Commodity Futures Market in India

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Started in India in 1875 (Bombay cotton Trade
Association)
Banned after Independence in 1952 for unnecessary

speculation and detrimental to healthy economy.
1960 following drought many farmers defaulted forward

contracts.
Till 1990: Dormant market which resulted in virtual

dismantling of the commodities future markets
Liberalization of Indian economy in 1991 recognised the

role of market and private initiative for the development
of the economy.
Scale of operation
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The year 2003 the real turning point in the policy

framework for commodity market
when the government issued notifications for
withdrawing all prohibitions and opening up forward
trading in all the commodities
2006 Commodity market crossed 1 trillion mark and still

growing.
The current mindset of the people in India is that the

Commodity exchanges are speculative (due to non
delivery) and are not meant for actual users.
Derivative Markets in India
Derivative markets can broadly be classified as
Ë financial derivatives and
Ë commodity derivative market.
Commodity derivatives markets trade contracts for which

the underlying asset is a commodity.
(agricultural commodity or metals like gold, silver, etc.)
Difference: Commodity derivatives & financial derivatives:

1. Due to the bulky nature of the underlying assets,
physical settlement in commodity derivatives creates the
need for warehousing.
2. In the case of commodities, the quality of the asset
underlying a contract can vary largely
Derivative Markets in India contd.
Two important derivatives are futures and options.
Ë Commodity Futures Contracts

Ë Commodity Options contracts
Major market players in commodities market are: -

Ë Hedgers, Speculators, Arbitragers
Ë Producers - Farmers
Ë Consumers - refiners, food processing companies,
jewellers, textile mills, exporters & importers
Ë [ Mandis (for regulation, dispute settlement) etc]

° D FOR FUTUR TRADI° in
commodity

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on account of
large-scale participations of entities associated with
different value chains.
It reflects #

$
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" of
people related to a particular commodity.
It provides
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% ! ! "
&

for all segments of players ranging from producers, traders
and processors to exporters/importers and end-users of a
commodity.
° D FOR FUTUR TRADI° in
commodity
Help in #&
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for the farmers,
thus minimizing the losses to the farmers.
Smart investment choice by providing hedging, trading

and arbitrage opportunities to market players.
Historically, pricing in commodities futures has been less

volatile compared with equity and bonds, thus providing
an efficient portfolio diversification option.
'||'
The commodity should be competitive,
There should be fluctuations in price.
The market for the commodity should be free from

substantial government control.
The commodity should have long shelf life and be

capable of standardisation and gradation.

( )%
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Institutional issues have resulted in very few deliveries
so far.
There are a lot of hassles such as octroi duty, logistics.
If there is a broker in Mumbai and a broker in Kolkata,

transportation costs, octroi duty, logistical problems
prevent trading to take place.
xchanges are used only to hedge price risk on spot

transactions carried out in the local markets.
Multiple restrictions exist on inter-state movement and

warehousing of commodities.

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Ë the price risk
Ëthe quantity risk,
Ë the yield/output risk and
& *
ËInitial Margins
Ë xposure margins
ËMarket to market of positions on a daily basis
ËPosition Limits and Intra day price limits
ËSurveillance
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%
" " &
%

i) °CD (°ational Commodity and Derivative

xchange),
ii) MC (Multi Commodity xchange of India Ltd)
iii) °MC IL (°ational Multi Commodity xchange of
India Ltd.)
--
$" &
&) recognised by
Forward Markets Commission (FMC), the market
regulator.
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List of Commodity Traded in MC

%% i ý i
A
G l & ' s t( r ) ( ( * lB C iD B C lmn E G r G
i l r + , s t - r . il E FGGHr o p lq r r p r q l s t s ( o o ) G r

| % + / c / 0 1 t . il IHJK o V u G r
s ti
ic + / 2r, N ic k H l ý G rc k
+ / tt/ 0 3 - - 4 L GFMNH Ir F M v t il
iz rwc x y z t

ic + / tt / 0 s - - 4 . il L t H H l { | s } ~ t t ( r )
r ti
+ r 1 4 - 5 , l6 . il T iM { ff~ ~ t t
rk s r)
ic
(T
W t G r/ 104 N 1t Z iM c ~r
r
G r/ 1 0 4 0 1 t . il
O ý
7 , 2 , s i, 7 8 , lli O PQRQ
r t r il
9 i0 s - - 4 S Ts Ur
r il
9 i0 s - - 4 . il U r
r c i l T
: 1 s t , r 4 . il V rTW
E r r il
: 1 s t, r4 3 - - 4 X llY Z [ X T s
N t r l G s Y
: 1 s t , r 4 3 - - 4 . il
à
; < = 5 , l6 / l- i0
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; - fi0 - 4 3 / > . il
! tt! " #r" \ ]r^ ] _ ` _
; - fi0 - 4 3 1 0 fl/? - r . il
Y
$ #%#s a b illi
; ic - < r , 0 ; - fi0 - 4 . il
a c d ie
3 , ffl/? - r f g g h (J g g ri )
3 , ffl/? - r . il j gk k gr
3 - s , 6 . il
3 /> : - , l
3 /> @ - , 0
3 / > , @ - , 0 . il
3 1 0 fl/? - r . il
3 1 0 fl/? - r 3 - - 4

MC
I° STM °T LIMIT A°D MARI°
Amount as low as Rs 5,000 as money for margins (5-
10% of the value of contract.) payable upfront to
exchanges through brokers.
It uses SPA° (Standard Portfolio Analysis of Risk)

system which follows a risk-based and portfolio-based
approach. The Initial Margin requirement is
BROK RA A°D TRA°SACTIO° CHAR S

