COMMODITY MARKET

History of commodity market

Evolution of commodity market
Commodity futures trading have evolved from the need for ensuring
continuous supply of seasonal agricultural crops. In Japan, merchants stored rice
in warehouses for future use. In order to raise cash, warehouse holders sold
recipes against the stored rice. These were known as rice tickets eventually,
such rice tickets became accepted as a kind of general commercial currency.
ules came into being, to standardi!e the trading in rice tickets.
The concept of organi!ed trading in commodities evolved in the
middle of the "#
th
century, in Chicago, $nited %tates. Chicago has emerged as a
ma&or commercial hub with railroad ' telegraph lines connecting it with the rest
of the world, thereby attracting wheat producers from mid(west to sell their
produce to the dealer and distributors. )owever, lack of organi!ed storage
facilities ' the absence of a uniform weighing* grading mechanism often
confined them to the mercy of sealer+s discretion. This led to inherent need to
establish a common meeting place, both for farmers and dealers to transact in
spot grain( to deliver wheat and receive cash in return. This happened in
",-,.
.radually, the farmers /sellers0 and dealers /buyers0 started to make
commitment to e1change the produce for cash in futures. This is how the
contract for futures trading evolved whereby the producers would agree to
sell his produce /wheat0 to the buyer at a future delivery date at an agreed upon
price. In this way the farmer knew in advance about what he would receive for
this produce and the dealer would know about his costs involved. This
arrangement was beneficial to both the producer and the trader.

These contracts became popular very 2uickly and started changing
hands even before the delivery date of the product. If a dealer is not interested in
taking delivery of the produce, he would sell his contract to some one who
needed the same. %imilarly, the farmer who did not intend to deliver his crop
would pass on the responsibility to another. the price of the contract would
depend on the price movement in the wheat market.
1
COMMODITY MARKET
3ith some more modifications, such contracts gradually
transformed into an instrument to protect the parties involved against adverse
factors like une1pected price movements, unfavorable climatic factors etc. for
e14 during bad weather, people having contracts to sell wheat would be
interested to hold more valuable contract due to supply shortages. Conversely, if
there is over supply, the seller+s contract value would decline. This prompted the
entry of traders in the futures market who had no intentions to buy or sell wheat
but would purely speculate on price movements in the market to earn profits.
Trading in futures as a result became a very profitable mode of
activity that encouraged the entry of other commodities in the futures market
thereby creating a platform to set up a body that can regulate and supervise this
contract. Thus, during ",-,, the Chicago board of trade /C56T0 was
established. it was initially formed as a common location known both to the
buyers and sellers negotiate forward contracts. )owever the popularity of the
contracts and the success of C56T in Chicago created interest in the other local
markets catering to specific commodities to establish trade bodies that would
facilitate dealing in futures contract.
In t the early 78
th
century, as communication and transportation
became more advanced, centrali!ed warehouses were built in the principal
market centers to distribute goods more economically. 9gricultural commodities
were the most commonly traded, but it led to the fact that the market can
flourish for any underlying as long as therein an active pool of buyers and
sellers.
2
COMMODITY MARKET
COMMODITY MARKETS IN INDIA
The :orward ;arkets Commission /:;C0 head2uartered at ;umbai, is
the .regulatory authority for Commodity <erivatives ;arkets in India. It is a
statutory body set up in /"#=> under the :orward Contracts /egulation0 9ct,
"#=7. :;C is in turn supervised by the ;inistry of Consumer 9ffairs, :ood and
?ublic <istribution, .ovt. of India.
The 9ct provides that the Commission shall consist of not less than two but
not e1ceeding four members appointed by the Central .overnment out of them
being nominated by the Central .overnment to be the Chairman thereof.
Currently the Commission comprises four members among whom %hri %.
%undareshan, I9%, is the Chairman and <r. @ewal am, lA%, <r. /%mt0
Jayashree .upta, C%%, and %hri. a&eev @umar 9garwal, I%, are the ;embers
of the Commission.
The functions of the Forward Markets
Commission are as follows:
a0 To advise the Central .overnment in respect of the recognition or the
withdrawal of recognition from any association or in respect of any other
matter arising out of the administration of the :orward Contracts
/egulation0 9ct "#=7.
b0 To keep fonward markets under observation and to take such action in
relation to them, as it may consider necessary, in e1ercise of the powers
assigned to it by or under the 9ct.
3
COMMODITY MARKET
c0 To collect and whenever the Commission feels it necessary, to publish
information regarding the trading conditions in respect of goods to which
any of the provisions of the act is made applicable, including information
regarding supply, demand and prices, and to submit to the Central
.overnment, periodical reports on the working of forward markets
relating to such goods4
d0 To make recommendations generally with a view to improving the
organi!ation and working of forward markets4
e0 To undertake the inspection of the accounts and other documents of any
recogni!ed association or registered association or any member of such
association whenever it considers it necessary.
There are three Bational level Commodity A1changes in India. They are
;ulti Commodity e1change of India Ctd., ;umbai, Bational Commodity and
<erivatives A1change /BC<AD0, ;umbai and Bational ;ulti Commodity
A1change /B;CA0, 9hmadabad. There are 7" other EregionalE commodity
e1changes situated in different parts of India.
4
COMMODITY MARKET
INTERNATIONAL COMMODITY EXCHANGES
:utures trading are a direct conse2uence of the problems related to the
maintenance of a year(round supply of commodities * products that are seasonal
as is the case of agricultural produce. Trading on the futures market platform
provides the solution to these problems and opens up new opportunities as well.
The economic benefits of e1change traded futures and options include the
ability to shift and manage the price risk e1posure of the market and tangible
positions. 3ith the liberali!ation in international trade policies, there is a new
need felt in many countries for price discovery and the e1istence of a futures
trading mechanism. This need can be met through commodity e1changes.
9s a result, recent years have witnessed a steep rise in the creation of
commodity e1changes along with a consistent e1pansion of the e1isting ones.
The $nited %tates, Japan, $nited @ingdom, 5ra!il, 9ustralia and %ingapore are
homes to leading commodity futures e1changes in the world.
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COMMODITY MARKET
Word!s Ma"or Commodity E#c$a%&es
The New York Mercantile Exchange (NYME!
The Bew Fork ;ercantile A1change is the worldGs biggest e1change for
trading in physical commodity futures. It is the primary trading forum for
energy products and precious metals. The A1change has been in e1istence for
">7 years and performs trades through two divisions, the BF;AD division,
which deals in energy and platinum and the C6;AD division, which trades in
all the other metals. 9 ma&or contribution of the A1change has been to develop
and launch energy futures and options contract in "#H, to facilitate price
transparency and risk management in this key market. The A1change has
become a significant part of the commercial, civic and cultural life of Bew
Fork. The A1change also clears trades for market participants who wish to
avoid counter(party credit risk by using standardi!ed contracts for Batural .as,
Crude 6il, efined ?roducts and Alectricity.
Commodities tradedI Cight %weet Crude 6il, Batural .as, )eating 6il,
.asoline, 565 .asoline, Alectricity, ?ropane, .old, %ilver, Copper,
9luminum, ?latinum, ?alladium, etc.
6
Lo%do% Meta E#c$a%&e
The Condon ;etal A1change /C;A0 is the worldGs premier non(ferrous
market, with highly li2uid contracts. It is an innovative e1change that has
maintained its traditional strengths in a modern business environment by
remaining close to its core users by ensuring that its contracts continue to meet
the high e1pectations of a demanding industry. It has become highly successful
with a trading turnover value of more than $%J7888 billion per annum and
contributes substantially to the invisible earnings. The A1change was formed in
",HH as a direct conse2uence of the industrial revolution witnessed in 5ritain in
the "#th Century. The primary focus of C;A is in providing a market for
participants from the non(ferrous base metals related industry to safeguard
against risk due to movements in base metal prices and also arrive at a price that
sets the benchmark globally. The e1change trades 7- hours a day through an
inter(office telephone market and also through an electronic trading platform. It
is famous for its open(outcry trading between ring dealing members that takes
place on the market floor. Commodities TradedI 9luminum, Copper, Bickel,
Cead, Tin, Kinc, 9luminum 9lloy, Borth 9merican %pecial 9luminum 9lloy
/B9%99C0, ?olypropylene, Cinear Cow <ensity ?olyethylene, etc.
The C;A metal futures contracts run on a daily basis for a period of three
months, unlike other commodity markets that are primarily based on monthly
prompt dates. The A1change thus combines the convenience of settlement dates
tailored to individual needs with the security of a clearinghouse for its clearing
members. The C;A also offers options contracts based on each of these futures
contracts, together with Traded 9verage ?rice 6ptions contracts /T9?6s0 based
on the monthly average settlement price /;9%?0 for all metals futures
contracts.
