NSEL, a spot exchange or a NBFC ?

Ringa ringa roses…..all fall down!  The music has stopped on the NSEL the verdict is out: sellers have become lenders and have to fend for them to recover or enforce obligations from the buyers or borrowers.

Looking at the position that NSEL has assumed and situation unwind, I fail to accept why participants should be called buyers or sellers while they have been lending and borrowing with an underlying commodity!  NSEL is just proving itself to be a pass through intermediary and its platform an unregulated NBFC providing commodity secured (?) funding for the buyers and run a carry trade. It all went sell until the commodity prices inverted.   

Let us think of a few matters that any lender or fund manager, that offer investment financial products to small investors, would have thought of in the course of its respective lending operations or its investment advice:

·        Borrower due diligence process.

·        Credit assessment of the buyers (borrowers).

·        MTM value of the commodities bought and sold by participants i.e. security.

·        Quality of security; quality storage, quality and quantity of commodities.

·        Warehouse depositories.

·        The quality of NSEL and its financial strength.

·        Enforceability of security and quality of title over goods.

·        Market participants (lenders) and quality of risk taking ability.

·        Regulators

As the NSEL unwinds its position the blame game must pause; markets and regulators must learn from the situation, devise and implement policies to safeguard markets, investors, and avoid systemic risks.  

The commodity exchange that also allows storage and de-mating of commodities idea is great idea as it helps create much needed liquidity, deepen markets, and help farmers and consumers discover price.  However, an efficient and credible market requires safeguards and regulations surrounding commodity exchanges and de-mating of commodities must also be clarified and strengthened; market participation are screened and restricted intelligent investors or advisors; investor-farmer education and protection watch dog  remains active.