Introduction to Commodity Market

What is “Commodity”? Any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as commodity. The article should be movable of value, something which is bought or sold and which is produced or used as the subject or barter or sale. In short commodity includes all kinds of goods. Indian Forward Contracts (Regulation) Act (FCRA), 1952 defines “goods” as “every kind of movable property other than actionable claims, money and securities”.

“The term refers to a whole range of natural resources that are used to create the goods that people buy and the food they eat.” Says Jeremy Baker, USB's Zurichbased head of Commodity Research'.

A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Securities. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators.

Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the, risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option.

What is a commodity Market?
Commodity market is a place where trading in commodities takes place. Markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized Contracts. It is similar to an Equity market, but instead of buying or selling shares one buys or sells commodities.

Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.

In fact, the size of the commodities markets in India is also quite significant. Of the country's GDP of Rs 13, 20,730 crores (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent. Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crores (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on. In current situation, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for commodity trading recognized under the FCRA. The national commodity exchanges, recognized by the Central Government, permits commodities which include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur, potatoes and onions, coffee and tea, rubber and spices. Etc.

History of Evolution of commodity markets
Historically, dating from ancient Sumerian use of sheep or goats, or other peoples using pigs, rare seashells, or other items as commodity money, people have sought ways to standardize and trade contracts in the delivery of such items, to render trade itself more smooth and predictable.

Commodities future trading was evolved from need of assured continuous supply of seasonal agricultural crops. The concept of organized trading in commodities evolved in Chicago, in 1848. But one can trace its roots in Japan. In Japan merchants used to store Rice in warehouses for future use. To raise cash warehouse holders sold receipts against the stored rice. These were known as “rice tickets”. Eventually, these rice tickets become accepted as a kind of commercial currency. Latter on rules came in to being, to standardize the trading in rice tickets. In 19th century Chicago in United States had emerged as a major commercial hub. So that wheat producers from Mid-west attracted here to sell their produce to dealers & distributors. Due to lack of organized storage facilities, absence of uniform weighing & grading mechanisms producers often confined to the mercy of dealers discretion. These situations lead to need of establishing a common meeting place for farmers and dealers to transact in spot grain to deliver wheat and receive cash in return.

Gradually sellers & buyers started making commitments to exchange the produce for cash in future and thus contract for “futures trading” evolved. Whereby the producer would agree to sell his produce to the buyer at a future delivery date at an agreed upon price. In this way producer was aware of what price he would fetch for his produce and dealer would know about his cost involved, in advance. This kind of as why Chicago Board of Trade (CBOT) was established in 1848. In 1870 and 1880s the New York Coffee, Cotton and Produce Exchanges were born.

Agricultural commodities were mostly traded but as long as there are buyers and sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants got together to bring chaotic condition in New York market to a system in terms of storage, pricing, and transfer of agricultural products. In 1933, during the Great Depression, the Commodity Exchange, Inc. was established in New York through the merger of four small exchanges – the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide Exchange. The largest commodity exchange in USA is Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and New York Coffee, sugar and cocoa Exchange. Worldwide there are major futures trading exchanges in over twenty countries including Canada, England, India, France, Singapore, Japan, Australia and New Zealand.

History of Commodity Futures

Commodities futures trading have evolved from the need for ensuring continuous supply of seasonal agricultural crops. In Japan, merchants stored rice in warehouse for future use. In order to raise case warehouse holders sold receipts against the stored rice. These were known as rice tickets. Eventually such rice tickets became accepted as a kind of general commercial currency Rules came into being, to standardize the trading in rice tickets. The futures contract, as we know it today, evolved as farmers (sellers) and dealers (buyers) began to commit to future exchanges of grain for cash. For instance, the farmer would agree with the dealer on a price to deliver to him 5,000 bushels of wheat at the end of June. The bargain suited both parties. The farmer knew how much he would be paid for his wheat, and the dealer knew his costs in advance. The two parties may have exchanged a written contract to this effect and even a small amount of money representing a "guarantee."

Such contracts became common and were even used as collateral for bank loans. They also began to change hands before the delivery date. If the dealer decided he didn't want the wheat, he would sell the contract to someone who did. Or, the farmer who didn't want to deliver his wheat might pass his obligation on to another farmer. The price would go up and down depending on what was happening in the wheat market. If bad weather had come, the people who had contracted to sell wheat would hold more valuable contracts because the supply would be lower; if the harvest were bigger than expected, the seller's contract would become less valuable. It wasn't long before people who had no intention of ever buying or selling wheat began trading the contracts. They were speculators, hoping to buy low and sell high or sell high and buy low. In the early 20th century, advanced communication & transportation, centralized warehouses built in the principal markets, to distribute goods more economically, paved the way to expanded interstate and international trade. Agricultural commodities were the most commonly traded, but it led to the fact that a market can flourish for any underlying a long as there is an active pool of buyers and sellers

The Indian Perspective
History of Commodity Market in India:The history of organized commodity derivatives in India goes back to the nineteenth century when Cotton Trade Association started futures trading in 1875, about a decade after they started in Chicago. Over the time datives market developed in several commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920). However many feared that derivatives fuelled unnecessary speculation and were detrimental to the healthy functioning of the market for the underlying commodities, resulting in to banning of commodity options trading and cash settlement of commodities futures after independence in 1952.

and even the retail investors. commodity exchanges are purely speculative in nature. K. Ministry of Consumer Affairs. the ultimate regulatory authority. Kabra) recommended allowing futures trading in 17 commodity groups. at a grassroots level. Commodity exchange in India plays an important role where the prices of any commodity are not fixed.Department of Consumer Affairs. rendering a crushing blow to the commodity derivatives market. The Committee (headed by Prof. and certain amendments to Forward Contracts (Regulation) Act 1952. particularly allowing option trading in goods and registration of brokers with Forward Markets Commission. It brings a price transparency and risk management in . the Government set up a committee (1993) to examine the role of futures trading. Others never had a say. Food and Public Distribution.N. The Government accepted most of these recommendations and futures’ trading was permitted in all recommended commodities. started actively encouraging commodity market. It also recommended strengthening Forward Markets Commission. The act envisages three tire regulations: (i) Exchange which organizes forward trading in commodities can regulate trading on day-to-day basis. The act prohibited options trading in Goods along with cash settlement of forward trades. After Liberalization and Globalization in 1990. Before discovering the price. (iii) The Central Government. The commodities future market remained dismantled and remained dormant for about four decades until the new millennium when the Government. Today. in a complete change in a policy. It is timely decision since internationally the commodity cycle is on upswing and the next decade being touched as the decade of Commodities. Under the act only those associations/exchanges. are allowed to organize forward trading in regulated commodities. in an organized way. (ii) Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government. which are granted reorganization from the Government.The parliament passed the Forward Contracts (Regulation) Act. Earlier only the buyer of produce and its seller in the market judged upon the prices. 1952. which regulated contracts in Commodities all over the India. they reach to the producers.

