Commodities Exchanges: Clearing members at high risk

KATHMANDU, SEP 08 -

Although commodities exchanges witness daily transactions worth Rs 50 million on an average, none of the clearing members affiliated to the exchanges have paid-up capital of more than Rs 2.5 million. Clearing members are the ones exposed to the highest level of risk, but their core capital is far less to absorb any possible shock.

There are 15 clearing members associated with six commodities exchanges. According to a recent study of the Securities Board of Nepal (Sebon), the clearing members’ paid-up capital ranges from Rs 2 to 2.5 million.

While entering into future and forward contract, clearing members should stay opposite to general investors. It means if general investors gain, clearing members lose.

If investors correctly analyse the market and invest, there are higher possibilities that they gain at the expense of clearing members. It may lead the clearing members into bankruptcy.

Also, clearing members have to strike balance between buyers and sellers. If there is a mismatch, it is the duty of clearing members to facilitate adequate liquidity.

Since clearing members of commodities exchanges are exposed to tremendous risk, in regulated international market, they retain a significant chunk of their profit and place it under clearing guarantee fund. Such a practice helps them absorb any possible shock.

“However, a majority of the clearing members operating here distribute all the profits,” said an official at a commodities exchange. “In other countries, only 25 percent of the income is distributed, while the rest is placed in a separate fund.”

Currently, a majority of investors in the exchanges are losing so the problem has not surfaced yet. “Once investors start earning, the entire clearing members can go bankrupt,” he said. The Sebon study says around 80 percent of investors are losing in the commodities exchange.

Almost all clearing members are operating under the investment of exchanges, so the entire profit is distributed ignoring the possible loss in future. “Almost all exchanges have their own clearing members along with some other independent members,” he said.

Investors trading in commodities exchanges maintain accounts in commercial banks. They are required to increase/decrease their deposits as per the price fluctuation. However, the interest earned on such accounts is enjoyed by clearing members and the exchanges, according to a Sebon official.

Government has not yet regulated the exchanges that have been operating for the last six years. None of the government offices has detailed record of transactions of the exchanges.

Source: The Kathmandu Post