the realities of physical trade".

In a statement on declining prices of sugar futures, the exchange said the decline was due to slipping global sugar futures, dip in physical sugar market price and lack of major buyers as most of them were holding excess stocks.

Dwelling on rising open positions, it said: "the healthy open position is because of increased participation of actual users and producers - large number of sugar mills are using our platform for effective hedging and are effecting deliveries."

"The April 2005 contract saw deliveries of 13,040 tonnes, which was 97 per cent of the open interest. This clearly demonstrates that only 3 per cent of open interest position was settled in cash, and in no way, sellers were able to depress the price by resorting to cash settlement and choosing to pay 0.5 per cent penalty. This evidently shows that there is wide scale participation of actual users and producers on NCDEX," it said.

NCDEX refuted allegations that it did not settle all open position on expiry of sugar contracts by physical delivery.

"We have seller's choice where in the seller who has open positions has a choice whether to go for physical settlement by delivering physical goods or for cash settlement of the contract at the settlement price determined by the Exchange. In case, the sellers want to deliver physical goods, the buyer has an obligation to take delivery of the physical goods," it said.

The decision to have seller's choice and not compulsory physical delivery was to avoid "short squeeze" whereby the sellers are unable to deliver physical goods in time to complete the settlement, the exchange said, adding that the chances of a short squeeze were high because the futures market was at a nascent stage.

The exchange wanted to reduce speculative interest in futures contracts as the expiry dates approaches.

"In order to facilitate this and to ensure early roll over of speculative positions from near month to mid or far month, we impose a pre-expiry additional margin of 5 per cent (at the rate of 1 per cent a day for five trading days before expiry of the contract).

"Also, for the sellers who have open positions on the day of expiry but fail to exercise their choice to deliver physical goods, we impose a penalty of 0.5 per cent of the value of the positions," it said.

NCDEX said it had not changed the norms for the sugar futures contract and they were the same when the market witnessed a bull run a few months ago.

"The developments in the market should be looked at from this perspective for a objective and factual understanding," it said.

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