The Chicago "oard of Trade
The first commodity e1change established in the world was the Chicago
5oard of Trade /C56T0 during the year ",-, by a group of Chicago merchants
who were keen to establish a central market place for trade. This was situated in
the premises of a flour store during its first four years. ?rior to this, farmers
often found no buyers for the grain they had transported to Chicago. .iven the
high transport costs, they had been left with little choice but to dump the unsold
produce in the nearby lake.
?resently, the Chicago 5oard of Trade is one of the leading e1changes in the
world for trading in futures and options. ;ore than =8 contracts on futures and
options are being offered by C56T currently through open outcry and*or
electronically. C56T is the oldest e1isting commodity e1change in the world
having established in the year ",-,. Initially, C56T dealt only in agricultural
commodities like corn, wheat E soybeans and oats. :utures contracts in C56T
evolved over a period of time to facilitate trading in non(storable agricultural
commodities and non(agricultural products like gold and silver. The first
electronic trading system in C56T was introduced in "##- after more than "=8
years of open auction trading where traders used to meet to buy and sell futures
contracts. Commodities tradedI Corn, %oybeans, %oybean 6il, %oybean meal.
3heat, 6ats, Athanol, ough ice, .old, %ilver, etc.
Cike any other commodity e1change, the primary role of C56T is to provide
transparency and li2uidity in its contracts to its members, clients and market
participants like farmers, corporate, small businessmen, financial service
providers, international trading firms and speculators for price discovery, risk
management and investment.
Tokyo Commodity Exchange (T#C#M!
The Tokyo Commodity A1change /T6C6;0 is the second largest
commodity futures e1change in the world with trade in metals and energy
contracts. It has made rapid advancement in commodity trading globally since
inception 78 years back. 6ne of the biggest reasons for this is the initiative
T6C6; took towards establishing 9sia as the benchmark for price discovery
and risk management in commodities like the ;iddle Aast Crude 6il. T6C6;
recent tie(up with the ;CD to e1plore cooperation and business opportunities is
seen as one of the steps towards providing a platform for futures price discovery
in 9sia for 9sian players in Crude 6il since the demand(supply situation in $.%.
that drives the BF;AD is different from the demand(supply situation in 9sia.
In January 788>, in a ma&or overhaul of its computeri!ed trading system,
T6C6; fortified Its clearing system in June by being the first commodity
e1change in Japan to introduce an in(house clearing system. T6C6; launched
options on gold futures, the first options contract in Japanese market, in ;ay
788-.
Commodities TradedI .asoline, @erosene, Crude 6il, .old, %ilver,
?latinum, ?alladium, 9luminium, ubber, etc.
Chicago Mercantile Exchange (CME!
The Chicago ;ercantile A1change /C;A0 is the largest futures e1change in
the $% and the largest futures clearing house in the world for futures and
options trading. :ormed in ",#, primarily to trade in agricultural commodities,
the C;A introduced the worldGs first financial futures more than >8 years ago.
Today it trades heavily in interest rate futures, stock indices and foreign
e1change futures. Its products often serve as a financial benchmark and witness
the largest open interest in futures contracts compared to any other e1change in
the world. The commodity futures profile of C;A consists of livestock, dairy
and forest products and enables small family farms to large agri(businesses to
manage their price risks. Trading in the C;A can be done either through pit
trading or electronically. Commodities TradedI 5utter, ;ilk, <iammonium
?hosphate, :eeder cattle. :ro!en ?ork bellies. Cean )ogs, live Cattle, Bon(fat
<ry ;ilk, $rea, $rea 9mmonium Bitrate, etc.
$ome Ma%or &nternational Commodity 'erivatives Exchanges
%r.
Bo
Bame and 9ddress Contract Traded
". Chicago ;ercantile
A1change
/C;A0
5utter, ;ilk, <iammonium
?hosphate, :eeder cattle, :ro!en ?ork
bellies, Cean )ogs, Cive Cattle, Bon(fat
<ry ;ilk, $rea, $rea 9mmonium
Bitrate, etc.
7. Bew Fork ;ercantile
A1change
/BF;AD0
Cight %weet Crude 6il, Batural .as,
)eating 6il, .asoline, 565 .asoline,
Alectricity, ?ropane, .old, %ilver,
Copper, 9luminum, ?latinum,
?alladium, etc.
>. Condon International
:inancial :utures and
6ptions A1change
/CI::A0
Cocoa, obusta Coffee, Corn, ?otato,
apeseed, 3hite %ugar, :eed 3heat,
;illing 3heat, etc.
-. Chicago 5oard of Trade
/C56T0
Corn, %oybeans, %oybean 6il,
%oybean meal. 3heat, 6ats, Athanol,
ough ice, .old, %ilver, etc.
=. Condon ;etal A1change
/C;A0
9luminum, Copper, Bickel, Cead,
Tin, Kinc, 9luminum 9lloy, Borth
9merican %pecial 9luminum 9lloy
/B9%99C0, ?olypropylene, Cinear Cow
<ensity ?olyethylene, etc.
L. Bew Fork 5oard of Trade
/BF56T0
Cocoa, Coffee, Cotton, Athanol,
%ugar, :ro!en Concentrated
6range Juice, ?ulp etc.
H. Tokyo Commodity
A1change /T6C6;0
.asoline, @erosene, Crude 6il,
.old, %ilver, ?latinum, ?alladium,
9luminum, ubber, etc.
,. %ydney :utures A1change
/%:A0
.reasy 3ool, :ine 3ool, 5road
3ool, Cattle, etc.
#. <ubai .old and
Commodities A1change
/<.CD0
.old, %ilver, :uel 6il, %teel, :reight
ates, Cotton, etc.
"8. 5ursa ;alaysia 5erhad efined 5leached <eodori!ed
?almolein, Crude ?alm 6il, ?alm @ernel
6il, etc.
"". 3innipeg Commodity
A1change
Canola, feed 3heat, 3estern 5arley,
etc.
"7. <alian Commodity
A1change
Corn, %oybean, %oybean ;eal, %oy
6il, etc.
">. Kheng Khou Commodity
A1change /CKCA0
3heat, Cotton, %ugar, etc.
"-. Central Japan
Commodity A1change
.asoline, @erosene, .as 6il, Aggs,
:errous %crap, etc.
"=. %hanghai :utures
A1change /%):A0
Copper, 9luminum, Batural ubber,
?lywood ' Cong .rained ice
"L. 5ra!ilian ;ercantile and
:utures A1change
9nhydrous :uel 9lcohol, 9rabica
Coffee, obusta(Conillon Coffee, Corn,
Cotton, :eeder cattle. Cive Cattle,
%oybean, Crystal %ugar, .old, etc.
"H. @ansai Commodity
A1change
%oybean, aw %ugar, aw %ilk,
%hrimp /fro!en0. Coffee, Corn, 9!uki
beans /ed0, etc.
",. 6saka ;ercantile
A1change
/ibbed %moked %heets0 %%>,
/Technically %pecified ubber0 T%78,
Bickel, 9luminum, ubber Inde1
"#. %ingapore Commodity
A1change
Coffee, ubber /%%", 7, >0
78. Tokyo .rain A1change
/T.A0
Corn, %oybean ;eal, %oybeans, ed
5eans, Coffee, %ugar, aw %ilk,
Megetables, etc.
7". Intercontinental
A1change /ICA0
5rent Crude 6il, Coal, Alectricity,
Amissions, .as 6il, )eating 6il,
.asoline /5650, Batural .as, 3TI
and all the futures contracts of its
subsidiary ( The international ?etroleum
A1change /I?A0
COMMODITY '(T(RES IN INDIA AND ITS REG(LATIONS
Evolution of Commodity futures in &ndia
The history of futures trading in commodities in India is almost as old as that
of $%. It has, however, passed through a turbulent past. IndiaGs first organi!ed
futures market was the 5ombay Cotton Trade 9ssociation Ctd., which was set
up in ",H=. :utures trading in oilseeds started with the setting up of .u&arati
Myapari ;andali in "#88. .old futures trading began in ;umbai in "#78.
<uring the first half of the 78th century, there were several commodity futures
e1changes trading in &ute, pepper, turmeric, potatoes, sugar, etc.
)owever, during the "#-8s to "#L8s, trading in forwards and futures became
difficult as a result of price controls. ;a&or policy decisions taken after
Independence, mainly because of the then prevailing scarcity situation,
adversely affected the development of futures and forwards markets in the
country. In "#=7, the :orward Contract egulation 9ct was passed which
controls all transferable forward and futures contracts. This again put restriction
on futures trading. <uring the "#L8s and H8s, the .overnment of India
suspended trading in several commodities like cotton, &ute, edible oilseeds, etc.
as the government felt that these markets were increasing the prices of
commodities.
The governmentGs twin policies of offering to buy agricultural produce at a
Eminimum support priceE /;%?0 and gaining a monopoly in
storage*transportation*distribution of agricultural produce along with a ban on
futures and options trading were the ma&or factors that weakened the agro(
commodity markets in the country.
