The National Commodity and Derivatives Exchange recently made a detailed submission to the Forward Markets Commission (FMC) with a request to reconsider its decision on withdrawing proposed transaction fees. Additionally, the exchange has also communicated to its employees over the observations made by the FMC in the February order, with a view to set its image right.

NCDEX?s attempt to lower transaction charges starting December 2008 was disallowed by the FMC and there were several observations made in the order. In a mailed communication to its employees on Saturday, the exchange management has sought to clear its position. These key issues included the issue of transaction fees, unauthorised deviations in use of funds and settlement guarantee fund (SGF). The ongoing tussle between the commodity futures market regulator and the NCDEX started in January when the commodity market regulator rejected a proposal by the exchange to cut transaction charges in its evening trade hours.

Faced with a sharp drop in turnover since July, the NCDEX had last month created two slabs for exchange rates, before 5 pm and after 5 pm. The aim was to encourage commodity traders to trade in the Indian evening hours when the New York and London commodity markets were open. This was expected to make it easy for traders to arbitrage between those markets and India. The additional trading would, therefore, have been a boon for NCDEX and also could have created a fine price discovery in commodities like metals. But the Forward Market Commission took exception to this reduction, saying it might affect the business of two other commodity exchanges adversely.

?We have made detailed submissions to the FMC with a request to reconsider the decision. We hope that the submissions would be considered objectively, in the larger public interest and with due regard to the commercial principles put forth by the exchange,? says the communication, confirmed an exchange official on Saturday.

The NCDEX approached the Bombay high court for relief. But the court on February 5 upheld the market regulator?s objection to the introduction of the new transaction fees and asked FMC to sort it out within 2 weeks.

The Commission in a 20-page document said that the NCDEX would not be able to attract more traders simply by reducing transaction charges levied by the exchange. ?Transaction charges may make only marginal difference in the choice of the exchange as far as market participation is concerned. The drastic cut in transaction charges cannot by itself bring a substantial jump in the volumes as expected by the exchange.?

FMC also observed that the exchange did not comply with the commission?s guidelines on transaction fees (by issuing a circular relating to transaction fees without taking the permission of the FMC). The exchange had said in its response that circulars issued by NCDEX did not violate any existing guideline issued by the regulator.

The allegation that the exchange has made unauthorised deviations and diversion of funds is baseless, maintains the communication. The exchange unequivocally affirmed that the funds belonging to the members are fully invested and are safe and secure and not used by the exchange for its operational purposes, it adds.

It also says, ?Such an observation conveys impression that the exchange has been diverting member funds, thus endangering the integrity of the market, implying that member funds are not safe in the exchange and that the exchange is bent upon using income not belonging to it and therefore the decision on reducing the transaction charge has to be interfered with.?

The exchange clarified that the margins are posted by a member and belong to the member concerned whereas SGF is pool of funds which is used to meet the shortfall in the event of a settlement default by any member. The margin posted by one member for taking positions cannot be appropriated against the requirement of margins of another member for taking positions.

In the event of a default, the SGF which is a kitty or pool of funds can be dipped into to make good the amount under default obligation of the defaulting member. One should not mix up member?s margin deposits and SGF as they are distinct.

The exchange reassures that the members? money which is not part of SGF has been invested safely, as confirmed by the external auditors appointed by the FMC and not used by the exchange for its operations. The FMC is also aware that the exchange has been using the interest earned from out of the funds, in line with global practices and as per the practice adopted by the other national commodity exchanges, the communication mentions.