A case study of the Indian commodity derivatives market

Susan Thomas and Ajay Shah

5th October 2007

Susan Thomas and Ajay Shah for the Colombo Stock Exchange

A case study of the Indian commodity derivatives market

Experiment phase I: reform the existing exchanges. FMC took inspiration from the success of the equity markets and set their aims on reforms for commodity derivatives. multi-commodity exchanges. Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market .The genesis The commodity derivatives market regulator is the Forward Markets Commission (FMC). Experiment phase II: RFP for starting new national. FMC accepted five proposals – out of these. Motivation? (a) Further development of the commodity derivatives markets. three are operational today.

Experiment phase II: RFP for starting new national.The genesis The commodity derivatives market regulator is the Forward Markets Commission (FMC). multi-commodity exchanges. Experiment phase I: reform the existing exchanges. Motivation? (a) Further development of the commodity derivatives markets. FMC accepted five proposals – out of these. three are operational today. Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market . FMC took inspiration from the success of the equity markets and set their aims on reforms for commodity derivatives.

The exchanges themselves were permitted to trade multiple commodities on a single screen. The selection of the products were left to the exchanges. The law has to be amended to permit both.Institutional development for commodity derivatives The same trading and clearing infrastructure as for equity derivatives. The Forwards Contract Regulations Act. this should be done within the same brokerage firm. FCRA also prohibits contracts that are not physically settled. derivatives. Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market . Currently. forbids options trading. (FCRA) 1952. Develop transparency of spot market prices: systems to poll prices off spot market transactions. the equity and the commodity derivatives business is segmented: ideally.

The selection of the products were left to the exchanges. (FCRA) 1952. Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market . this should be done within the same brokerage firm. The Forwards Contract Regulations Act. FCRA also prohibits contracts that are not physically settled. the equity and the commodity derivatives business is segmented: ideally. derivatives. Currently. forbids options trading. The law has to be amended to permit both.Institutional development for commodity derivatives The same trading and clearing infrastructure as for equity derivatives. Develop transparency of spot market prices: systems to poll prices off spot market transactions. The exchanges themselves were permitted to trade multiple commodities on a single screen.

The Forwards Contract Regulations Act. forbids options trading. The exchanges themselves were permitted to trade multiple commodities on a single screen. this should be done within the same brokerage firm. (FCRA) 1952. Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market . Develop transparency of spot market prices: systems to poll prices off spot market transactions. Currently. derivatives.Institutional development for commodity derivatives The same trading and clearing infrastructure as for equity derivatives. the equity and the commodity derivatives business is segmented: ideally. FCRA also prohibits contracts that are not physically settled. The law has to be amended to permit both. The selection of the products were left to the exchanges.

Currently. derivatives. FCRA also prohibits contracts that are not physically settled. The Forwards Contract Regulations Act. forbids options trading. The exchanges themselves were permitted to trade multiple commodities on a single screen. Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market . The law has to be amended to permit both.Institutional development for commodity derivatives The same trading and clearing infrastructure as for equity derivatives. the equity and the commodity derivatives business is segmented: ideally. this should be done within the same brokerage firm. (FCRA) 1952. Develop transparency of spot market prices: systems to poll prices off spot market transactions. The selection of the products were left to the exchanges.

Develop transparency of spot market prices: systems to poll prices off spot market transactions. Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market . The law has to be amended to permit both. forbids options trading. (FCRA) 1952. The exchanges themselves were permitted to trade multiple commodities on a single screen. FCRA also prohibits contracts that are not physically settled. Currently. derivatives. The Forwards Contract Regulations Act. The selection of the products were left to the exchanges.Institutional development for commodity derivatives The same trading and clearing infrastructure as for equity derivatives. this should be done within the same brokerage firm. the equity and the commodity derivatives business is segmented: ideally.

The evolution of commodity derivatives in India Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market .

which was started Financial Technologies. Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market . which was started with the joint effort of ICIC Bank and NSE. which started November 2002.The exchanges There are three exchanges trading commodity derivatives: The National Multi-Commodity Exchange of Ahmadabad (NMCE). National Commodity Derivatives Exchange (NCDEX). A year later. Multi-Commodity Exchange (MCX). In addition. the old. single commodity derivatives exchanges are in place.