The government appointed two committees to study this sector i.e. the
<antwala Committee in "#LL, and the @husro Committee in "#,8, which
recommended the reintroduction of futures trading in ma&or commodities. The
government finally brought back forward trading in agricultural commodities In
the early "#,8Gs. 5ut, it was done for commodities that did not have a very
significant role in the economy ( such as castor seed and castor oil, &aggery, &ute,
pepper, potato and turmeric. %everal locali!ed e1changes started trading in the
same commodity, each of them with a local broker*wholesale(merchandiser.
5ut, even after a decade, none of the markets achieved the levels of li2uidity
that e1isted prior to the ban on commodity futures trading.
6nce futures trading became operational, in spite of liberali!ation, it has
been difficult for trade to be transferred from illegal black markets, which have
!ero ta1 liability and no reporting re2uirements to the legal authorities as
compared to the regulated markets, where ta1es ' reporting are part of the legal
procedures. :urther, responding to the need for commodity futures in India, in
"##>, a committee was set(up for assessing the scope for forwards and futures
trading in commodities and for recommending steps to be taken for
development of futures trading in India. The Committee so instituted was
known as the @abra Committee and much of its recommendations have been
implemented.
3hereas, with the current initiatives of the regulators, these markets have
shown revolutionary changes in the last few years, with the Bational(level multi
commodity e1changes in India showing tremendous potential to tap the
commodity derivatives market.
)efore t$e ad*e%t of %atio%+ide, o%i%e, m-ti
commodity e#c$a%&es, t$e o+ *o-me i% t$e
re&io%ai.ed e#c$a%&es i% I%dia +ere attri/-ted to t$e
foo+i%& reaso%s0
". A1cessive government intervention in the form of subsidies, price control,
compulsory purchasing and rationing in the agricultural markets. This led
to inefficient functioning of the markets ' lower yield in terms of income
to the farmers.
7. Influential ' large commodity producers * traders acting as members *
brokers of commodity e1changes ' manipulation in the prices of
commodities.
>. Imperfect mechanisms ' lack of standardi!ation for physical delivery,
settlement, documentation and warehousing arrangements.
-. 9bsence of organi!ed interconnected spot markets, which resulted in
flawed price discovery mechanisms and no means to arbitrage to achieve
price efficiency in geographically separated markets.
This resulted in fragmenting the volumes across the local e1changes.
The following suggestions were made to im(rove the commodities
futures market
". 9llow commodity futures e1changes to be run by independent
professionals, rather than by brokers.
7. 9llow trading of short(term futures contracts in commodities, which has
an e1isting cash market to enable hedgers to protect themselves against
adverse price fluctuations.
>. To change the working of the :orward ;arkets Commission from micro
management to macro management
-. Introduce commodity futures contracts with different grades for trading.
=. Aliminate price manipulation ' circular trading.
L. $se of latest technology ' systems that have been developed for the
financial derivative markets
H. Introduce options contracts to augment futures.
Currently the multi commodity e1changes in India, which started their
operations in 788>, have done well in terms of nation wide reach, online trading
and efficient and effective risk management and thereby generating appreciable
volumes in the first year of their operations.
3ith Commodity Acosystem much bigger than the stock markets, we have
witnessed how fast commodity futures have picked up compared to the stock
futures when they were introduced. The permission granted to the stock broking
community to participate in the commodity markets has further increased the
scope of creating more li2uid and vibrant contracts. :urther liberali!ation, de(
regulation of markets, 3T6 implications, and technological and informational
changes are going to add more fuel to the markets in the coming years.
9 preview of the Committee eport would help understand the markets that
e1isted then and what needs to be done in developing these markets. ;ost of the
recommendations have already been implemented.
Re&-atory 'rame+ork
Forward Contracts ()egulation! *ct+ ,-./
The Constitution of India brought the sub&ect of stock e1changes and futures
;9@AT in $nion list. 9s a result, the responsibility for regulation of
commodity futures markets devolved on .ovt of India. The Commodity
A1changes in India are governed and regulated under the :orward Contracts
/egulation0 9ct, "#=7 and ules framed there under.
It provides for a > tier regulatory system, namely4
an association recogni!ed by the .overnment of India on
recommendation of :orward ;arkets Commission /:;C0
the :orward ;arkets Commission /it was set up in %ept "#=>0 and
the Central .overnment
Forward Markets Commission
The :orward ;arkets Commission, under the ;inistry of Consumer 9ffairs,
:ood and ?ublic <istribution, .overnment of India is the regulating authority
for all Commodity :utures A1changes in India.
Functions of the Forward Markets Commission 0 $tatutory
a0 To advise the Central .overnment in respect of the recognition of or the
withdrawal of recognition from any association or in respect of any other
matter arising out of the administration of this 9ct4
b0 To keep forward markets under observation and to take such action in
relation to them as it ma0 consider necessary, in e1ercise of the powers
assigned to it by or under this 9ct4
c0 To collect and whenever the Commission thinks it necessary, publish
information regarding the trading conditions in respect of goods to which
any of the provisions of this 9ct is made applicable, including
information regarding supply, demand and prices and to submit to the
Central .overnment periodical reports on the operation of this 9ct and on
the working of forward marketN relating to such goods4
d0 To make recommendations generally with a view to improving the
organi!ation and working o forward markets4
e0 To undertake the inspection of accounts and other documents of any
recogni!ed association o registered association or any member of such
association whenever it considers it necessary4 and
f0 To perform such other duties and e1ercise such other powers as may be
assigned to the Commission by or under this 9ct, or as may be
prescribed. ?rincipal :eatures of the :C/09ct "#=7 are as followsI
The act enables the regulating authority to take such action as may be
considered desirable respect of specified commodities and specified
area without automatically applying the entire provisions of the act to
all commodities in all areas in sec "=
The act prohibits option trading in all commodities
The act ordinarily e1empted non transferable specific delivery contracts
from regulationI sec",O"0
The act ordinarily covers transferable specific delivery contract as well
as hedge contracts
The act empowers the .ovt to prohibit forward contracts in particular
commodity by notification sec "H
The act provides for grant of recognition to associations concerned with
forward tradioI sec L
The act provides that the regulation of forward markets should
ordinarily take place thought governing bodies of recogni!ed
associations sec ""
The act empowers the Central .ovt to appoint not more than four
members on k governing bodies of recogni!ed associations sec LO7b0
It provides for a machinery for the supervision and regulation of the
governing bodies from point of public interest this machinery is the
forward markets commission
)egulatory measures evolved 1y the Commission2
a0 Cimit on open positions of an individual operator to prevent overtrading.
b0 Cimit on price fluctuations to prevent abrupt upswing or downswing in
prices.
c0 %pecial margin deposits to be collected on outstanding purchases or sales
to curb e1cessive speculative activity through financial restraints.
d0 ;inimum * ma1imum prices to be prescribed to prevent futures prices
from falling below0 levels that are not remunerative and from rising
above the levels not warranted by genuine supply and demand factors.
e0 <uring shortages, e1treme steps like skipping trading in certain deliveries
of the contract, closing the markets for a specified period and even
closing out the contract to overcome emergency situations are taken.
#rgani3ational $tructures of Forward Market Commission
The 6rgani!ational %tructures of :orward ;arket Commission is classified
as followsI
Commodity <ivision
Anforcement <ivision
9dministrative <ivision
4ro(osed amendments to the FC()! *ct+ ,-./
The government has proposed certain amendments to the :orward Contracts
/egulation0 9ct, "#=7. The amendments include setting up of a separate
Clearing Corporation, registration of intermediaries and enhancement of penal
provisions in the :C/0 9ct. A1empting :;C from payment of ta1 on wealth,
income and profits or gains4 conferring powers upon the Centre to regulate
forward contracts and options in goods.
The Cabinet cleared the decks for the :orward ;arket Commission /:;C0
to become an independent regulator for the commodities futures market. 9 5ill
will be introduced in ?arliament during the ne1t parliament session to amend
the :orward Contracts /egulations0 9ct of "#=7. 6nce the 5ill is passed, the
:;C would be able to generate its own resources and have the powers to
recogni!e or derecogni!e futures commodities e1changes. The amendments will
allow trading in options in goods and registration of intermediaries with the
:;C and redefine commodities to include energy, weather and other e1otic
products and also push forth demutuali!ation of regional e1changes.
3ith the :;C having recommended to thegovernmentto allow banks,
:oreign Institutional Investors/:II0 and ;utual :unds /;:0 to participate in
commodity futures market, it is e1pected that the daily trade volume to go up to
s 7=,888(>8,888 crore in the coming years. 6ption trading is all set to play a
dynamic role in commodities futures trade, following the e1pected change in
regulatory framework.
