INTRODUCTION

A commodity is defined as “an intermediate good with a standard quality, which can be traded on
competitive and liquid global international physical markets” (Clark et al., 2001, p. 3). A
commodities exchange is an exchange where various commodities and derivatives products are
traded. Most commodity markets across the world trade in agricultural products and other raw
materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil,
Metals, etc.) And contracts based on them. Specificity is that no physical commodity is traded,
but contracts are, and these contracts are strictly standardized. These contracts can include spot
prices, forwards, futures and options on futures. In most cases, commodity exchanges are formed
as public companies, which main purpose isn’t to make profit from operating, but to give
possibility to establishers to operate on them, and they make profit from provisions for executing
orders on exchange. In some way, establishers have monopole in trading on exchange because
only establishers / brokers are allowed to trade on exchange.

GROWTH OF WORLD COMMODITY DERIVATIVES MARKET

Since 2004, the development of commodity derivatives markets is impressive. Volumes only
stopped growing during one year in 2008. In 2010 the growth rate of volumes (+35%) was
higher than for all other segments of organized derivatives markets except currency derivatives.

Figure 2

BRIEF HISTORY OF COMMODITY EXCHANGES

There is a popular belief among many historians and economists that the commodity exchange
developed and evolved as a product of the ancient fairs and open-air markets of the middle Ages.
There is evidence to support the fact that the first exchange similar to those on the lines of today
were established in France and England way back in the 15th , 16th and 17th centuries.

In the 19th century, US businessmen began to organize forums in the market to make the buying
and selling of products easier. These marketplaces provided a place for buyers and sellers to meet
and set quality standards, as well as establish rules of their business.

Agricultural products and commodities were the ones that were mostly traded but as long as
there are buyers and sellers, any product and commodity can be traded. In 1872, a few dairy
merchants from Manhattan got together to bring about some chaotic conditions in the New York
market to a system in terms of storage, pricing, and transfer of agricultural produce.

In 1933, while suffering from the Great Depression, the Commodity Exchange, Inc. was
established. It was started in New York and via the merger and amalgamation of four smaller
exchanges - the National Raw Silk Exchange, the Rubber Exchange of New York, the National
Metal Exchange, and the New York Hide Exchange.

The Chicago Board of Trade was the first commodity exchange in the United States of America
to be opened in 1848, and is still the largest exchange as well. The futures contract was
developed here in the 1860s. The New York Cotton Exchange founded in 1871 was also among
few other early United States exchanges.

CME Group still dominates the scene for commodity derivatives and is present with important
volumes on all the segments (Agricultural, Energy and Metal) via its various trading platforms:
CME, CBOT and NYMEX. CME Group has also developed clearing facilities to process OTC
trades with its platform Clearport. In 2010, OTC trades registered on CME Group decreased
slightly (-9%) whereas pure on-exchange trades increased by 48%. Other exchanges active in the
trading of Agricultural derivatives in the Americas, namely ICE and BM&FBovespa also
increased rapidly in 2010 but volumes remain significantly lower.

In Asia Pacific, the growth rate of volumes that was close to the one observed in Americas
(+36% agains +35%) was mainly driven by Chinese exchanges that were accounting for 87% of
the volumes traded in that region. Evolutions were however contrasted among those Chinese
exchanges: Shangaï and Zhengzhou surged (respectively by +43% and +118%) whereas Dalian
Commodity Exchange slightly decreased (-3%).

In Europe, ICE Futures increased significantly on energy derivatives (+31%) whereas London
Metal Exchange slightly decreased (-1%) on metal derivatives. Other exchanges experienced
high growth rates but volumes remain much lower.

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The highest growth rate of volumes in 2010 was observed for agricultural products (+41%)
followed by metal derivatives (+33%) and energy (+11%).

In China, exchanges are generally specialized in one type of agricultural product. On Shanghai
Futures Exchange, 99% of the volumes are concentrated on metals and rubber, Dalian Exchange
is specialized in soybean products (63% of the volumes) and in Zhengzhou 79% of the contracts
traded are linked to white sugar and cotton.

CME Group acquired platforms for each type of products: CBOT for agricultural products,
COMEX for metal derivatives and NYMEX for energy.