and no one can offer to sell higher than someone else’s lower offer. the commodities future market in India has experienced an unexpected boom in terms of modern exchanges.the vital market. The three exchanges are: National Commodity & Derivatives Exchange Limited (NCDEX) Mumbai. a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities. Since 2002. In India there are 25 recognized future exchanges. In 2002-03. . except some negligible activities on OTC basis. Government of India has allowed forward transactions in commodities through Online Commodity Exchanges. Since 1952 till 2002 commodity datives market was virtually non. Prime Minister. of which there are three national level multi-commodity exchanges. Multi Commodity Exchange of India Limited (MCX) Mumbai and National MultiCommodity Exchange of India Limited (NMCEIL) Ahmedabad. B. Vajpayee. The GOI in that very year took two steps that gave a fillip to the commodity markets. There are other regional commodity exchanges situated in different parts of India.existent. Shri. The first one was setting up of nation wide multi commodity exchanges and the second one was expansion of list of commodities permitted for trading under (FC(R) A). demonstrated its commitment to revive the Indian agriculture sector and commodity futures markets. After a gap of almost three decades. By Exchange rules and by law. and keeps the traders on their toes to make sure no one gets the purchase or sale before they do. A. That keeps the market as efficient as possible. A big difference between a typical auction. no one can bid under a higher bid. number of commodities allowed for derivatives trading as well as the value of futures trading in commodities. where a single auctioneer announces the bids and the Exchange is that people are not only competing to buy but also to sell. in his Independence Day address to the nation on 15th August 2002. which crossed $ 1 trillion mark in 2006.

some commodities may display characteristics not normally found in financial assets. It creates basis risk in commodity derivatives. . and a commodity derivatives market that trades a range of instruments on (artificially) standardized commodities. For example. This means that demand is not purely price dependent. This reflects the heterogeneous nature of commodity production in terms of quality or grade. Consumption goods – commodities are primarily consumption goods rather than investment products. This dictates that the commodity market has two layers. location and structure. This aspect of commodities ha a number of dimensions. The physical or cash market that trades a range of commodities of varying quality. 2. currency or equity represent financial claims on different aspects of real assets. including: 1. In contrast.mmodity Markets – Key Characteristics Nature of Commodities – Commodities are real assets that are produced and consumed in an industrial or other process. other asset classes of interest rates. This is driven by the need to facilitate trading. This is driven by the desire of the generator to shed excess output as electricity cannot be stored. This contrasts with other financial assets that are homogenous. In addition. Non standard structure – commodities are generally not standardized. zero or negative price may occur in electricity markets where generators seek to ensure that their plants are dispatched for contiguous blocks of time longer than a simple slot for which separate time bids are accepted.

Forward prices of commodities will generally change as time to maturity changes. Cost of production – commodity prices frequently gravitate towards the cost of production. The structure of the participants and the nature of their activities/motivations are more complex than in other asset classes. If prices are significantly above or below the cost of production (including a "normal" profit component). Seasonal patterns in consumption and production are manifested in recurring behavior of prices and volatility. 4. Commodity Markets – Participants The structure of commodity markets dictates that there are several types of participants active in the trading of commodities and commodity derivatives. This is because the market will adjust over time.3. Price behavior – commodity prices display seasonality and may change over different phases of the commodity life. The major participants in commodity markets include: . then supply will adjust in the longer term.


If prices decline sharply. These include lack of transparency. The application of commodity derivatives in frequently driven by the pattern of cash flows. The inherent risk-exposure drives the use of commodity derivatives by producers and users. This investment must generally be made in advance of production and sale of the commodity.Commodity Producers/Consumers: These participants have natural underlying outright long (producers) and short (consumers) positions in the relevant commodity. then revenues may be insufficient to cover the cost of servicing the capital investment (including debt service). Producers must generally make significant capital investments (sometime significant in scale) to undertake the production of the commodity. Price arrangements to reduce the price risk for both parties. low liquidity and exposure to counterparty credit risk. producer and consumer deal directly with each other. The bilateral . The form of arrangement may include negotiated bilateral long term supply or purchase contracts between the producers and consumers. This means that there is a natural tendency for producers to hedge at levels that ensure adequate returns without seeking to optimize the potential returns from higher returns. This may also be necessitated by the need to secure financing for the project. This means that the producer is exposed to the price fluctuations in the commodity. In many commodities. Consumer hedging behavior is more complex. These arrangements create a number of difficulties. The contracts may include fixed. Consumer desire to undertake hedges is influenced by availability of substitute products and the ability to pass on higher input costs in its own product market.

oil refiners are exposed to the differential between the price of the crude oil and the price of the refined oil products (diesel. Financial Institution/Dealers: Dealer participation in commodity markets is primarily as a provider of finance or provider of risk management . Where traders provide ancillary services such as commodity derivatives as the principal. Where a trader acts as a principal. Traders also occasionally provide financing and other services. it will generally have outright commodity price risk that requires hedging. This reflects the fact that the contracts combine supply/purchase obligations and price risk elements in a single contract. Commodity Traders: Commodity markets have complex trading arrangements. This reflects the fact the processors have a spread exposure to the price differential between the cost of the input and the cost of the output. aviation fuel. etc. A trader as a pure agent will generally have no price exposure. The nature of the exposure drives the types of hedging activity and the instruments used. the traders act as an agent or principal to secure the sale/purchase of the commodity. heating oil. Commodity Processors: These participants have limited outright price exposure. Where involved.). include the involvement of trading companies (such as the Japanese trading companies and specialized commodity traders). 4. This may. 3. gasoline. For example. the market risk assumed will need to be hedged or managed. depending on the nature of their activities.structure also creates potential adverse performance incentives. Commodity traders have complex hedging requirements. Traders increasingly seek to add value to pure trading relationship by providing derivative/risk management expertise. 2.

coffee. forwards. Other sophisticated products may include interest rates. The gradual recognition of commodities as a specific class of investment assets is an important factor that has influenced the structure of commodity derivatives markets. maize. 5. These contracts can include spots.) and contracts based on them. Investors: This covers financial investors seeking to invest in commodities as a distinct and a separate asset class of financial investment. Most commodity markets across the world trade in agricultural products and other raw materials (like wheat. milk products. speed. metals. futures and options on futures. Dealers frequently bundle risk management products with other financial services such as provision of finance. cotton.products. Commodity Exchange  Definition A commodities exchange is an exchange where various commodities and derivatives products are traded. environmental instruments. swaps. The dealers' role is similar to that in the derivative market in other asset classes. . etc. immediacy of execution and structural flexibility. cocoa. barley. oil. sugar. or ocean freight contracts. pork bellies. The dealers provide credit enhancement.