5hy do we re6uire National level Multi Commodity Futures
Exchanges in &ndia7
To develop active trading interest across commodities, it is necessary to have
a common platform of commodity futures e1change where demand and supply
forces can act together in bringing out the best price for any commodity. The
main economic purpose of a futures commodity e1change as a marketplace is to
enable commodity producers * processors to sell their produce in advance to
protect them against possible price fall for their commodities and allow
consumers, traders, processors to buy in advance to protect against possible
price increase. In this way they are able to EhedgeE their price risk, by locking a
price, which they will receive, and which they will pay respectively.
Commodities futures trading is a global phenomenon and offers tremendous
potential to market participants for both profit taking on small price corrections
as well as to hedgers looking at managing price risk on account of price
fluctuations.
In India, futures trading is now allowed in more than "88 commodities.
;ost of the allowable commodities are traded through various e1changes in
India. Indian economy is directly and indirectly dependent on agricultural
produce. The agricultural commodity market already has ma&or share and with
the availability of futures trading on national(level, commodity futures
e1changes will provide more li2uidity, price discovery and better risk
management strategies. Bational level commodity e1changes will also
invite new streams of investors for new trading and business opportunities for
diversification. 3ith the .overnment control e1pected to gradually come to
anend, all commodity prices will be market determined. It necessitates national
level commodity futures e1changes to provide price discover better investment
opportunities and prudent risk management practices.
Three nationwide electronic e1changes in India and 7" recogni!ed regional
or small commodity e1changes in India had an estimated total combined
turnover of s 7".>- Cakh crore for the year 788= ( 8L. This translates into a
>H>P growth over the previous financial year.
In developed markets, futures trading are conservatively estimated at "8
times the si!e of cash market in commodities. If we consider the fact that in the
$%, where futures trading are almost 78 times that of the cash market
production, it would only be fair to suggest that our futures market 3ould be a
very large and deep, easily many times more than that of the securities market
itself.
Le&a 'rame+ork
Commodity futures contracts and the commodity e1changes organising
Trading in such contracts are regulated by the .overnment of India
$nder the :orward Contracts /egulation0 9ct, "#=7, and the rules
:ormed there under. The nodal agency for such regulations is the
:orward ;arkets Commission /:;C0, which functions under the aegis
6f ;inistry of Consumer 9ffairs, :ood ' ?ublic <istribution of the
Central .overnment.
9ccording to rough estimates, the unorganised commodity markets have
an annual turnover in e1cess of s "7 lakh crore. .iven the convenience
and transparency in online trading, commodity markets has potential to
grow to annual turnover of s -=(=8 lakh Crore /assuming a future
Trading multiple of about - times the physical market0, which is about
7 to > times the si!e of e2uity markets in India. Aven globally, commodity
;arkets are much bigger than e2uity markets. :or instance, annual
Trading of gold on Bew Fork ;ercantile A1change /Byme10 alone is
3orth over J >88 billion.
5hy Commodity futures market 7
$nlike the physical market, futures markets trades in commodity are
largely used as risk management /hedging0 mechanism on either
physical commodity itself or open positions in commodity stocks. :or
instance, a &eweler can hedge his inventory against perceived short(term
downturn in gold prices by going short in the future markets.
In addition to this, speculators and arbitragers participate to take benefit
from changes in prices or price differential between two commodity
e1changes and are not interested in taking physical delivery. .lobally
also Commodity future contracts are normally offset before the e1piry and
therefore do not result in physical movement of physical commodity.
Commodity E#c$a%&es i% I%dia
National 8evel Multi Commodity Exchanges
%r.
Bo
Bame and
9ddress
Commodities
". ;ulti Commodity
A1change of India
Ctd.,
;umbai
.old, %ilver, 9luminum, Copper ,Bickel,
%ponge Iron, %teel :lat, %teel Cong /5havnagar0,
Tin, Castor 6il, Castor %eeds Castor %eeds
/<isa0, Cottonseed, Crude ?alm 6il, .roundnut
6il, @apasia @halli /Cottonseed 6ilcake0,
;ustard %eed /)apur0, ;ustard seed /Jaipur0,
;ustard * apeseed 6il, ;ustard %eed /%irsa0,
5< ?almolein, efined %oy 6il, %esame seed,
%oymeal, %oy %eeds, .hana, ;asur, Tur, $rad,
Fellow peas, ice, 5asmati ice, 3heat, ;ai!e,
%arbati ice, 5lack pepper, ed Chilli, Jeera,
Turmeric, Cashew @ernel, ubben @apas,
Cotton long staple, medium staple, short staple0.
.uar seed, .uargum, .ur, ;entha 6il, %ugar,
)igh <ensity ?olyethylene /)6?A0,
?olypropylene /??0, 5rent Crude 6il, Crude 6il,
:urnace 6il., Batural .as, etc.
7. Bational Cashew, Castor %eed, .hana, Chili, Coffee (
Commodity '
<erivatives
A1change Ctd.,
;umbai
9rabica, Coffee (obusta, Common aw ice,
Common ?arboiled ice ,Crude ?alm 6il,
Cotton %eed 6ilcake, A1peller ;ustard 6il,
.rade 9 ?arboiled ice, .rade 9 aw ice,
.roundnut /in shell0. .roundnut A1peller 6il,
.uar gum, .uar %eeds, .ur, Jeera, Jute sacking
bags Cemon Tur, Indian ?arboiled ice, Indian
aw ice, Indian 7, mm Cotton, Indian >" mm
Cotton, ;aharashtra Cai Tur, ;asoor .rain
5old, ;edium %taple Cotton , ;entha 6il,
;ulberry .reen Cocoons, ;ulberry aw %ilk,
;ustard %eed, ?epper, aw Jute, apeseed(
;ustard %eed 6ilcake, 5< ?almolein, efined
%oy 6il, ubber, %esame %eeds, %oyabean,
%ugar, Fellow %oybean ;eal, Turmeric, $rad,
M(H#H @apas, 3heat, Fellow ?eas, Fellow ed
;ai!e Alectrolytic Copper Cathode, ;ild %teel
Ingots, %ponge Iron, .old, %ilver, 5rent Crude
6il, :urnace 6il, etc.
>. Bational ;ulti
Commodity
A1change of India
Cimited. 9hmedabad
.ur, 5< ?amolein, .roundnut 6il,
%unflower 6il, apeseed* ;ustard seed,
apeseed*;ustard seed 6il, apeseed* ;ustard
seed oilcake. %oy bean. %oy 6il, Copra,
Cottonseed, %afflower, .roundnut, %ugar,
%acking, Coconut oil, Castor seed. Castor(oil,
.roundnut oil cake, Cottonseed oil, %esamum,
%esamum oil, %esamum 6ilcake, %afflower
6ilcake, ice 5ran 6il, %afflower 6il,
%unflower 6ilcake, %unflower %eed, ?epper,
Crude ?alm 6il, .uar seed. Castor 6ilcake,
Cottonseed ce 6ilcake, 9luminum Ingots,
Bickel, Manaspati, %oybean 6ilcake, ubber,
Copper, Kinc, Cead, Tin, Cinseed, Cinseed 6il,
Cinseed 6ilcake, Coconut 6ilcake, .ram, .old,
%ilver, ice, 3heat, Cardamom, @ilo oe .old,
;asoor, $rad, Tur, etc.
)egional Exchanges
Sr. Name and Address Commodities
" 5hatinda 6m ' 6il
A1change Ctd., 5hatinda.
.ur
7 The 5ombay Commodity
A1change Ctd., ;umbai
.roundnut 6il, %unflower
6il, Cottonseed %afflower,
.roundnut, Castor seed, Castor see
Cottonseed oil, %esamum 6il,
%esamum 6ilcake %afflower 6ilcake,
ice 5ran, ice 5ran 6il, ice 5ran
> The a&kot %eeds oil '
5ullion ;erchantsE 9ssociation
.roundnut 6il, Castor seed
- The ;eerut 9gro
Commodities A1change Co.
.ur
= The %pices and 6ilseeds Turmeric
L 9hmedabad Commodity
A1change Ctd., 9hmedabad
Cottonseed, Castor seed
H Mi&ay 5eopar Chamber Ctd.,
;u!affarnagar
.ur, ;ustard %eed
, India ?epper ' %pice Trade
9ssociation.
@ochi
?epper <omestic(;. ", ?epper
<omestic(=88g* ", 5lack ?epper
IntGl(;C% 9%T9, 5lack ?epper
IntGl(M5 9%T9, 5lack pepper IntGl :9Q,
# a&dhani 6ils and 6ilseeds .ur, apeseed*;ustard seed
"8 Bational 5oard of Trade
/B56T0, Indore
apeseed * ;ustard seed, rapeseed *
;ustard seed oil apeseed * ;ustard
seed oilcake, soy bean, soy meal soy oil,
crude palm oil.