The Multi Commodity Exchange of India stands sixth in the world in number of Commodities
Derivatives Contracts traded in the year 2010.India has a long and chequered history of
commodity derivative trading, spanning over 130 years. The commodity derivative exchanges
witnessed several ups and downs for the past 13 decades, with a booming phase of unbridled free
futures trading in as many as 300 markets during the pre-independence era, followed by a ban on
such trading for almost a decade after the outbreak of the Second World War in 1939. Subsequent
to independence in 1947, the then Government of Bombay enacted the Bombay Forward
Contracts Act and permitted futures trading in cotton and oilseeds under the auspices of the
recognized associations. Outside Bombay Presidency, commodity futures trading was also
revived, but remained free and unregulated except by the exchanges organizing such trading.
With the Constitution of India coming into force on January 26, 1949, the subject of futures
trading came under the Union List. As a result, the Government of India brought on the Statute
Book the Forward Contracts (Regulation) Act, 1952 (FCRA), and established the Forward
Markets Commission (FMC) in 1953. Under the FCRA, futures trading came to be allowed in
select agricultural commodities and their products under the auspices of associations recognized
by the Government of India. By mid-1960s, around 30 associations were recognized for trading
in about a score of commodities. Trading was subject to severe regulatory measures. But no
sooner the markets began to bloom with some activity, the government turned volte-face, and
proscribed futures trading in almost all major food crops in the fond hope of restraining the
raging inflation in the economy.

Following the launch of economic reforms in the early 1990s, and especially after India signed
the General Agreement on Trade and Tariffs (GATT) to enter the World Trade Organization
(WTO), the World Bank and UNCTAD submitted a joint report to the Government of India
recommending revival of futures trading in farm commodities and their products to render trade
in such commodities competitive in the world markets after the envisaged removal of trade and
non-trade barriers. As a result, future trading was revived, after a lapse of nearly three and a half
decades, towards the close of the 20 century. The onset of the new millennium thereafter
th

witnessed the setting up of three new national commodity exchanges, which were permitted to
trade in commodities of their choice, unlike the traditional regional and single commodity
exchanges that traded in one or few closely related commodities only. At present, there are
almost 32 commodity exchanges, including three national exchanges, trading in as many as 100
Commodities together existing and the details are given below.
Indian commodity derivative markets are regulated under the Forward Contracts (Regulation)
Act, 1952 (or FCRA Act), which proposes a three-tier regulatory structure for the industry. The
Government of India is the primary regulator, while Forward Market Commission (FMC) acts as
an intermediary between the GoI and the exchanges. Key functions of the FMC include
providing limits on speculative open positions, placing price limits for all commodities and
providing directives for margin requirements.
DEVELOPMENTS IN THE COMMODITY DERIVATIVE MARKETS:
Commodity derivatives trading in India notwithstanding its long and tumultuous history, with
globalisation and recent measures of liberalisation, has witnessed a massive resurgence turning it
one of the most rapidly growing areas in the financial sector. S.M. Lokare (2007). A commodity
derivative trading although has witnessed a long and chequered history, with the recent measures
of liberalisation, the sector has witnessed a massive boom in the country. S.M. Lokare (2007).
During 2009-10, forward trading was regulated in 109 commodities at 21 recognized exchanges.
The break up of the total value of commodities traded stood as under-

• Bullion - Rs.31.64 lakh crore. (40.75%)

• Base metals - Rs.18.02 lakh crore. (23.20%).
• Energy products - Rs.15.78 lakh crore (20.32%)
• Agricultural commodities-Rs.12.18 lakh crore (15.69%).

Out of 21 recognized exchanges, Multi Commodity Exchange (MCX), Mumbai, National

Commodity and Derivatives Exchange (NCDEX), Mumbai, National Multi Commodities
Exchange, (NMCE), Ahmedabad, Indian Commodity Exchange, Ltd., Gurgon, National Board of
Trade (NBOT), Indore, contributed 99.62% of the total value of the commodities traded during
the year

Sources : Forward Market Commission Annual Report 2009-10

Sources : Forward Market Commission Annual Report 2009-10

During 2009-10, MCX accounted for 87.3% of the total value of trade in the commodity market.
In actual terms the total value of trade in the MCX was Rs. 63.93 lakh crore. During the year, 43
commodities were traded at the MCX platform. Amongst which predominant commodities
traded during the year were Gold, Crude Oil, Silver, Copper, Natural Gas, Nickel and Zinc. The
total value of trade and percentage share of each of these predominantly traded commodities at
MCX, Mumbai in 2009-10 is given below:
Sources : Forward Market Commission Annual Report 2009-10
The graphical presentation of the percentage share of the prominently traded commodities at
MCX Mumbai is given below.

