It may be easy to say this with the benefit of hindsight, but the fact is that the payments crisis at the National Spot Exchange Ltd. (NSEL) was something waiting to happen. Here was an exchange that was pushing the envelope well beyond its stated mandate of offering a trading platform for buying and selling commodities, mainly agricultural but also metals. From being a spot exchange, NSEL morphed into yet another vehicle for speculating on commodities, especially at a time when equity markets were listless. And worse, unlike other commodities trading exchanges such as the MCX or NCDEX, NSEL operated in a regulatory vacuum, making it a dangerous proposition not just for traders but for the entire market system in the event of a collapse, as now. The government’s questionable decision to allow NSEL to deal in one-day forwards without bringing the exchange under regulatory watch has now caused a Rs.5,600 crore payments crisis. It is difficult to believe that the commodities market regulator — the Forward Markets Commission (FMC) — and the government were not aware of the goings-on at NSEL. More so considering that just in February 2012 the government had directed NSEL to file periodic reports with the FMC on its business. The regulatory inaction can only mean one of two things — benign neglect or tacit approval of NSEL’s activities. Either way, the government and the FMC need to answer for this.

If this was bad, worse was the manner in which the crackdown on the exchange finally came. By asking NSEL to stop launching new contracts forthwith and wind up existing ones on their due dates, the government probably precipitated a crisis. A gradual, orderly wind down of outstanding positions over an extended timeframe would have been a saner way of reining in the exchange’s business. These actions show up the FMC and the government in rather poor light. That said, the priority now is to ensure that the crisis is contained within NSEL and does not pose a risk to the system itself. This is important considering that there are a few big traders who are also major players in the stock markets. NSEL has already appointed a committee with independent members to oversee the settlement but the FMC has to be involved too. The government on Tuesday issued a notification empowering the regulator to oversee the settlement process and the FMC should get down to the job in right earnest. A number of small investors have been caught in the net unwillingly and their interests have to be secured. From the long-term viewpoint as well, the government should bring spot exchanges under the regulatory purview of the FMC, even if it means amending the Forward Contracts Regulation Act.

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