"" The Chamber of Commerce, .ur, apeseed * ;ustard seed
"7 The Aast India Cotton
9ssociation, ;umbai /AIC90
Indian Cotton
"> The Central India
Commercial A1change Ctd.,
.ur, apeseed * ;ustard seed
"- The Aast India Jute '
)essian A1change Ctd.,
)essian sacking
"= :irst Commodity A1change Copra, Coconut oil, copra cake
"L 5ikaner Commodity
A1change Ctd, 5ikaner
apeseed * ;ustard seed,
apeseed*;ustard seed oil
"H The Coffee :utures
A1change India Ctd. /C6:C0,
Coffee ( ?lantation 9, Coffee (
obusta Cherry 95, atf Coffee
", A(%ugar(lndia Ctd. %ugar .rade ( ;, %ugar .rade ( %
"# %urendranagar Cotton 6il
and 6ilseeds 9ssoc. Ctd.,
@apas
78 )aryana Commodities Ctd.,
)issar
apeseed, ;ustard seed, apeseed *
;ustard seed oil
7" A(Commodities Ctd. and
5ombay 5ullion 9ssociation
COMMODITY '(T(RES
Meaning and o1%ectives of commodity futures
9 commodity futures contract is an agreement between two parties to buy or
sell a specified and standardi!ed 2uantity and 2uality of a commodity at a
certain time in future at a price agreed upon at the time of entering into the
contract on the commodity futures e1change.
The need for a futures market arises mainly due to the hedging function that
it can perform. Commodity markets, like any other financial instrument, involve
risks associated with fre2uent price volatility. The loss due to price volatility can
be attributed to the following two reasonsI
Consumer ?referenceI In the short( term, their influence on price volatility is
small since it is a slow process permitting manufacturers, dealers ' wholesalers
to ad&ust their inventory in advance
Changes in %upplyI They are abrupt ' unpredictable bringing about wild
fluctuations in prices. This can be especially noticed in agricultural commodities
where the weather plays a ma&or role in affecting the fortunes of people
involved in this industry. The futures market has evolved to neutrali!e such risks
through a mechanism4 namely hedging.
The o1%ectives of commodity futures are as follows:
)edging with the ob&ective of transferring risk related to the possession
of physical assets through any adverse movements in price.
Ci2uidity and ?rice discovery to ensure base minimum volume in trading
of a commodity through market information and demand(supply factors
that facilitates a regular and authentic price discovery mechanism.
;aintaining buffer stock and better allocation of resources as it augments
reduction in inventory re2uirement and thus the e1posure to risks related
with price fluctuation declines. esources can thus be diversified for
investments
?rice stabili!ation along with balancing demand and supply position.
:utures trading leads to predictability in assessing the domestic prices,
which maintains stability, thus safeguarding against any short(term
adverse price movements. Ci2uidity in the contracts of the commodities
traded also ensures in maintaining the e2uilibrium between demand and
supply.
:le1ibility, certainty and transparency in purchasing commodities
facilitate bank financing. ?redictability in the prices of commodity would
lead to stability, which in turn would eliminate the risks associated with
running the business of trading commodities. This would make funding
easier and less stringent for banks to commodity market players.
In commodity futures, it is necessary to distinguish between investment
commodities and consumption commodities. 9n investment commodity is
generally held for investment purposes whereas consumption commodities are
held mainly for consumption purposes. .old and %ilver can be classified as
investment commodities whereas oil and steel can be classified as consumption
commodities.
4artici(ants in Commodity derivatives
9edgers
:utures contracts have been used as financial offsets to cash market risk for
more than a century. futures to reduce or limit the price risk of the physical
asset. )edging is an insurance used to avoid reduce price risks associated with
any kind of futures transaction.
Commodity futures markets provide insurance opportunities to commercials,
merchant producers and processors, against the risk of price fluctuation. In the
case of a trader, an adverse price change brought about by either supply or
demand change, affects the total value of his commitment Carger the value of
his inventory, larger the risk to which he is e1posed. The futures market
provides4 mechanism for the trader to lower the inventory risk and his
commitments in the cash market /where actual physical delivery of the
commodity must eventually be made0 through hedging. )edging allow a market
participant to lock in prices and margins in advance and reduce the potential for
unanticipated loss or competitive disadvantage. 9 hedge involves establishing a
position in the futures market this is e2ual and opposite to a position in the
physical market. The principle behind establishing e2ual an opposite positions
in the cash and futures markets is that a loss in one market should be offset b a
gain in the other market. )edging works because cash prices and futures prices
tend to move tandem, converging as the futures contract reaches e1piration.
The degree of effectiveness of a hedge Is determined by the percentage of
the actual gain or loI incurred in a futures transaction. Though most hedges
reduce risks related to price variations, they not eliminate them altogether.
E;arginE for futures contracts Is usually between =P and "8P of the
contract value and is put up if good faith, indicating the buyer or sellerGs
willingness to pay or deliver the entire amount If the contract is held until
delivery. 5ecause margin re2uirements are so low, it is possible to hedge small
or larges 2uantities of commodities. In fact, the low margins re2uired for trading
in futures contract provides high EleverageE for traders. This is because4 the
traders can take large e1posures even by investin marginal /small0 amount of
deposit with the e1change. :or e.g., on "=th ;ay 788L, if a trader wants t/ take
a long position in 9ugust .old futures contract at the prevailing futures price of
s. "8,888 per gm, then he would be re2uired to deposit the margin amount /-P
or s. -8,8880 with the e1change This enables him to obtain a leverage of up to
7= times of his margin deposit, since his total e1posure in terms of the contract
value is s. "8,88,888.
$(eculators
3hen supplies of a commodity are greater than the present demand or need,
prices tend to decline, If supplies appear to fall short of demand, prices trend
upward. Astimating market supply and demand conditions are the challenges
faced by market participants. It is generally accepted that speculators are
interested in making fast money by anticipating future price movements.
Commodity futures allow speculators to create high leveraged positions. 9
speculator accepts the risk that hedgers seek to avoid, giving the market the
li2uidity re2uired to service hedge participants effectively by providing the
market with the necessary bids and offers for a continuous flow of transactions.
%peculation is the opposite of hedging. 9 speculator holds no offsetting cash
market position and deliberately incurs price risk In order to benefit from price
movements.
9 speculator is an additional buyer of commodities whenever it seems that
market prices are lower than they should be. Consumers consider this to be
against their best interest. Conversely, when it appears that prices are too high, a
speculator becomes an active seller.
Individual speculators tend to trade a smaller number of contracts than
hedgers and hold market positions for a shorter time, so several of them may be
needed to offset one large hedge order. The ma1imum number of contracts that
can be held by any one speculator is limited by e1change rules.
The small amount of capital needed makes speculating in futures contracts
very attractive. If the total value of the contract had to be paid, the rate of return
on most commodities would be e1tremely small. The small margin provides
speculators with the necessary leverage to generate a substantial rate of return.
6n the other side it also generates substantial risk
*r1itragers
9rbitragers are interested in making purchases and sales in different markets
at the same time to profit from price discrepancy between the two markets. %o
arbitragers are interested in locking in a minimum profit by simultaneously
entering into transactions intwoor more markets. 9narbitrager knows the
minimum profit potential at the time of entering into transactions. 9rbitragers
lock in profits when they spot cash and carry arbitrage opportunity or reverse
cash and carry arbitrage opportunity.
Traders who continually watch the markets can see inconsistencies in pricing
and can make relatively low(risk profits by arbitraging those inconsistencies. In
todayGs financial markets, most arbitrage opportunities occur either between
regions, delivery periods, types of instruments /such as options to futures0 or
across a combination of these conditions. In addition to providing a low(risk
benefit to trading companies, arbitrage helps the market in two waysI It
provides pressure on prices to move to rational or normal levels and maintains
li2uidity in the markets.
Commodity as a% Asset Cass
R%ecular 5ull market in Commodities S globally
R3orld .<? .rowth <rivers S 5 I C and other 9sian and %9 economies
R9frican Continent yet to integrate with 3orld markets
RCommodities I )edge against
RCurrency isk
R?olitical isk
R:inancial ;arkets isk
R?romoter*;anagement isk
R6pportunitiesI Time spreads, location spreads, 5adla possible, ratio
spread
Commodity markets
R A2uity markets fluctuate on local factors.
R In the short run particular shares can be manipulated by local players.
R ;uch higher Misibility of price direction in commodities as an asset class
compared to e2uity %tocks.
R Common man :amiliar with Commodities
R Indian markets are a part of .lobal markets in commodities
R Indian markets are not part of global e2uity markets
;arket ;oving :actors
:actors affecting commodity ?ricesI
R ;ost Important factor I <emand ' %upply
R 3eather and Climatic Conditions.