Channa. Pepper.482 1. Gold. Surendranagar ∗ Rajkot Seed oil. Gold. Silver. Aluminium Soy Oil Mustard Seed Castor Seed Kapas (Cotton) Volumes (USD million) 56. Bullion Merchants Association Ltd.220 1. Zinc Jeera. Ahmedabad ∗ NBOT (National Board of Trade). Hapur ∗ Ahmedabad Commodity Exchange Ltd.490 510 705 136 Castor Seed 135 Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market . Guar Seed. Zinc.Monthly volumes on the top commodities exchanges. Bombay ∗ NMCE. Indore ∗ Chamber of Commerce. Rubber. Crude Oil. Bombay ∗ NCDEX. Ahmedabad ∗ The Surendranagar Cotton & Oilseeds Association Ltd. March 2007 Market ∗ MCX. SoyOil Pepper.626 19. Rajkot Popular contracts Copper.

Turmeric) Non-edible Agriculture (Cotton and Cottonseed Oilcake. Jaggery/Gur. Coffee. Cumin/Jeera seeds. Iron) Sponge Polymers (Polyethylene. Palmolein. Zinc) Agricultural Pulses (Chana. Chilli. Polypropelene. Brent Crude Oil. Guar Seed and Guar Gum. Groundnut seed and oil. Mustard Seed and Oil. Tin. Coconut cake and Oil. Cotton seed and oil. Yellow Peas) Grain (Barley. Potato) A case study of the Indian commodity derivatives market Ferrous Metals (Steel. Polyvinyl Chloride) Susan Thomas and Ajay Shah for the Colombo Stock Exchange . Soya Bean and Soya Oil. Lead. Mulberry Coocoons and silk. Nickel. Copper.Products Non-Agricultural Energy (Crude Oil. Parboiled Rice and Basmati Rice. Sesame Seeds) Spices (Cardamom. Tur. Natural Gas) Precious Metals (Gold. Masoor. Sugar. Furnace Oil. Pepper. Silver) Base Metals (Aluminium. Moong. Urad. Rubber) Others (Cashew. Wheat) Oils and oilseeds (Castor Oil. Raw Jute and Jute Bags. Mentha Oil.

Indian exchanges have experimented with partial cash settlement procedures. 2 3 4 Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market . the 15th or the 20th on a contract by contract basis. virtually all commodity contracts today have mandatory physical delivery. The longest possible contract listed are twelve-month contracts. But.Contract specifications 1 Exchanges trade commodity futures contracts. Expiry dates vary: NCDEX has almost all its expiry dates on the 20th of the month and MCX has them on the 5th. The shortest maturity contracts are one-month contracts. but no commodity options.

NCDEX MCX Size Quality Delivery Additional Daily Price Limit Expiry Position Limit 1 kg 995 purity Ahmedabad Mumbai 3% 5th day 2 Metric Tons NCDEX 1 kg 995 purity Mumbai Ahmedabad 4% 20th day 2 Metric Tons Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market .Example of the gold contract on MCX.

million) 3.510 (73%) 7.040 1. March 2007 Market Commodity derivatives of which Agriculture Non-agriculture Equity derivatives Equity spot Government bonds spot Average Daily Volumes (USD.400 890 (27%) 2.925 2.Average daily volumes on Indian financial markets.020 Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market .

586.405.04 425 13.132.685.212.88 147 6.165.409.702.52 84 3.21 54 2.11 285 12.29 56 2.508.65 267 7. volumes for 1-15 June 2007 Commodity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Gold Copper Silver Crude Oil Zinc Jeera Nickel Guar Seed Pepper Soy Oil Soy Oil Gold Chana Soy Oil R/M Seed Exchange MCX MCX MCX MCX MCX NCDEX MCX NCDEX NCDEX NCDEX NBOT NCDEX NCDEX MCX NCDEX Trading volume (Rs.83 80 3.68 94 4.80 550 20.Cr/2 weeks) ($ Million/day∗ ) 26.88 558 26.035.32 87 4.821.857.795.Top 15 Futures on Physical Commodities.209.65 67 2.78 129 4.78 44 Share (%) 18 18 14 9 9 5 4 3 3 3 3 2 2 2 1 Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market .044.

org Susan Thomas and Ajay Shah for the Colombo Stock Exchange A case study of the Indian commodity derivatives market .in Email: ajayshah@mayin.Questions? Email: susant@igidr.ac.

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