Going by a Business Standard on the genesis of the crisis, NSEL offered a pair of contracts, one where settlement happens in two days and a second where the settlement is deferred by 25-50 days.
This allowed speculators to make financial returns without actually taking physical possession of commodities.
BS points out that the commodity is required to be delivered physically under the contract specifications. But the exchange facilitated use of electronic warehouse receipts thereby enabling financial investors to make use of the arbitrage without taking physical possession of goods.
For example, the goods which are delivered in the first contract, which is a buy lies in the warehouse itself till the delivery is due on the reverse leg, which is a sell, helping speculators run amok, says BS.
I would like to ask the Forum:
- Are such paper transactions going on in other Commodity Exchanges?
- If yes, what could be the impact?
- Will other Commodity exchanges face similar crisis?
- What happens if the transactions are not backed by physical stocks or quality stocks as per specifications?
- Who should be held responsible?
Suggest we debate on this since the agriculture commodity trading – the nation's mainstay – is bound to be hit.
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