R ?roducer * miner hedging interest
R Total production ' e1pected consumption around the world
R The Aconomic and ?olitical ?olicies like S $% <ollar, Interest rates,
inflation etc
M(LTI COMMODITY EXCHANGE O' INDIA LTD1
*1out MC
;ulti Commodity A1change of India Cimited /;CD0 is a Enew orderE
e1change with permanent recognition from the .overnment of India for
setting up a nationwide, online /electronic multi(commodity marketplace,
offering Eunparalleled efficienciesE, Eunlimited growthG and opportunitiesE to
market participants. ;CD, a nationwide multi(commodity e1change, is an
indeper and demutuali!ed e1change since inception. ?romoted by :inancial
Technologies /India0 Cimited, has introduced a state(of(the(art, online digital
e1change for commodities trading in the country. Ii with its strong belief of
setting up a truly independent and a neutral platform, ;CD is committed
pursuit of broad basing its ownership and has accordingly Initiated several steps
to make the e1ch4 ownership pattern broader, representative and inclusive. 9t
the time of writing this reference mati efforts are being made to go for an Initial
?ublic 6ffering /I?60 to further make the organi!ation r dynamic. %ubse2uent
to this, the e1change would be accountable not only to :;C but also %A5I.
In its endeavor towards establishing India as a ma&or hub for global trading
in commodities, has taken up the initiative by entering into tie(ups with ma&or
international e1changes and commodity trading centers.
In a significant development that would have widespread ramifications
across the entire commodity trading circles, ;CD, in the first week of
Bovember, 788-, signed a ;emorandum $nderstanding/;6$0with the Tokyo
Commodity A1change/T6C6;0,which is one of the largest commodity futures
e1change in the world, very active in metals and energy futures contracts. The
tie(up would hT the two e1changes in information sharing, market development
and monitoring, surveillance method market operations, trading practices and
regulations in the commodities futures markets. This is theU authentic step in
bringing global recognition to the Indian commodity markets and raises
standard of commodity trading to globally acceptable levels. It would also open
up opportunities for Indian producers and consumers to get the best prices for
their products and consumables.
;CD has also forged another partnership with a ma&or international
conglomerate, the <ubai ;etals and Commodity Center /<;CC0 in Bovember
788-, to set up the <ubai .old and Commodity A1change /<.CD0, which has
become operational from 7"st Bovember 788=. The e1change, situated in the
free trade !one of <ubai, offers a transparent trading environment for dollar
denominated .old futures contracts. <.CD is also on the anvil of launching
currency futures contracts. <ubai has firmly established itself as the gateway of
international gold market to India. The setting up of this e1change would fill a
very critical gap for the International trading community since business from
the .ulf is currently routed to Bew Fork, Condon and Tokyo.
In yet another initiative taken by ;CD to reduce the adverse impact of
volatility in freight rates, it has entered into a strategic alliance with the 5altic
A1change, Condon, to introduce freight futures contracts in India for the first
time. The move will have a significant impact on the Indian shipping industry as
well as commodity traders, e1porters and importers since the increasing cost of
freight is increasingly impacting the transportation of cargo. This will facilitate
the establishment of a very vibrant freight derivatives market in %outh(Aast 9sia
for freight risk management of trade done outside the region.
In 6ctober 788=, ;CD and Condon ;etal A1change /C;A0 announced the
signing of a licensing agreement that will allow the ;CD to launch futures
contracts in non(ferrous metals using C;A prices as the basis of settlement.
;CD has also signed a ;emorandum of $nderstanding /;o$0 to e1plore areas
of cooperation and business opportunities with the goal of assisting and
benefiting the underlying producers, end(users and investors in their commonly
traded products by ma1imi!ing the application of International best practices for
price risk management and e1change operations that could mutually benefit the
e1changes.
:ey $hareholders of MC
:inancial Technologies /India0 Ctd.
%tate 5ank of India
Bational %tock A1change of India Ctd. /B%A0
Bational 5ank for 9griculture and ural <evelopment /B959<0
)<:C 5ank
:idelity International
5ank of India
$nion 5ank of India
5ank of 5aroda
%tate 5ank of Indore
%tate 5ank of )yderabad
%tate 5ank of %aurashtra
%5I Cife Insurance Co. Ctd.
Canara 5ank
;CD is well poised to emerge as the EA1change of ChoiceE for the
commodity futures trading community in the country. ;CD has formulated
strategic alliances with leading commodity trade associations in India, namelyI
5ombay 5ullion 9ssociation /5590
5ombay ;etal A1change /5;A0
%olvent A1tractorsG 9ssociation of India /%A90
?ulses Importers 9ssociation /?I90
MC has a strongly esta1lished growth (ath with its aim to o;er:
Ci2uidity ( Introduce new Commodities*;embers*;easures
A1pansion ( Anroll Institutional ' other classes of ;embers
Ceadership (To be a Commodity A1change of Choice
Information ( <isseminate trade ' commodity information
Technology ( Continue technological leadership for cost effective
e1pansion
Trade friendliness ( 3ork with trade ' industry for growth
.lobali!ation ( ;arket IndiaGs commodity sector globally
@nowledge ( Create ' %hare(pool of commodity knowledge
Training ( Industry ' ?rofessionals on Commodity ;arkets, 6perations,
isk ;an
Trading strategies such as hedging underlying e1posures using
commodity futures contraG
Converge ( ;arkets, ?articipants ' Commodities
9s of January 788L, ;CD has already appointed more than "=88 members
with over #88C 3ork %tations /T3%0.
"usiness #(erations
;CD is conducting trading in derivatives contracts in various commodities
permitted .overnment of India under the :orward Contracts egulations 9ct,
"#=7, sub&ect to approval :orward ;arkets Commission.
"usiness )ules
5usiness ules of ;ulti Commodity A1change of India Cimited is sub&ect to
the provision :orward Contracts /egulations0 9ct, "#=7, and ules framed
there under, 9rticles of 9ssociation ules and 5ye(Caws of ;ulti Commodity
A1change of India Cimited /;CD0, as applicable ;embers of the A1change,
their epresentatives and their Clients.
*((lica1ility
These ules are enforceable on the ;embers of the A1change,
Clearing 5anks, Constituents and all other ?articipants operating on or through
the A1change in respect of their rig obligations relating to trading on ;CD.
They are sub&ect to &urisdiction of the Courts of IV *irrespective of the place of
business of the ;embers of the A1change or their customers and d India or
elsewhere.
Eligi1ility for Trading
9t ;CD, only the members of the A1change, who have been admitted as
such by the 5oard, are / to participate in trading. ?ersons, who are not members
of the A1change, can participate in trading as approved users or clients through
a registered member of the A1change.
Mem1ershi( at MC
Currently, there are three categories of membership available at ;CD,
depending upon the Trading the Clearing ights. These ;embership types are
e1plained in detail as under.
CONTEM2ORARY ISS(ES IN COMMODITY MAR3ETS
)ole of "anks in Commodity Markets
:inancing of agriculture poses certain special risks for banks and so, banks
need to mitigate these risks in order to ensure effective credit delivery to the
agricultural sector. 6ne of the key risks for banks is the commodity price risk.
The volatility in the prices of agricultural commodities may cause severe loss to
the farmer who may be unable to repay his dues to the bank. If the prices
collapse, the distress in the farming community can be widespread and security
obtained by the bank may have very limited usefulness, Commodity derivatives
can mitigate these risks to a certain e1tent. The issue has been e1amined in
greater detail later in the report.
9 well(established system of issuance of 3arehouse eceipts is a pre(
re2uisite of an efficient market in commodity derivatives. 3arehouse eceipts
are also useful to the farmer in securing timely finance from banks at
economical rates.
In terms of %ection , of the 5anking egulation 9ct, "#-#, no banking
company shall directly or indirectly deal in buying or selling or bartering of
goods e1cept in connection with realisation of securities given to or held by it,
or engage in any trade or buy, sell or barter goods of others. :or this purpose,
EgoodsE means every kind of movable property, other than actionable claims,
stocks, shares, money, bullion and spices and all instruments referred to in
clause /a0 of sub(section /"0 of %ection L of the 5.. 9ct, "#-#. Thus, while
bullion is specifically permitted for trading under the 9ct, banks are prohibited
from entering into commodity business and therefore, they are not permitted to
participate in the commodity derivatives market.
5anks do have an e1tensive rural reach and e1pertise in agricultural lending
which enable them to play a big role in the development of the commodity
market. 9s they have e1posure to agriculture, which is a priority sector, they
would be better off in case they were able to hedge their positions. 5anks can
also help to fund margin or trading capital re2uirements. :urther, banks can
provide loans against commodities by accepting warehouse receipts /30 as
collateral.
The 3orking .roup on 3arehouse eceipts and Commodity :utures was set
up by the eserve 5ank of India /5I0 with the task of evolving broad
guidelines, criteria, limits, risk management system as also a legal framework
for facilitating participation of banks in commodity /derivative0 market and use
of 3 in financing of agriculture. The group has put forward guidelines for
banks to e1tend loans against warehouse receipts and also offered a framework
for participation in the commodity futures market. The.roup had members from
the 5I, Indian 5anksG9ssociation /I590, :orward ;arkets Commission
/:;C0, B959< and selected banks active in agricultural lending such as
%5I, ?un&ab Bational 5ank, of5aroda and I.ICI 5ank.