They thus play a critical role in robust price discovery where several buyers and sellers interact and determine the most efficient price for the product. .Commodity exchanges are institutions which provide a platform for trading in ‘commodity futures’ just as how stock markets provide space for trading in equities and their derivatives.

STRUCTURE OF COMMODITY MARKET IN INDIA After a gap of almost three decades.In India there are 21 regional exchanges and three national level multicommodity exchanges. Government of India has allowed forward transactions in commodities through Online Commodity Exchanges. a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities. The three exchanges are: .

NCDEX currently facilitates trading of 57 commodities. NCDEX is the only Commodity Exchange in the country promoted by national level institutions. professionalism and transparency. NCDEX is regulated by Forward Markets Commission (FMC). Stamp Act. Canara Bank and Goldman Sachs by subscribing to the equity shares have joined the promoters as a share holder of exchange. It is committed to provide a world class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices. Life Insurance Corporation of India (LIC). Indian Farmers Fertilizer Cooperative Limited (IFFCO).(1) National Commodities & Derivatives Exchange Limited (NCDEX) National Commodities & Derivatives Exchange Limited (NCDEX) promoted by ICICI Bank Limited (ICICI Bank). Commodities Traded at NCDEX:• Bullion:Gold KG. NCDEX is a national level technology driven on line Commodity Exchange with an independent Board of Directors and professionals not having any vested interest in Commodity Markets. Forward Contracts Regulation Act and various other legislations. Brent • Minerals:- . Contracts Act. Silver. NCDEX is a public limited company incorporated on 23 April 2003. Credit Ratting Information Service of India Limited (CRISIL). Punjab National Bank (PNB). National Bank of Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSC). NCDEX is located in Mumbai and offers facilities to its members in more than 550 centers through out India. NCDEX is also subjected to the various laws of land like the Companies Act.

Chilli LCA334 • Energy:Crude Oil. Mustard seeds. Refined soya oil. Mentha oil. Masoor. Yellow soybean. Indian Pusa Basmati Rice. Wheat. Furnace oil (2) Multi Commodity Exchange of India Limited (MCX) . Lemon. Pepper Plantation:Cashew. Zinc Metal Ingot. . Sugar. Meal • • Pulses:Grain:Urad. Medium Staple. Raw Jute. Yellow peas. Coffee Arabica. Crude Palm Oil. Mild steel Ingots • Oil and Oil seeds:Cotton seed. Mulberry raw Silk. RM seed oil cake. Oil cake. Caster seed. Grain Bold. Barley. V-797 Kapas. Nickel Cathode. Potato. Guar. Indian parboiled Rice (IR36/IR-64). Chana. RBD Pamolein. Indian raw Rice (ParmalPR-106). Cotton. Groundnut (in shell). Indian 31mm cotton. Aluminum Ingot. Jute sacking bags.Electrolytic Copper Cathode. Green Cottons. Rape seeds. Tur. Mulberry. Groundnut expeller Oil. . Yellow red maize • • Spices:Jeera. Indian 28 mm cotton. Turmeric. Guar seeds. Coffee Robusta • Fibers and other:Guar Gum.

Iron/steel. . Commodities Traded at MCX:• Bullion:Gold. Corporation Bank of India.Multi Commodity Exchange of India Limited (MCX) is an independent and demutulized exchange with permanent reorganization from Government of India. Coconut Oil Cake. seeds. Tur. Sunflower Oil cake. Tamarind seed oil. MCX facilitates online trading. Zinc. Solvent Extractors Association of India. Barley. State Bank of India. Bank of India and Canara Bank. Silver Coins. Key share holders of MCX are Financial Technologies (India) Limited. having Head Quarter in Mumbai. Urad. Copper. Crude Palm oil/ RBD Pamolein. clearing and settlement operations for commodity futures market across the country. Wheat. • Pulses:Chana. MCX deals wit about 100 commodities. Maize. Silver. Nickel. Lead • Oil and Oil seeds:Castor oil/castor Groundnut . Mustard/ Rapeseed oil. Copra. Sunflower oil. MCX started of trade in Nov 2003 and has built strategic alliance with Bombay Bullion Association. Bajara. Yellow peas • • Grains:Spices:- Rice/ Basmati Rice. Tin. pulses Importers Association and Shetkari Sanghatana. • Minerals:Aluminum. Masur. Union Bank of India. Soy seeds/Soy meal/Refined Soy Oil. Bombay Metal Exchange.

Ginger. Art Silk Yarn. Gaur seed and Guargum. Furnace Oil. • Fiber and others:Kapas. Cardamom. Potato. Cinnamon. Raw Jute. Coconut. • Petrochemicals:High Density Polyethylene (HDPE). Red Chili. • Plantation:Cashew Kernel. Areca nut. Gur and Sugar. Khandsari. Cotton (long staple. short staple). Jute Goods. Mentha Oil. Cotton Cloth. Polypropylene (PP). Rubber. Coffee. Natural Gas The exchanges follow best international risk management practices and provide a financially secure environment by putting in place a suitable risk management mechanism (system of upfront margining based on the Value at Risk margining system. Crude Oil. Betel nuts. The performance of the contracts registered by the exchange are guaranteed either by the exchange or its clearing house. Jute Sacking. medium staple. Clove. Middle East Sour Crude Oil. Kapas Khalli. daily mark to market and special intra-day clearing and settlement in the event of high volatility in prices). . Cotton Yarn. Poly Vinyl Chloride (PVC) • Energy:Brent Crude Oil. Jeera. Chara or Berseem.Pepper.

