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Thu, Jul 24 2014. 01 16 PM IST

Another commodity exchange, another fraud


Signs of fraudulent trading practices have emerged in another corner of the commodity marketsat Universal Commodity Exchange
Mumbai: Signs of fraudulent trading practices have emerged in
another corner of the commodity markets. Universal Commodity
Exchange (UCX), which suspended trading operations last week
citing prevailing market conditions, was, at the time, under the
scanner of the Forward Markets Commission (FMC) for alleged
fictitious trades conducted for the undue benefit of a certain set of
investors.
The commodities market regulator issued notices to the bourse
the first was in Marchseeking an explanation for a sudden
increase in trade volume, trades executed by a set of investors
familiar with each other, and buy/sell orders in certain contracts
being punched at exactly the same time. Mint has a copy of the
notices sent by FMC to the exchange.
Navi Mumbai-based UCX, which was launched last year in
April, suspended operations on 16 July, saying that it would
draw up a fresh strategy for new segments and products.
Photo: Mint

Similar issues were found in the case of Multi Commodity Exchange


of India Ltd (MCX). A special audit of MCX, done by
PriceWaterhouseCoopers, highlighted quite a few instances of
specific abnormal patterns such as wash trades or non-genuine
transactions. National Spot Exchange Ltd (NSEL), which is
currently engulfed in a `5,574.35 crore payment crisis, also saw
circular trades to show substantial turnover and volumes as per the audit report prepared by Chokshi and Chokshi . NSEL suspended
settlement of all contracts last year in August.
Navi Mumbai-based UCX, which was launched last year in April, suspended operations on 16 July, saying that it would draw up a fresh
strategy for new segments and products.
Due to prevailing market conditions, it has been decided to suspend the trading activities of the exchange temporarily subject to the
approval of the Forward Markets Commission till such time a renewed plan is put in place, said a circular issued by UCX on 16 July. The
exchange made no mention of the concerns raised by FMC.
FMC first initiated an enquiry into operations of UCX in February and conducted an audit on the exchange after it noticed that fictitious
volumes were being used to push up profits and valuation of the exchange.
It is observed that most of the trades are fictitious. You are therefore requested to explain whether the exchange has taken any action
against the members/traders for indulging in such type of fictitious/non-genuine trades. The Commission (FMC) has viewed indulgence of
the exchange for allowing such types of fictitious trades seriously, said an FMC notice dated 21 March. Thereafter, on 3 April, FMC issued
another notice to UCX, asking for details on action taken against members and also for a report on abnormal trading pattern.
Mint could not ascertain whether UCX replied to FMCs notices. UCX chairman and promoter Ketan Sheth did not respond to calls and a
text message sent to his cellphone. An email query sent to the exchange also remained unanswered.
FMC declined comment on the matter.
In particular, FMC sought details from UCX related to trading of contracts based on lead, nickel, soyabean oil, silver and zinc. FMC, in its
notice, highlighted suspicious trading patterns witnessed in the contracts for lead, zinc and nickel. In the case of nickel contracts expiring in
March and April, FMC found that the time of buy and sell orders was matching in as many as 95 trades out of 125 trades on 4 February. It
may also be possible the members in this case may be familiar with each other or with the clients and such trades might have been
entered for certain undue benefit, says the notice.

Such trades led to a near doubling in the exchanges turnover from `4,695 crore in December 2013 to `8,660 crore in February. Since then,
turnover on the exchange has declined and settled close to `1000 crore. The exchange finally shut shop in July.
The exchange was not left with any money to carry out the business, said a person aware of the developments asking not to be identified
due to the sensitivity of the matter.
As of July, UCX was the smallest of the national commodity exchanges. According to the fortnightly dissemination data by FMC, UCX
reported a turnover of `1,111.80 crore between 1 and 15 July. MCX leads the turnover table with `2.09 trillion followed by National
Commodity and Derivatives Exchange Ltd (NCDEX) at `56,079.65 crore. Ace Derivatives and Commodity Exchange and National
Multi Commodity Exchange (NMCE) clocked a turnover of `1,851 crore and `1,374.41 crore, respectively, during the fortnight ended 15
July.
It is unclear whether any genuine investors have been hurt by the fraudulent practices found at UCX.
Most of the investors trade on either MCX or NCDEX because they are more liquid and between them they offer the entire range of
agricultural and non-agricultural commodities, said an analyst who declined to be identified.
The suspension of trading on UCX comes close on the heels of the Indian Commodity Exchange (ICEX), which stopped operations in
April. ICEX also attributed the closure to lacklustre business performance.
Experts say that commodity exchanges can survive only if they are able to provide some value addition to the existing list of commodities
and contracts as both MCX and NCDEX provide ample liquidity.
Value addition is the key to the success of any commodity exchange, says Naveen Mathur, associate director, commodities and
currencies, Angel Broking Ltd. If there is no product differentiator, then there will be no interest as the market already has liquid
exchanges. The potential is large but there has to be a seamless integration in terms of logistics, bandwidth and IT infrastructure from a
members perspective, he says.