6ne of the ma&or recommendations of the working group is to amend the
5anking egulation 9ct, "#-# permitting banks to deal in the business of
agricultural commodities including derivatives. me final report was published in
9pril 788=. :urther it also recommended that banks can maintain I*oprietary
positions with ade2uate limits in agri commodity derivatives to mitigate their
risk while lending to armers. 5esides, banks also may be granted general
permission to become professional clearing nembers of commodity e1changes
sub&ect to the condition that they should not assume any e1posure sk on account
of offering clearing services to their trading clients.
Clearing bank entertains the opening of the clearing and settlement accounts
for the e1change and its members, The settlement accounts provide the facility
to transfer the funds between the members and clearing(house, In other words,
clearing bank take electronic instruction from the e1change and respond for
pay(ins and payouts.
9griculture is integral to economic development in India. :or a long time,
Indian agriculture has remained isolated from the mainstream development.
%ince independence, India has come a long way in removing technological
isolation of agriculture. Afforts were made in introducing scientific methods in
agriculture, including high yielding hybrid varieties. The resulting .reen
evolution has solved the problem of food security for the country. There is a
growing feeling that time has come to remove economic and financial isolation
in which agricultural economy has been functioning so far. 6f the efforts being
made in several directions, managing of risks through commodity derivatives
and facilitating financing of agriculture by using 3arehouse eceipts has
received particular attention in the recent years.
In the ;id(term eview of the 9nnual ?olicy %tatement for the year 788-(
8=, .overnor, eserve 5ank of India announced constitution of a 3orking
.roup on 3arehouse eceipts ' Commodity :utures with a view to e1amining
the role of banks in providing loans against 3arehouse eceipts and evolving a
framework for participation of banks in the commodity futures market. The
.roup had members from the eserve 5ank of India, Indian 5anksG 9ssociation
/I590, :orward ;arkets Commission /:;C0, B959< and select banks
active in agricultural lending such as %tate 5ank of India, ?un&ab Bational
5ank, 5ank of 5aroda and ICICI 5ank Ctd. The 3orking .roup was entrusted
with the task of evolving broad guidelines, criteria, limits, risk management
system as also a legal framework for facilitating participation of banks in
commodity /derivative0 market and use of 3arehouse eceipts in financing of
agriculture.
The Terms of )eference of the 5orking <rou( were=
a0 To e1amine the role of banks in developing commodity markets ( both
cash and derivative S and lay down a road map for banksG participation in
commodity markets as well as to suggest the criteria, limits and risk
management systems for banks in relation to their commodities business4
b0 To e1amine whether banks may offer commodity derivative based
products to farmers to enable them to hedge their risks as they do not
have easy accessibility to the commodity e1changes and may lack
necessary e1pertise4
c0 To suggest enabling measures to encourage flow of institutional finance
to farmers includinglending against 3arehouse eceipts4
d0 To e1amine the statutory provisions and suggest necessary amendments
including the provisions of the 5anking egulation 9ct, "#-# in regard
to dealing in commodities by banks and the Begotiable Instruments 9ct,
",," for imparting negotiable status to 3arehouse eceipts so as to
enable the banks to play a meaningful role in developing commodity
markets and e1tend necessary credit facilities4
e0 To recommend appropriate level of participation by banks in various
capacities in the commodity e1changes and to suggest necessary
regulatory arrangements4
f0 To e1amine whether the banks may be permitted to take and give physical
delivery of contracts in the commodity derivative markets4 and
g0 To consider any other matter relevant to the sub&ect by the 3orking
.roup.
Recomme%datio%s Of T$e Worki%& Gro-4 O%
Ware$o-se Recei4ts A%d Commodity '-t-res )y T$e
Reser*e )a%k Of I%dia 5R)I6
"0 The .roup recommends that Central .overnment may issue a
notification under clause /o0 of sub(section /"0 of %ection L of the
5anking egulation 9ct, "#-# permitting banks to deal in the business of
agricultural commodities including derivatives.
70 The .roup recommends that a system needs to be evolved by which
3arehouse eceipts become freely transferable between holders as it
would reduce transaction costs and increase usage.
>0 The .roup recommends creating an umbrella structure, which may act as
a Closed $ser .roup /C$.0 for everyone engaged in the agricultural
commodities business. The membership of the C$. may e1tend to
commodity e1changes, 9?;Cs, commission agents registered with
9?;Cs, warehouses, e1porters, importers and domestic users of
commodities, banks, insurance companies and producers. The umbrella
structure or the C$. is envisaged as an electronic platform that would
offer straight through processing for everyone connected with the
commodities. There can be more than one C$. and that they will be
sub&ect to regulation and supervision by a regulatory authority such as
:;C.
-0 The .roup recommends that proprietary positions in agricultural
commodity derivatives could be used by banks to mitigate their risk in
lending to farmers. To achieve this, they will have to buy options and
options on futures. Therefore, the .roup recommends that the :orward
Contracts /egulation0 9ct, "#=7 may be suitably amended and :onward
;arkets Commission may evolve a suitable framework for option trading
in agricultural commodities in India.
=0 The .roup recommends that banks may be permitted to have independent
proprietary position in commodity futures linked in a macro way to their
credit portfolio. 5anksG e1posure to a particular commodity is a general
e1posure and cannot be linked to a particular loan. ?ermitting banks to
have independent proprietary positions is the best way in which banks
can cover their risks. )owever, suitable risk control measures may have
to be adopted by the banks.
L0 The .roup considered whether banks may be permitted to deal in
commodities other than agricultural commodities such as oil and gas.
)owever, keeping in view the current state of development of spot as
well as futures markets, the .roup recommends that for the present, it
will be prudent to permit banks to deal in agricultural commodities only.
H0 9t present, purely cash settled contracts are not available in India. The
banks trading or dealing in commodity contracts should therefore be
prepared to make or accept delivery of physical goods. The .roup
recommends that while no restriction may be placed in this regard, banks
may be persuaded to preferably close their positions and cash settle the
contracts.
,0 9s the farmers are likely to find it difficult to assume positions in future
market of their own, the .roup deliberated whether banks can offer non(
standard contracts to the farmers and cover themselves in the e1change
traded futures. The position was e1amined from the angle of :on9*ard
Contracts /egulation0 9ct, "#=7. 9ccordingly, the .roup recommends
that banks may offer non(standard contracts to farmers to suit their needs.
The .roup also recommends that banks may be permitted to offer
commodity derivative based products to farmers to enable them to hedge
their commodity price risk.
#0 In regard to 6TC contracts, the .roup recommends that in order to make
6TC contracts a feasible proposition for banks, the .overnment may
e1empt transferable specific delivery /T%<0 contracts, where one of the
parties to the contract is a bank authori!ed by 5I, from the operation of
all or any of the provisions of :C9, "#=7. This would enable banks to
provide bilateral contracts tailored to suit the needs of their customers
without running the risk of taking or making delivery.
"80 The .roup recommends that banks may be granted general
permission to become professional clearing members of commodity
e1changes sub&ect to the condition that they should not assume any
e1posure risk on account of offering clearing services to their trading
clients.
""0 The .roup recommends that at least for the present, banks may not
be permitted to act as Trading ;embers in the Commodity A1changes.
"70 The .roup recommends that while banks may continue to hold
their e2uity stake in the commodity e1changes in order to provide them
financial strength and stability, the banks may reduce * divest their e2uity
holding to a ma1imum permitted level of =P over a period of time so as
to avoid any conflict of interests and address the regulatory concern that
owners of commodity e1changes do not also become traders in these
e1changes.
">0 In order to get a global perspective of how banks manage risks
associated with trading in commodities, the .roup e1amined the
guidelines issued by :inancial %ervices 9uthority /:%90, $@ and
9ustralian ?rudential egulation 9uthority /9?90. 9ccordingly, the
.roup recommends that the guidelines issued by :%9 and 9?9 may be
suitably modified as would be consistent with the instructions issued by
eserve 5ank on capital ade2uacy and market risk so far.
"-0 The .roup recommends that initially a limit may be placed on a
bankGs total e1posure or gross positions, long plus short regardless of
maturity, in all the commodities in relation to net loans and advances
and*or capital or net worth of the bank. Initially, the limit could be put at
=P of the net worth of the bank, which could be increased later in the
light of e1perience gained.
4artici(ation of Fll and Mutual Funds in Commodity Markets
;utual :unds and :oreign Institutional Investors are presently not allowed
to trade in commodity markets. The .overnment is considering the proposal to
allow these entities to trade in commodity futures markets.
:or commodity markets to grow rapidly, retail participation is essential as
has been the e1perience in developed countries. 5ut the e1tent of knowledge
dissemination of commodity futures among the mass market is at an abysmal
level.