It got reorganization in Oct 2002. the clearing house becomes the buyer to every seller and vice versa (novation). . It is being supported by Central warehousing Corporation Limited. (3) National Multi Commodity Exchange of India Limited (NMCEIL) National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-mutualised Electronic Multi Commodity Exchange in India. Clearing Houses interpose between buyers and sellers as a legal counter-party. Novation thus obviates the need for ascertaining the credit-worthiness of each counter-party and the only credit risk that the participants face is the risk of clearing house committing a default.e. NMCEIL Head Quarter is at Ahmedabad.Clearing Houses put in place a sound risk-management system to be able to discharge their role as counter-party to all participants. which can be used in case of any default.. Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. On 25 th July 2001 it was granted approval by Government to organize trading in edible oil complex. Some exchanges have also prescribed certain minimum capital adequacy norms. The exchanges also maintain their own Trade/Settlement Guarantee Fund. i.

To advise the Central Government 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 Forward Contracts (Regulation) Act 1952. 3. to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable. The act provides that the commission shall consist of not less than two but not exceeding four members appointed by the Central Govt. Food and Public Distribution. The functions of the Forward Markets Commission are as follows: 1. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act. in exercise of the powers assigned to it by or under the Act. . 1952. demand and prices. be the chairman thereof. is the regulatory authority for commodity derivatives in India.Regulatory authority for commodity Market Forward Markets Commission (FMC) The Forward Markets Commission (FMC) headquartered at Mumbai. FMC is in turn supervised by the Ministry of Consumer Affairs. including information regarding supply. 2. out of them being nominated by the Central Govt. To collect and whenever the Commission thinks it necessary. periodical reports on the working of forward markets relating to such goods. as it may consider necessary. Govt. To keep forward markets under observation and to take such action in relation to them. of India. and to submit to the Central Government.

4. Limit on open position of an individual operator to prevent over-trading 2. To make recommendations generally with a view to improving the organization and working of forward markets. Minimum / Maximum prices to be prescribed to prevent futures prices from falling below the levels that are not remunerative and from rising below the levels not warranted by genuine supply and demand factors. Special Margin deposits to be collected on outstanding purchases or sales to curb excessive speculators activity through financial restraints. Limit on price fluctuation to prevent abrupt upswing or downswing in prices 3.4. During shortages. To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary. closing the markets for a specified period and even closing out the contracts to overcome the emergency situations are taken . Regulatory Measures Evolved By FMC 1. 5. 5. extreme steps like skipping trading in certain deliveries of the contracts.

. Brazil. A major contribution of the Exchange has been to develop and launch energy futures and options contract in 1978 to facilitate price transparency and risk management in this key market. The United States. Australia.International Commodity Exchanges Recent years have witnessed a steep rise in the creation of the commodity exchanges along with a consistent expansion of the existing ones. The Exchange has been in existence for 132 years and performs trades through two divisions. civic and cultural life of New York. United Kingdom. Crude Oil. Singapore are homes to leading commodity futures exchanges in the world. It is the primary trading forum for energy products and precious metals. Refined products and Electricity. Exchange also clears trades for market participants who which to avoid counter-party credit risk by using standardized contracts for Natural Gas. which deals in energy and platinum and the COMEX division which trades in all the other metals. Japan. the NYMEX divisions. Exchange has become a significant part of the commercial. Worlds Major Commodity Exchanges: The New York Mercantile Exchange (NYMEX) The New York Mercantile Exchange is the world's biggest exchange for trading in physical commodity futures.

London Metal Exchange (LME) The London Metal Exchange (LME) is the world's premier non-ferrous market. Lead. unlike other commodity markets that are primarily based on a monthly prompt dates. Natural gas. It has become highly successful with a trading turnover value of more than US$2000 billion per annum and contributes substantially to the invisible earnings. Copper. Linear Low Density Polyethylene. Electricity. 24 hours a day through an inter-office telephone market and also through an electronic trading platform. Platinum. The Exchange was formed in 1877 as a direct consequence of the industrial revolution witnessed in Britain in the 19th Century. It is famous for its open-outcry trading between ring dealing members that takes place on the market floor. Silver. with highly liquid contracts. etc. Palladium. The exchange trades. It is an innovative exchange 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 expectations of a demanding industry. Gasoline. Commodities Traded – Aluminum. Aluminum. Tin. Zinc. Aluminum Alloy. Copper. The LME metal futures contracts run a daily basis for a period of three months. etc.Commodities traded – Light Sweet Crude Oil. Nickel. RBOB Gasoline. Gold. North American Special Aluminum Alloy (NASAAC). Propane. Heating Oil. Polypropylene. The primary focus of LME is providing a market for participants from the non-ferrous base metals related industry to safe guard against risk due to movements in base metal prices and also arrive at a price that sets the benchmark globally. The Exchange thus combines the convenience of settlement dates tailored to individual .

Soybean Oil. Currently through open-outcry and/or electronically. The first electronic trading system in CBOT was introduced in 1994 after more than 150 years of open auction trading where traders used to meet to buy and sell futures contracts. The LME also offers options contracts based on each of these futures contracts together with Traded Average Price Options contracts (TAPOs) based on the monthly average settlement price (MASP) for all metals futures contracts. Futures contracts in CBOT evolved over a period of time to facilitate trading in non-storable agricultural commodities and non-agricultural products like gold and silver. the Chicago Board of Trade is one of the leading exchanges in the world for trading in futures and options. Wheat. Rough Rice. they have been left with little choice but to dump the unsold produce in the near by lake. Ethanol. Oats. wheat. More than 50 contracts on futures and options are been offered by CBOT. The Chicago Board of Trade (CBOT) The first commodity exchange established on the world was the Chicago Board of Trade (CBOT). Given the high transport cost. This was situated in the premises of a flour store during its first four years. clients and market participants . Prior to this farmers often found no buyers for the grain they had transported to Chicago.needs with the security of a clearinghouse for its clearing members. and oats. Commodities traded Corn. Initially. Soybeans. CBOT dealt only in agricultural commodities like corn. CBOT is the oldest existing commodity exchange in the world having established in the year 1848. soybeans. Like any other commodity exchange the primary role of CBOT is to provide ] transparency and liquidity in its contracts to its members. During the year 1848 by a group of Chicago merchants who were keen to establish a central market place for trade. and Silver etc. Presently. Gold. Soybean Meal.

