There have been some reports in the media about the trading in Guar seed and Guar gum contracts on the Exchange and the action taken thereon. This is to set the facts straight.
At the outset, it is to be made clear that Guar seed is not a food grain. Guar seed is mainly used for producing Guar gum, which is an industrial product, almost the entire production of which is exported.
Guar prices have remained firm during the past two years on account of robust demand from the overseas oil drilling industry for the ‘Hydraulic Fracking’ process. This is reflected in the record export numbers reported by Governmental agencies in the past year. Hence, inspite of record production in 2010-11 and a relatively lower, albeit higher than average production in 2011-12 season, prices have been rising. During the period from October 01, 2011 to March 27, 2012, spot prices of Guar seed and Guar gum increased substantially. This directly impacted the futures market prices. Considering the unprecedented price move during the mentioned period, the FMC and the Exchange have closely monitored the price movement and trading data continuously.
With a view to contain the exuberance and to prevent excessive speculation the FMC and the Exchange initiated various stringent and successive regulatory measures as given below -
Margins on the long side were progressively hiked, several times. Margins were as high as 60 % (to be given in cash) on longs towards the end of the January expiry. This was over and above the normal margin. The total margin at that time exceeded 70%.
Member and client level limits were reduced on January 21, 2012.
Fresh positions disallowed in the January expiry contract w.e.f. January 17, 2012 onwards to facilitate smooth closure of the contract.
Open positions of certain entities that appeared to be acting in concert were clubbed within a single client level limit thereby effectively curbing their ability to participate in futures trading and garner large positions in the futures market in January 2012.
Change in delivery system form ‘Early Delivery’ to “Staggered Delivery” for March expiry contract.
Launch of August and September contracts was deferred in view of reports of reduced deliverable stocks and unavailability in physical markets.
Disallowed fresh positions in all Guar Seed and Guar gum contracts w.e.f. March 21, 2012.
Eventually, in view of the reduced liquidity, the Exchange closed out all the running contracts in Guar seed and Guar gum on March 27, 2012.
We are not aware of any other instance the world over, of such a series of stringent regulatory steps for controlling the market.
In addition to the above regulatory measures at the market level, certain specific actions were undertaken including inspection of large members. The Exchange imposed heavy penalties for irregularities relating to client funding on some of the members.
FMC also separately conducted inspections of some large members and in the follow-up action suspended 3 members for considerable periods up to one year, primarily for trading irregularities.
While the above regulatory steps are unprecedented in the annals of futures trading, the effect on the price movement has been has been minimal. This reinforces the fact that the spot/physical market and its dynamics caused the price rise on the futures platform.
It should be appreciated that those who had taken speculative short positions in the futures market without corresponding physical holdings based on their anticipation / price view that the Guar prices should fall, suffered losses. In other words, those who suffered losses had consciously taken naked short positions.
Data available with the APMCs in Rajasthan clearly indicate that farmers were able to sell their produce at significantly higher prices than in 2010-11.
It should be noted that as on May 3, 2012 Guar gum prices were above Rs 1 lakh per quintal compared to around Rs. 80,000 when futures contracts at our Exchange were closed out in late March. The prices of Guar seed and Guar gum have remained at much higher levels even after the futures’ trading was discontinued. Thus it is clearly evident that the price movement has been fuelled by the underlying fundamentals of the commodity and not caused by futures markets.
Guar gum is not a food grain and is an industrial product. It is clear that the Indian economy has benefited immensely by the increase in international prices of the commodity which is largely exported. Farmers, processors, exporters and traders engaged in the physical trade have greatly reaped the benefits.