The ongoing tussle between the commodity futures market regulator Forward Markets Commission and the National Commodities and Derivatives Exchange has intensified, with the former accusing the exchange of misuse of funds.
In its order that rejected a proposal by NCDEX to slash the transaction charges in its evening session of trade, FMC said the exchange's settlement guarantee fund has fallen to meagre Rs 5,05,000 at the end of calendar year 2008.
Performance audit done by the auditors at the behest of FMC shows that the exchange also earned an interest of Rs 24.87 crore (Rs 248.7 million) on this fund during March 2004 to March 2006.
FMC passed the order on February 19. The exchange is yet to reply to the order.
FMC has noted in the order that the current SGF corpus is much below the exchange's byelows that say that the minimum balance in the fund should be Rs 5 crore (Rs 50 million).
An NCDEX spokes person said "there has been no settlement defaults so far. The risk management system of the exchange is robust and in line with global best practices."
The spokesperson added that "the byelaws of the exchange state that the initial corpus of the dettlement fund shall be Rs 5 crore (Rs 50 million), or as decided by the relevant authority from time to time.
The bye laws also provide that the members shall be required to contribute to the fund, as determined from time to time by the relevant authority. These are enabling provisions and not yet implemented.
The exchange constituted the SGF on November 1, 2008 and the accretion of funds to this SGF so far is about Rs 5,05,000."
FMC has barred exchanges from using fund from SGF for purposes other than the settlement. The regulator has also said that "we have taken serious note of unauthorised diversion of funds while treating SGF."
The NCDEX spokesperson did not agree with the FMC's charge that funds had been misused, but said that "As stated above, in our view, SGF is not to be confused with members' margin money funds. The entire corpus of members' margin money funds deposited with the exchange is invested fully and the same is safe and secure.
These funds have not been utilized by the Exchange for its own purposes or operations."
FMC has said that the exchange's financial health is highly vulnerable at this time and also cited examples of financial mismanagement.
The exchange has spent Rs 26 crore (Rs 260 million) for leased-in premises at Kanjurmarg in Mumbai, which the regulator said was improper. The exchange made a payment of Rs 4.59 crore (Rs 45.9 million) to various brokers for creating awareness, but brokers used this for 'effecting uneconomic trades to give false impression of high volumes.'
Settlement fund guidelines soon
FMC is working on guidelines for the use and maintenance of SGF. The exchanges have to maintain this fund for use in case of default by member-brokers. At present, exchanges are maintaining their SGF, but there is no established norms for such funds.
The regulator wants to have guidelines for SGF to bring uniformity among national exchanges (there are three such exchanges at present and one more will launch operations in the next few months) aiming at proper management and safety of funds.