Aluminum. Crude Oil. TOCOM launched options on gold futures. Formed in 1898 primarily to trade in agricultural commodities. small business men. In January farmers. Gasoline. international trading firms and speculators for price delivery. Kerosene. in May 2004. One of the biggest reasons for this is the initiative TOCOM took towards establishing Asia as the benchmark for price discovery and risk management in commodities like the Middle East Crude Oil. financial service providers. TOCOM fortified its clearing system in June by being the first commodity Exchange in Japan to introduce an in-house clearing system. Palladium. Silver. Gold. Today it trades heavily . risk management and investment. Etc. Platinum. Commodities Traded. in a major overhaul over its computerized trading system. It has made rapid advancements in commodity trading globally since inception 20 years back. Tokyo Commodity Exchange (TOCOM) The Tokyo Commodity Exchange (TOCOM) is the second largest commodity futures exchange in the world with trade in metals and energy contracts. the first options contract in Japanese market. TOCOM's recent tie-up with the MCX to explore cooperation and business opportunities is seen as one of the steps towards providing a platform for futures price discovery in Asia for Asian players in Crude Oil since the demand-supply situation in US that drives the MYMEX is different from the demand-supply in Asia. the CME introduced the world's financial futures more than 30 years ago. corporate. Chicago Mercantile Exchange (CME) Chicago Mercantile Exchange (CME) is the largest futures exchange in the US and the largest futures clearing house in the world for futures and options trading. Rubber.

Butter. Its products often serve as a financial benchmark and witness the larges the open interest in futures contracts compared to any other exchange in the world. Lean interest rate futures. Stock indices and foreign exchange futures. Frozen Pork bellies. live Cattle. Etc. Milk. dairy and forest products and enables small family farms to large agri-businesses to manage their price risks. Commodities Traded. Urea Ammonium Nitrate. Feeder cattle. Trading in the CME can be done either through pit trading or electronically. Non-fat Dry Milk. Diammonium Phosphate. The commodities futures profile of CME consists of livestock. Urea. .

A person deposits certain amount of say. Futures have something called an expiry date. A person can buy or sale a commodity future on an exchange based on his expectation of where the price will go. by when the buyer or seller either closes (square off) his account or give/take delivery of the commodity. The first is the spot trade. Squiring off is done by taking an opposite contract so that the net outstanding is nil. The broker maintains an account of all dealing parties in which the daily profit or loss due to changes in the futures price is recorded. . The second is futures trade. in which one pays cash and carries away the goods. The underpinning for futures is the warehouse receipt.How Commodity market works? There are two kinds of trades in commodities. good X in a ware house and gets a warehouse receipt which allows him to ask for physical delivery of the good from the warehouse but some one trading in commodity futures need not necessarily posses such a receipt to strike a deal.

The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. Today Commodity trading system is fully computerized. But at present in India very few warehouses provide delivery for specific commodities. Traders need not visit a commodity market to speculate. The commodity trading system consists of certain prescribed steps or stages as follows: I. Trading: . Following diagram gives a fair idea about working of the Commodity market.At this stage the following is the system implementedOrder receiving .For commodity futures to work. the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt. With online commodity trading they could sit in the confines of their home or office and call the shots.

This stage has following system in placeMatching Registration Clearing Clearing limits Notation Margining Price limits Position limits Clearing house. . Settlement: . Clearing: .This stage has following system followed as followsMarking to market Receipts and payments Reporting Delivery upon expiration or maturity.- Execution Matching Reporting Supervision Price limits Position limits - II. III.

It tries to finds a match on the other side of the book. If it does not find a match. Time stamping is done for each trade and provides the possibility for a complete audit trail if required. If the 20th of the expiry month is a trading holiday. A brief overview of how transactions happen on the NCDEX’s market. trading. the contracts shall expire on the previous trading day. it is an active order. TRADING The trading system on the NCDEX provides a fully automated screen based trading for futures on commodities on a nationwide basis as well as online monitoring and surveillance mechanism. Thus a January expiration contract would expire on the 20th of January and a February expiry contract would cease trading on the 20th of February. If it finds a match. time and quantity.The NCDEX System Every market transaction consists of three components i. All quantity fields are in units and price in rupees. . two month and three month expiry cycles. a trade is generated. All contracts expire on the 20th of the expiry month. the order becomes passive and gets queued in the respective outstanding order book in the system.e. The exchange notifies the regular lot size and tick size for each of the contracts traded from time to time. The exchange specifies the unit of trading and the delivery unit for futures contracts on various commodities. New contracts will be introduced on the trading day following the expiry of the near month contract. clearing and settlement. It supports an order driven market and provides complete transparency of trading operations. its price. When any order enters the trading system. NCDEX trades commodity futures contracts having one month. Order matching is essential on the basis of commodity.

At NCDEX. after . Only clearing members including professional clearing members (PCMs) only are entitled to clear and settle contracts through the clearing house. The settlement guarantee fund is maintained and managed by NCDEX.The figure shows the contract cycle for futures contracts on NCDEX CLEARING National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades executed on the NCDEX.

on the basis of locations and then randomly. All positions of a CM. NCDEX . commodities already deposited and dematerialized and offered for delivery etc. On the date of expiry. After completion of the matching process. On the expiry date of a futures contract. clearing members are informed of the deliverable/ receivable positions and the unmatched positions. A professional clearing member is responsible for settling all the participants’ trades. which he has confirmed to the exchange. the final settlement price is the spot price on the expiry day. Matching done by this process is binding on the clearing members. the matching for deliveries takes place firstly.the trading hours on the expiry date. and the final settlement which happens on the last trading day of the futures contract. keeping in view the factors such as available capacity of the vault/warehouse. The responsibility of settlement is on a trading cum clearing member for all trades done on his own account and his client’s trades. daily MTM settlement and the final MTM settlement in respect of admitted deals in futures contracts are cash settled by debiting/crediting the clearing accounts of CMs with the respective clearing bank. Unmatched positions have to be settled in cash. created during the day or closed out during the day. brought forward. The cash settlement is only for the incremental gain/loss as determined on the basis of final settlement price. based on the available information. On the NCDEX. members submit delivery information through delivery request window on the trader workstations provided by NCDEX for all open positions for a commodity for all constituents individually. SETTLEMENT Futures contracts have two types of settlements. the MTM settlement which happens on a continuous basis at the end of each day. are market to market at the daily settlement price or the final settlement price at the close of trading hours on a day.