Ranges from 0.10-0.25 % of the contract value
Transaction charges range between Rs 6 and Rs 10
per lakh/per contract. The brokerage cannot exceed the
maximum limit specified by the exchanges.
Settling Commodity Future Contract
Commodity Futures contracts are usually not settled
with physical delivery. The purchase or sale of an
offsetting position can be used to settle an existing
position, allowing the speculator or hedger to realize
profits or losses from the original contract. At this point
the margin balance is returned to the holder along with
any additional gains, or the margin balance plus profit
as a credit toward the holder's loss.
Cash settlement is used for contracts like stock or

index futures that obviously cannot result in delivery.
The purpose of the delivery option is to insure that the
futures price and the cash price of good converge at
the expiration date.
Advantages of Futures Trading
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. the potential for large profits in a short period of time.
The reason that futures trading can be so profitable is the high leverage. To
µown¶ a futures contract an investor only has to put up a small fraction of the
value of the contract (usually around 10-20%) as µmargin¶.
( !) )%%/)

. it is as easy to sell as it is
to buy. By choosing correctly, you can make money whether prices go up or
down. Therefore, trading in the futures markets offers the opportunity to
profit from any potential economic scenario. Regardless of whether we have
inflation or deflation, boom or depression, hurricanes, droughts, famines or
freezes, there is always the potential for profit making opportunities.
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Analysis of opportunity in bullion market with respect to other major
exchanges as been shown below:
(Approx. figs.) MC °YM TOCOM
Contract Size (grams) 1000 3110 1000
Benchmark Market Mumbai °ew York Tokyo
Operational Cost Low High High
Transaction cost 0.01 % 0.08 0.1 % 0.4 %
Channel Trade Transparency High Low Low
Channel Financial Integrity High Low Low
Lead Transaction Time Low High High
Physical Delivery Yes °o °o

(
"
ith the gradual withdrawal of the government from various sectors in the
post-liberalization era, the need has been felt that various operators in the
commodities market be provided with a mechanism to hedge and transfer
their risks. India's obligation under TO to open agriculture sector to world
trade would require futures trade in a wide variety of primary commodities
and their products to enable diverse market functionaries to cope with the
price volatility prevailing in the world markets. overnment subsidy may go
down as a result of TO. The MSP programme will not be sustainable in
such a scenario. The farmer will have to look at ways of being in a position
to trade on commodity exchanges in future. Also, corporates will feel the
pressure to hedge their price risk once the frontiers open up for free trade.
Indian markets have recently thrown open a new avenue for retail investors
and traders to participate: commodity derivatives. For those who want to
diversify their portfolios beyond shares, bonds and real estate, commodities
are the best option.
Options contracts in commodities are being considered and this would
again boost the commodity risk management markets in the country.
Other Advantages
Apart from above following are promising features that makes Indian
commodity future market attractive:
Better Reach in all parts of the country
ider base for speculators from other markets including securities
market
Broad basing of the underlying commodity
Industry diffused in several parts of the country may also directly
participate
Few commodities can be projected viable for an international futures
Contract, with participation from global player
°ovation of all open positions in the market by the exchange
Best management practices, end of day mark to market, online
margining and surveillance, daily pay-in & pay-out are some of the
features to woo the players
Thanks

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| 

 Banned after Independence in 1952 for unnecessary

 1960 following drought many farmers defaulted forward

 Till 1990: Dormant market which resulted in virtual

 Liberalization of Indian economy in 1991 recognised the

 The year 2003 the real turning point in the policy

 2006 Commodity market crossed 1 trillion mark and still

 The current mindset of the people in India is that the

Commodity derivatives markets trade contracts for which

Difference: Commodity derivatives & financial derivatives:

Two important derivatives are futures and options.

Ë Commodity Futures Contracts

Major market players in commodities market are: -

Ë [ Mandis (for regulation, dispute settlement) etc]

 Smart investment choice by providing hedging, trading

 Historically, pricing in commodities futures has been less

 The commodity should be competitive,

 There should be fluctuations in price.

 The market for the commodity should be free from

 The commodity should have long shelf life and be

 There are a lot of hassles such as octroi duty, logistics.

 If there is a broker in Mumbai and a broker in Kolkata,

 xchanges are used only to hedge price risk on spot

 Multiple restrictions exist on inter-state movement and

i) °CD (°ational Commodity and Derivative

List of Commodity Traded in MC

It uses SPA° (Standard Portfolio Analysis of Risk)

BROK RA A°D TRA°SACTIO° CHAR S

 Cash settlement is used for contracts like stock or

 ,   $

2  ,  2  , !2  ,

Contract Size (grams) 1000 3110 1000

Benchmark Market Mumbai °ew York Tokyo

Operational Cost Low High High

Transaction cost 0.01 % 0.08 0.1 % 0.4 %

Channel Trade Transparency High Low Low

Channel Financial Integrity High Low Low

Lead Transaction Time Low High High

Physical Delivery Yes °o °o

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|

Banned after Independence in 1952 for unnecessary

1960 following drought many farmers defaulted forward

Till 1990: Dormant market which resulted in virtual

Liberalization of Indian economy in 1991 recognised the

The year 2003 the real turning point in the policy

2006 Commodity market crossed 1 trillion mark and still

The current mindset of the people in India is that the

Smart investment choice by providing hedging, trading

Historically, pricing in commodities futures has been less

The commodity should be competitive,

There should be fluctuations in price.

The market for the commodity should be free from

The commodity should have long shelf life and be

There are a lot of hassles such as octroi duty, logistics.

If there is a broker in Mumbai and a broker in Kolkata,

xchanges are used only to hedge price risk on spot

Multiple restrictions exist on inter-state movement and

It uses SPA° (Standard Portfolio Analysis of Risk)

Cash settlement is used for contracts like stock or

, $

2 , 2 , !2 ,