Sources : Forward Market Commission Annual Report 2009-10

The above study lime lights to identify what made MCX to have such a tremendous contribution
towards Indian Commodities Market. The study identified that MCX and NCDEX were launched
at the same time, the key reason for the success of MCX has been its orientation towards global
commodities. NCDEX, though successful in garnering healthy volumes in agricultural
commodities, has seen limited success in global commodities. Further, gold – which accounted
for 39% of the overall value traded on exchanges – has been a spectacular success at MCX. One
reason for this was the difference in contract specification by the two exchanges. MCX gold
contracts were based on 995 purity bar as underlying (which is the primary domestic import
standard) while NCDEX contracts were benchmarked to 999 purity. However, NCDEX too has
now shifted to contracts with 995 purity.
CHANGING INDUSTRY CONTOURS…COMMEXES TO SPEARHEAD GROWTH

In India, equity exchanges were the first to achieve a structural shift from unorganized to the
organized market. With equities being the only available asset class that could be traded on
sophisticated platforms, the segment has registered a strong 46% CAGR in turnover over the last
14 years and contributes 70% to the industry turnover. On the contrary, commodity derivative
trading on exchanges has commenced only five years ago despite commodities valued at 45% of
India’s GDP. With global benchmark of derivative markets at 30-40x the underlying physical
market, we believe commodity exchanges (commexes) offer high growth potential. In this
backdrop, we expect the share of commodities segment to almost double to 40% of the industry
turnover in the next five years
Commodity markets – highly unorganized till about three years ago – are comparatively younger
in the Indian context. Interestingly, India is the largest consumer of precious metals like gold and
silver as also the largest producer of agri. commodities. With turnover on commodity exchanges
registering a 40x growth over the last five years, the Indian commodities market is finally rising
above structural inefficiencies and attracting relevant participation as also liquidity. MCX, the
largest commodity exchange in the country (87% market share in FY09), was ranked World No.1
for silver and No.3 for gold (only after CME and TOCOM) and copper (after LME and SHFE) in
terms of number of contracts traded in 2008 (Source: FIA). Commodities are valued at 45% of
India’s GDP with the size of the physical commodity market at US$320bn. Globally, commodity
derivatives markets are at an average 30-40x the underlying physical market while India
currently stands at 3x. Building in the fact that the industry would take time to mature, we have
discounted the global average by 50% and expect the turnover to reach US$4trn by FY14.

CONCLUSION

The global commodities markets are having prosperous future and they are going to place new
records in volumes of trading. As in the article stated by Nirmal (2011) In the economic circles,
both academic and policy making bodies there is a heated debate whether the death knell has
been sounded for the dollar in its status as a reserve currency and gold is emerging as the
Reserve currency. Many countries are investing in Gold and it has been kept as the reserve. Thus
the Commodities Metal segment will record a high volume of contracts which will make the
world commodities market to flourish. As far as Indian commodities markets is concerned it is
well known fact that the participation of Financial Institutions and FII are restricted to trade on
Commodities futures but bill was passed by FMC for getting approval to make the above
mentioned players to participate. This is the time for the Commission has to take certain steps to
ensure that the markets are broad based and its benefits reach all the stakeholders of the
Commodity Markets. The FMC has to promote the participation of hedgers to counter balance
the speculative element in the price discovery. Lot of awareness programmes, workshops and
seminars are to be conducted to different category of stakeholders especially farmers in
Tamilnadu and other near by mofusils to make them aware of the existence of as well as to
benefit from the futures markets. The FMC should increase the range of commodities in future
commodities in commodity market in India along with a perfect regulatory system. The
promotion of Commodities related education is urgent and lots of courses are to be floated to
inject the knowledge about Commodities Market.
The Commission should conduct various meetings with different category of stakeholders of the
futures market to take feedback from them to improve the functioning of the futures markets and
to understand their difficulties, problems and felt needs so as to align/ design policies to increase
the level of trading in Commodities market. As per the statistics displayed on the website of
MCX on August 30, 2011 MCX ropes the world in trading in silver No2, in Gold, Copper and
Natural Gas, and No3 in Crude Oil. This plainly exhibits the influence of Commodities Markets
in the perception and psychology of the Indian Investors.