who would courier the same to the buyer’s clearing member. Exchange India Pepper & Spice Trade Association. Mustard seed Gur. Bhatinda The Chamber of Commerce. Mustard seed its oil & oilcake Gur Gur. 5. Muzaffarnagar Rajdhani Oils & Oilseeds Exchange Ltd. 3.. Kochi (IPSTA) Vijai Beopar Chambers Ltd. Potatoes and Mustard seed Gur . the warehouse accepts them. The commodities have to meet the contract specifications with allowed variances. If the commodities meet the specifications. Delhi Bhatinda Om & Oil Exchange Ltd. On an appointed date. 6. Warehouse then ensures that the receipts get updated in the depository system giving a credit in the depositor’s electronic account. The seller the gives the invoice to his clearing member. 1.on receipt of such information matches the information and arrives at delivery position for a member for a commodity. the buyer goes to the warehouse and takes physical possession of the commodities. 4. The seller intending to make delivery takes the commodities to the designated warehouse. These commodities have to be assayed by the exchange specified assayer... Trading is taking place in about 78 commodities through 25 Exchanges/Associations as given in the table below:- No.. The Present Status Presently futures’ trading is permitted in all the commodities. 2. Hapur The Meerut Agro Commodities Exchange Ltd. Meerut Commodity Pepper (both domestic and international contracts) Gur.

Oil & Bullion Merchants Association... Soya seed. 12. 16. Groundnut. Cottonseed. Gwalior E-sugar India Ltd. Soya oil and Soya National Board of Trade. Coffee Sugar Several Commodities 18.. Cotton.. Surendranagar E-Commodities Ltd. 14. Sangli.. cotton (kapas) and RBD Palmolein. its oil and 8. Rapeseed/Mustard seed its oil and oilcake and RBD Palmolien The First Commodities Exchange of Copra/coconut.7. its oil & cake. Castorseed.. Calcutta The East India Cotton Association Ltd... Mumbai Rajkot Seeds. its oil & cake. 9. cottonseed. Kochi Central India Commercial Exchange Gur and Mustard seed 15. Indore meals. cottonseed. its oil & oilcake Cotton Turmeric 13. Bangalore Surendranagar Cotton Oil & Oilseeds. New Delhi National Commodity & Derivatives. 17.. Ahmedabad oilcake The East India Jute & Hessian Exchange Hessian & Sacking Ltd. India Ltd. 11. Castor oil international contracts Castor seed. Ltd. Mumbai National Multi-Commodity Exchange of India Ltd.. Exchange Ltd. 20. The Bombay Commodity Exchange Ltd. Oilseed Complex. Ahmedabad Coffee Futures Exchange India Ltd. 21. Kapas 19. 10. Mumbai The Spices & Oilseeds Exchange Ltd. Rajkot The Ahmedabad Commodity Exchange. Mumbai Sugar (trading yet to commence) Several Commodities ..

Guar seed. For which Xerox copy of any one of the following can be given a) PAN card Number b) Driving License c) Vote ID d) Passport . What is Identity Proof? When investor approaches Clearing Member. 24. Mumbai Bikaner commodity Exchange Ltd. Bikaner Haryana Commodities Ltd. 25.. the member will ask for identity proof. Gram. 23. Jaipur Several Commodities Mustard seeds its oil & oilcake..Multi Commodity Exchange Ltd.. Hissar Bullion Association Ltd. 22. Guar Gum Mustard seed complex Mustard seed Complex How to invest in a Commodity Market? With whom investor can transact a business? An investor can transact a business with the approved clearing member of previously mentioned Commodity Exchanges.. The investor can ask for the details from the Commodity Exchanges about the list of approved members.

the clearing member will insist on Xerox copy of Ration card or the Pass Book/ Bank Statement where the address of investor is given. . The clientele. What aspects should be considered while selecting a commodity broker? While selecting a commodity broker investor should ideally keep certain aspects in mind to ensure that they are not being missed in any which way. The number of franchises/branches. The market credibility. What are the other forms to be signed by the investor? The clearing member will ask the client to sign a) Know your client form b) Risk Discloser Document The above things are only procedure in character and the risk involved and only after understanding the business. What are the particulars to be given for address proof? In order to ascertain the address of investor.What statements should be given for Bank Proof? The front page of Bank Pass Book and a canceled cheque of a concerned bank. he wants to transact business. Otherwise the Bank Statement containing details can be given. These factors include • • • • Net worth of the broker of brokerage firm.

losses in the physical market are offset. by the gains in the futures market. Hedging thus performs the economic function of helping to reduce significantly. if not eliminate altogether. He is also known as the authorized dealer. The benefits of hedging flow from the relationship between the prices of contracts (either ready or forward) for physical delivery and those of futures contracts. In other words the Commodity Broker is the member of Commodity Exchange. having direct connection with the exchange to carry out all trades legally. So long as these two sets of prices move in close unison and display a parallel (or closely parallel) relationship. Types of Traders:Hedgers Hedging involves buying or selling of a standardized futures contract against the corresponding sale or purchase respectively of the equivalent physical commodity.back office functioning being most important. the losses emanating from the price risks in commodities. These are amongst the most important factors to calculate the credibility of commodity broker. .• • • • The references. Broker:The Broker is essentially a person of firm that liaisons between individual traders and the commodity exchange. The research team. Credit facility. The kind of service provided. either fully or substantially.

These participants include independent floor traders and investors. For protection against higher prices of the produce. A person keeps a close watch upon the prices discovered in trading and when the comfortable price is reflected according to his wants. Selling a futures contract in anticipation of a price decrease is known as ‘going short’. he sells futures contracts. who at one point or another deal in the underlying cash commodity. Take an example: A Hedger pay more to the farmer or dealer of a produce if its prices go up. Buying a futures contract in anticipation of price increases is known as ‘going long’. he hedges the risk exposure by buying enough future contracts of the produce to cover the amount of produce he expects to buy. Speculative participation in futures trading has increased with the availability of alternative methods of participation. In this way he gets an assured fixed price of his produce. the futures position will profit if the price of the produce raises enough to offset cash loss on the produce. Speculators Speculators are some what like a middle man. Hedgers are often businesses.Hedgers are those who protect themselves from the risk associated with the price of an asset by using derivatives. Since cash and futures prices do tend to move in tandem. They will just buy from one end and sell it to the other in anticipation of future price movements. They actually bet on the future movement in the price of an asset. In general. They are never interested in actual owing the commodity. or individuals. hedgers use futures for protection against adverse future price movements in the underlying cash commodity. They are the second major group of futures players. They handle trades for their personal clients or brokerage firms. Speculators have certain advantages over other investments they are as follows: .