$nlike the financial derivatives market, one can enter the commodity
derivatives market with a much lower investment, since margins are lower in
the range of =("8P. The leverage that can be obtained in the commodity futures
market is much higher. In case mutual funds are allowed to participate in
commodity markets by structuring commodity funds for retail investors, this
would prove to be an added advantage for the lay investor, who may not have
the knowledge and wherewithal to trade in such markets. The commodity
futures e1changes remain largely in the shadows of the booming e2uity markets
e1changes due to low awareness levels.
Tracking commodity prices is not &ust a balance sheet analysis or a company
specific study. .lobal factors and rather macro factors play a much important
role into it. That demands domain e1pertise in commodities, market dynamics
and price forecasting. This is the reason for mutual funds to participate in
commodity markets, since4 they are e2uipped with 2ualified analysts and fund
managers who undertake value investing and boost up the reliability for the
retail investors.
.lobally, commodity markets are being acknowledged as an effective market
to hedge against the vagaries of the e2uity markets. The presence of foreign
funds in the securities market has been found to have a high correlation with the
interest as well as activity in e2uity segment. 9 similar scenario is e1pected to
be replicated in the commodity market, in case regulation permits the entry of
:oreign Institutional Investors into this market.
Fet the other set of challenges in front of the e1changes are creating
awareness and information dissemination. 3hile volumes are important for
commodity e1changes, what is probably more critical is awareness. There Is
need for e1changes to keep relentlessly pursuing an awareness creation strategy.
9wareness at the grassroots will be essential to materiali!e and sustain the
success it is foreseeing. <isseminating market discovered prices to the farmer
level calls for a mammoth structural framework and massive investments. 6ver
here, all options need to be e1plored from IT(enabled facilities such as display
boards and ticker boards to manual information spread where such facilities are
not available. Initiatives such as ITC Ctd.Gs e(choupal need to be encouraged to
facilitate wider participation from the grassroots level of the society.
Conclusion
The history of commodity marketing has its origin in the rise of human
civili!ation. 9s the nomadic man settle on land to grow crops, he began to
provide service such as those of carpenter, ironsmith, goldsmith, washer man,
and barber. Thus began the e1change of different goods and services between
the producers of different agricultural crop and the service provider. The barter
trade evolved as a result, an in due course emerged the ba!aars or markets.
The 7"
st
century saw the beginning of a transformation in the commodity
market of the country. 9t the dawn of century the government lifted the 5an on
futures trading and allowed the commodity e1changes to develop futures market
in different commodity and their product so that such trading could effectively
and efficiently serve its twin economic functions of the price discovery and
price risk management. 3hile the old regional and single(commodity e1changes
were permitted to revive future trading in their traditional commodities, three
new demutualised national e1changes were also set up.
7isit to MCX 5m-ti Commodity E#c$a%&e6
To $nderstand and study the commodity market point of view on the
investment e1change. I visited the ;CD %pared some of his valuable times to
e1plain in brief about the commodity market he also answered to some of my
2uestion
Which are the national level multi-commodity exchanges?
The national level multi(commodity e1changes are I
National Commodity Derivatives Exchange Ltd. (NCDEX) !um"ai.
###.ncdex.com
!ulti Commodity Exchange o$ %ndia Ltd. (!CX)
!um"ai. ###.mcxindia. Com
National &oard o$ 'rade( %ndore(N-&)')
###.n"otind.org .
National !ulti Commodity Exchange o$ %ndia Ltd. (
*hmeda"ad (N!CE) ###.nmce.com
*re the trading terminals + systems $or commodity
,utures se-arate $rom those o$ e.uity $utures ?
Since the exchanges are separate, the VSATs, trading CTCL terminals
risk Management Systems, contract notes, etc. are independent of those
for eqity ftres. !e can connect throgh VSATs, "igh Speed #nternet
$road %ands&'eliance !LL, Tata #ndicom $road %ands, etc. (
%t is mandatory to ta/e Delivery ?
#t is not mandatory to take the deli)ery of a commodity in a ftres trading
contract. "o*e)er there is al*ays a pro)ision for deli)ery in commodity
ftres trading to ensre that the ftres prices are in conformity *ith the
nderlying.The option for deli)ery is normally *ith the seller+ the %yer,
Seller + the %yer,seller has to express his intention for deli)ery a%ot
fi)e to se)en days %efore the expiry. "o*e)er, pro)ision )ary from
exchange to exchange, -or instance in !CX ha)e to gi)e intention to
%ack office person in head office they *ill gi)e intention to exchanges %y
fax and for Ncdex ha)e to gi)e intention %oth in %ack office as *ell as
dealers in head office so that dealers ha)e to pnch intention in Trader
!orkstation Corporate #. on expiry date %efore / pm . 0xchange *ill take
this file for allocation of commodities *ith qantity to other conter parties
confirmation of deli)ery can %e kno* next day of expiry at morning as
exchange release .eli)ery allocation file.
0o# is a contract settled ?
The contract *hich are not assigned for deli)ery *ill %e settled in cash.

0o# much margin is a--lica"le in commodities mar/et
*nd ho# is it arrived at ?
Margin is different for each commodity and also changes depending on
the changes in prices and )olatility . 1nder normal circmstances, margin
is %et*een 23 4 2/ 5 of the contract )ale. As in Stocks, the margin in
commodities is calclated in Va' system. Commodities, like eqities,
also ha)e a system of initial margin and mark6to6mark &MTM( margin.
Commodities have many .ualities ho# do % 1no# #hich
2uality is "eing traded in $utures ?
The specification of each commodity *ill %e gi)en and mentioned in the
Contract master as attached *ith this presentation. 0ach participant *ill
$e trading in that particlar qality only.
0o# much margin is a--lica"le in commodities mar/et
*nd ho# is it arrived at ?
Margin is different for each commodity and also changes depending on
the changes in prices and )olatility . 1nder normal circmstances, margin
is %et*een 23 4 2/ 5 of the contract )ale. As in Stocks, the margin in
commodities is calclated in Va' system. Commodities, like eqities,
also ha)e a system of initial margin and mark6to6mark &MTM( margin.
%s sales tax a--lica"le on trades ? %$ so ( is registration
!andatory ?
#f a trade is sqared off no sales tax is applica%le. Sales Tax is applica%le
only i$ a trade reslts in deli)ery. 7ormally it is the seller8s responsi%ility
to collect and pay sales tax. This sales tax is applica%le at the place of
deli)ery shold ha)e sales tax registration nm%er for seller not for %yer.
0o# does the clearing and settlement ta/e -lace ?
The clearing and settlement takes place throgh %anks arranges %y the
exchanges *hich ha)e tied p *ith different %anks, #nstittions. 7cdex
has tied p *ith 7SCCL for clearing prpose. Mcx has tied p *ith ".-C
$ank and #nds#nd $ank for pro)iding clearing and settlement facilities.
Without o#ning the commodity(ho# is it -ossi"le to sell
%t ?
9ne doesn8t need to ha)e commodity physically or to o*n a contract for
The commodity to enter into a sale contract in the ftres market. The
Contract is simply an agreement to sell the physical commodity at later
.ate or sell it short. #t is possi%le to reprchase the contract %efore the
Matrity, there %y dispensing *ith deli)ery of goods.
What ha--ens i$ there is any delivery or $und de$ault ?
The exchange ha)e a penalty clase *hene)er the fnd or deli)ery
defalt happens . There is also a separate ar%itration panel of exchanges.
$oth the exchanges &Mcx and 7cdex( *ill also maintain settlement
:arantee fnds.
*re o-tions also allo#ed in commodity derivatives ?
9ptions in goods are presently prohi%ited nder section 2; of the
-or*ard Contracts &'eglation( Act, 2;/<. 7o exchange or person can
organi=e or enter into or make or perform options in goods. "o*e)er the
market expects the go)ernment to permit options trading in commodities
soon.
Unit of Trading
3 4ound 5 6.7871g
3 2uintal 5366 1g
3 !' 5 3666 1g
3 &arrel 5 389.:6 Liter
3 !aund 5 6.;<;=7= 2uintal
3 !ann (>u?arati) 5 =61g
1 Kg = 1000 Gra!
3 &ales 5 866 &ags
3 Cartoon 5 ==.:@ 1g
36 !' 5 36666 1g
3 1g 5 ;3.99 ounce (>old 6.998 4urity)
3 1g 5 ;=.339 ounce (>old 6.999 4urity)
3 1g 5 ;=.386< ounce (Ailver 6.999 4urity)
Contract Balue 5 'otal 2ty X 4rice &ase -rice 5 =6 1gs
)i/io&ra4$y
"ooks"
Coodit# $i!ion % Maga&in'( )*+#,i!!*' 1
Coodit# -*t*r' % .*idan/' 0oo1+'t froMC23
3ebsitesI
www.thefreedictionery.com
www.google.com
www.mcx.com
www.nseindia.com