he will take offsetting positions in both the markets to lock in a profit. yet he can ride on the full value of the contract as it moves up and down. Futures are highly leveraged investments. to change more quickly than real estate or stock prices. If he finds future prices of a commodity edging out with the cash price. A broker of Commodities is also required to meet certain obligations to gain such a membership in exchange. but a performance bond. How to become a Commodity Trader/Broker of Commodity Exchange? To become a commodity trader one needs to complete certain legal and binding obligations. 50 Lakhs.If the trader’s judgment is good. a person who has been officially chosen to make a decision between two people or groups who do not agree is known as Arbitrator. The actual value of the contract is only exchanged on those rare occasions when delivery takes place. There is routine process followed. . on average. which is stated by a unit of Government that lays down the laws and acts with regards to commodity trading. This sum has been determined by Multi Commodity Exchange. In commodity market Arbitrators are the people who take the advantage of a discrepancy between prices in two different markets. Arbitrators According to dictionary definition. he can make more money in the futures market faster because prices tend. The trader puts up a small fraction of the value of the underlying contract as margin. Moreover the commodity futures investor is not charged interest on the difference between margin and the full contract value. To become a member of Commodity Exchange the broker of brokerage firm should have net worth amounting to Rs. The money he puts up is not a down payment on the underlying contract.

He should not be bankrupt. He should be Graduate or having equivalent qualification. along with all enclosures. Institutional Trading-cum-clearing Member (ITCM):- . 4. A person desired to register as TCM is required to submit an application as per the format prescribed under the business rules. and clear and settle trades himself. 3. a cooperative society. 1. He is required to go through interview by Membership Admission Committee and committee is also empowered to frame rules or criteria relating to selection or rejection of a member. A sole proprietor. Partnership firm. There are two types of TCM.How to become a Member of Commodity Exchange? To become member of Commodity Exchange the person should comply with the following Eligibility Criteria. a public sector organization or any other Government or non-Government entity can become a TCM. TCM-1 and TCM-2. a corporate entity. fee and other documents specified therein. Trading-cum-Clearing Member (TCM):A TCM is entitled to trade on his own account as well as on account of his clients. 5. He should have completed 21 years of his age. He has not been debarred from trading in Commodities by statutory/regulatory authority. He should be Citizen of India. There are following three types of Memberships of Commodity Exchanges. 2. a joint Hindu Undivided Family (HUF). TCM-1 refers to transferable non-deposit based membership and TCM-2 refers to non-transferable deposit based membership.

The member may be allowed to make deals for himself as well as on behalf of his clients and clear and settle such deals.Only an Institution/ Corporate can be admitted by the Exchange as a member.50 Lakhs 0. Professional Clearing Member (PCM):A PCM entitled to clear and settle trades executed by other members of the exchange. authorized persons and Trading Members who would be registered as trading members.No.50 Lakhs 50. The member would be allowed to clear and settle trades of such members of the Exchange who choose to clear and settle their trades through such PCM. Particulars 1 2 3 4 5 6 Interest Free Cash Security Deposit Collateral Security Deposit Admission Fee Annual Membership Fees Advance Minimum Transaction Charges Net worth Requirement NCDEX: TCM 15.PCM . ITCMs can also appoint sub-brokers. conferring upon them the right to trade and clear through the clearing house of exchange as an Institutional Trading-cum-clearing Member (ITCM).00 Lakhs Professional Clearing Membership: .00 Lakhs 0.TCM Sr.00 Lakhs 15. Membership Details for NCDEX:- Trading-cum-clearing Member: .00 Lakhs 5. A corporate entity and an institution only can apply for PCM.

10 Lakhs Rs 50.00 Lakhs 1.A. No. 50 Lakhs Rs.00.10 Lakhs Rs 50.Sr. 50 Lakhs Rs.A.00 Lakhs 25. 50 Lakhs Rs. 50 Lakhs Rs. 50 Lakhs Rs.000 Rs 50 Lakhs Rs. 5Crores Rs. Nil Rs 1.000 Rs.5 Lakhs Rs 50. 50 Lakhs Rs. 50 Lakhs Annual Subscription Net worth Criteria Corporate Partnership Individual TCM-1 TCM-2 ITCM PCM Rs.A.000 N. 1 2 3 4 5 Particulars Interest Free Cash Security Deposit Collateral Security Deposit Annual Subscription Charges Advance Minimum Transaction Charges Net worth Requirement NCDEX: PCM 25. .A.000 N. 50 Lakhs Rs. 50 Lakhs Rs.00 Lakhs Membership Details for MCX:- Category Admission Fees Initial Security Deposit Rs. N. N.00 Lakhs 1. 15 Lakhs Rs.00 Lakhs 5000.

National Securities Depository Limited (NSDL) to remove the difficulties arising out of the use of physical (paper) certificates for settlement of trades on stock exchanges and for improving settlement efficiency. Demat of warehouse receipt eliminates the difficulties arising out of the use of physical warehouse receipts. share certificates. Dematerialization refers to the process of conversion of the physical paper (i. What is a Warehouse Receipt? . warehouse receipts.e.) into the electronic balances. In this process the physical paper is destroyed and electronic balance is credited in the demat account owner of the physical document. With the increase in trade volume at the Commodity Exchanges. the need to have a vibrant and efficient settlement system was felt. This led to the concept of dematerialization of warehouse receipts. The concept of demat has been in vogue in the securities market from the year 1996 with the setting up of the first depository i.Dematerialization and Rematerialization in commodity markets Introduction The Indian commodity futures market has grown exponentially in the recent times.e. etc.

The physical warehouse receipt suffers from the following deficiencies being the paper form of title documents.32 of the Bombay Warehouse Act. a receipt issued by a warehouseman shall. Either the original depositor or the holder in due course (transferee) can claim the commodities from the warehouse. be transferable by endorsement. unless otherwise specified on the receipt. mutilation. which floats the physical paper document.  Need to physically move the warehouse receipt from one place to another with the risk of theft. loss in transit etc.  Risk of fake / forged warehouse receipt with the introduction of dematerialization of warehouse receipt the above deficiencies are taken care of. Entities involved in the demat process  Issuer: The issuer is an entity. These receipts are transferable by endorsement and delivery. and shall entitle its lawful holder to receive the goods specified in it on the same terms and conditions on which the person who originally deposited the goods would have been entitles to receive them. A single warehouse receipt is generally issued to the depositor for the goods deposited by him at one time hence he faces this difficulty in case of part transfer. if the transferor and the transferee are at two different locations.  Need for splitting the warehouse receipt in case the depositor has an obligation to transfer only a part of the commodities. According to Sec. It would be a company in case of the share certificate or warehouse in case of warehouse receipt.Warehouse receipts are title documents issued by the warehouse to the depositors against commodities deposited in warehouses. . 1959.

The basic reason behind opening the account in both the depositories is that the Depositories have not yet started Inter-Depository transfer in case of commodities. The commodity balances are credited in this type of account. NSDL and CDSL. The existing demat account for securities cannot be used for the purpose of holding and transacting in the commodity. Unlike the securities demat account. The account is used by the member for giving or receiving delivery of commodity to or from the Clearing House of the Exchange. Presently there are two depositories in India i. Clearing Member Pool Account is used for the purpose of settlement of delivery obligation. . The depositor is required to quote this account number at the time of depositing commodity in the warehouse. In short the pay-in and pay-out of the exchange is settled through this account. All the members of the exchange are required to open the CM Pool Account with both the depositories.e. This cannot be used for holding the commodity. National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) Types of Demat Account Beneficiary Owner Account is used to hold and transact in commodity balances. the investors need to open the commodity demat account with both the depositories i. The Registrar and Transfer Agents: It acts on behalf of the issuer as an interface between the issuer and the depository for converting the physical warehouse receipt in the demat form.  The Depository: The Depository maintains the records of the beneficial owner in its books.e. All the investors trading in the commodity markets are required to separately open beneficiary owner account for commodity.

Process of Demat Commodity The depositor at the time of deposit of commodity contacts the Exchange approved Quality Certifying Agency (QCA) to get the quality of goods assayed in order to ascertain whether the goods confirms to the quality specification norms of the Exchange. The depositor is required to ensure that all these details are properly filled in the form to avoid any kind of delays or errors. Registrar and Transfer Agent and the Depository. quantity. Commodities that have been dematerialized are identified by its unique code (i. demat account number of the depositor.e. The warehouse management then initiates the process of demat credit in co-ordination with the Exchange. The depositor is required to check the holding statement (which can be obtained from his depository participant) after a day or two to see whether the commodity deposited has been credited to his account under proper Commodities Identifier – ICIN. quality certificate and warehouse receipt to the warehouse and receives acknowledgement of the same. ICIN is generated on the uniqueness of the following 4 parameters:  Commodity. ICIN) allotted by depository. validity dates of both for a commodity. Concept of International Commodity Identification Number (ICIN) ICIN refers to International Commodity Identification Number. The depositor submits the CDF. . etc. After receipt of the quality certificate from the QCA the depositor is required to fill Commodity Deposit Form (CDF) which contains the details of the quality.

Process of Demat Delivery If the futures contract on its expiry results into delivery.  Validity date of the commodity. the exchange credits the commodity to the Buying Member Pool Account. The ICIN description provides the name of the commodity. Warehouse Location. the unit of measurement and the validity date of the ICIN. Rematerialization / Withdrawal / Revalidation of Commodities The depositor approaches the DP and makes request for withdrawal of commodity in the prescribed form called Remat Request Form (RRF). The acknowledgement copy of . then the member having delivery obligation is required to give delivery of the commodity to the exchange on or before the respective pay-in date. grade of goods. Change in any of the above parameters will result in the generation of new ICIN. the member is required to give the delivery instruction to his Depository Participant before the pay-in deadline.  Grade / Fineness of the commodity. suppose there are four designated Vaults for Gold delivery and 2 qualities of gold are tendered for delivery then a total of 8 ICINs will be generated for Gold. For example. On Payout. This is done by transferring commodity from the Clearing Member Pool Account to the Clearing House Account of the Exchange.

 The depositor can go for revalidation of the commodity. The depositor will approach the vault / warehouse along with the following documents for withdrawal of commodity. After the validity date. The depositor has two options after the validity date:  The depositor can withdraw the goods from the warehouse. ICIN is considered to have expired and the same would not be acceptable as good delivery at the exchange. the depositor needs to submit the fresh quality certificate as revalidation form. .RRF is given to the depositor. "Validity / Revalidity Duration" refers to the number of times and the corresponding duration for which the quality certification is valid.  Original copy of acknowledgement issued by DP on which RRN is written  Authority letter from the depositor (in case agent)  Proof of identification of the agent person. The “final expiry” of commodity refers to the maximum time period for which the particular commodity has shelf-life. All agricultural commodities have a shelf life and cannot be stored indefinitely. The relevant quantity will be credited on the new ICIN. Thus in case of revalidation of commodity.

since margins are lower in the range of 5-10%. Unlike the financial derivatives market.Participation of FII and Mutual Funds in Commodity Markets Mutual Funds and Foreign Institutional Investors are presently not allowed to trade in commodity markets. The Government is considering the proposal to allow these entities to trade in commodity future markets. one can enter the commodity derivatives market with a much lower investment. The leverage that can be obtained in the commodity futures market is much . retail participation is essential as has been the experience in developed countries. But the extent of knowledge dissemination of commodity futures among the mass market is at an abysmal level. For commodity markets to grow rapidly.

Disseminating market discovered prices to the farmer level calls for a mammoth structural framework and massive investments.higher. in case regulation permits the entry of Foreign Institutional Investors into this market. this would prove to be an added advantage for the lay investor. market dynamics and price forecasting. commodity markets are being acknowledged as an effective market to hedge against the vagaries of the equity markets. A similar scenario is expected to be replicated in the commodity market. . they are equipped with qualified analysts and fund management who undertake value investing and boost up the reliability for the retail investors. While volumes are important for commodity exchanges. who may not have the knowledge and wherewithal to trade in such markets. This is the reason for mutual funds to participate in commodity markets since. The presence of foreign funds in the securities market has been found to have correlation with the interest as well as activity in equity segment. In case mutual funds are allowed to participate in commodity markets by structuring commodity funds for retail investors. There is a need for exchanges to keep relentlessly pursuing an awareness creation strategy. The commodity futures exchange remain largely in the shadows of the booming equity market exchanges due to low awareness levels. Global factors and rather macro factors play a much important role in it. Awareness at the grassroots will be essential to materialize and sustain the success it is foreseeing. Yet the other set of challenges in front of the exchanges are creating awareness and information dissemination. Globally. Tracking commodity prices is not just a balance sheet analysis or a company specific study. That demands domain expertise in commodities. what is probably more critical is awareness.

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