TOPIC:

ESTABLISHMENT OF COMMODITY EXCHANGE IN PAKISTAN

INTERODUCTION:
A commodity exchange market, in its simplest form, acts as an intermediary between a
seller (farmer) and buyer (consumer) of the commodity. However, with the growth of
modern agricultural practices (and industries), the functions of a commodity exchange have
increased.
Commodity derivative:
Now-a-days a commodity exchange generally involves many parties who provide risk
management solutions in the form of commodity derivatives to businesses. A commodity
derivative product is basically an agreement to buy or sell the particular product in the
future at a current specified price.
Objective
The objective of a derivative product is to protect buyers from fluctuations in the market
price and to offer a fair price mechanism to sellers of the commodities.
Pakistan Mercantile Exchange Limited (formerly National Commodity Exchange Limited -
NCEL) is Pakistan's first futures commodity market having its registered Head office
in Karachi, Sindh. It is the only company in Pakistan to provide a centralized and regulated
place for commodity futures trading and is regulated by Securities and Exchange
Commission of Pakistan (SECP). It has started full trading activities on 11 May 2007.
Pakistan mercantile exchange limited commission ( formerly national commodity
exchange limited)
Pakistan Mercantile Exchange (formerly National Commodity Exchange Limited) is the first
technology driven, web-based, demutualized multi-commodity exchange in Pakistan. It is
licensed and regulated by the Securities and Exchange Commission of Pakistan and has a
100% Institutional shareholding.
Pakistan mercantile exchange limited:
Pakistan Mercantile Exchange Limited started its operations in May 2007 as a fully electronic
exchange with nationwide reach.
Pakistan Mercantile Exchange is the first Exchange in Pakistan to employ modern risk
management techniques based on Value-at-Risk with a pre-trade risk check in real time. The
Exchange acts as a central counterparty to both buyers and sellers through a novation
process and provide clearing & settlement on a T+0 basis using on-line bank transfer
mechanism.
Membership of Pakistan Mercantile Exchange:
The Membership of Pakistan Mercantile Exchange is open to all. Currently there are more
than 300 members registered on the Exchange and the number is growing every month. The

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members include brokerage houses, individuals and industry specialists ranging from
traders to exporters and importers and commodity specialists.
Pakistan Mercantile Exchange recently changed its name from National Commodity
Exchange Limited to better reflect its broad mandate and scope of activity to trade all types
of futures contracts.
The Exchange recently increased its timings and now operates 21 hours.
National Bank of Pakistan, Karachi Stock Exchange, Lahore Stock Exchange, Islamabad Stock
Exchange, Pak Kuwait Investment Company (Pvt.) Limited, and Zarai Taraqiati Bank Ltd.

There is a need to connect farmers in rural areas with the operations of the Pakistan
Mercantile Exchange
The theoretical foundations of a commodity exchange advocates devising mechanism for
farmers to minimize their losses and access the best possible market rates. With the
establishment of the Chicago Mercantile Exchange in 1898, modern commodity exchanges
have started offering risk management derivative products (forward and options) to
investors.

Modern commodity exchange

A modern commodity exchange generally offers trade in three broad categories; crops,
metals and energy.
Crops categories:
The crops include offering futures contracts in sugar, rice, wheat, cotton, chillies, palm oil,
potato, coffee etc.
Metals categories:
The category of metals includes silver, gold, Aluminium , steel, iron etc.
Energy categories:
The category of energy includes futures contracts in oil, gas, electricity etc.
Pakistan mercantile exchange:
The Pakistan Mercantile Exchange (PMEX), established in 2002 under the name of National
Commodity Exchange, is the sole commodity exchange working in the country offering
futures contract of nine commodities. The annual turnover at the PMEX in last year was
Rs710bn with more than 15pc average annual returns.
Purpose of commodity exchange:
The original purpose of a commodity exchange — to serve the needs of farmers — is not
genuinely reflected in the PMEX. There are various factors responsible for the non-
participation of the farmers’ community in the operations of PMEX including financial
illiteracy, lack of access to capital, absence of branch networks in rural areas etc.
There is a need to connect farmers in rural areas with the operations of the PMEX to offer
them fair price mechanism and to increase their incomes.

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To achieve this objective, international experiences can be studied. For example, in Kenya,
the Agricultural Commodity Exchange has been established to link the small-scale farmers
with the national and regional commodity markets.

Uses of information technology:

It employs the use of information technology to disseminate the prices of various
agricultural crops among farmers. It also serves as a clearing house and arranges logistics
hereby providing best fair price to the farmers.

In case of India:
Similarly, in India, the working of E-Choupal is helping the farmers to access the regional
market by sharing national-level price information at the village level. The E-Choupal system
has enabled farmers to access the best market price through the use of information
technology.
The learning from these experiences can be applied in Pakistan to link small and medium
size farmers with the PMEX by using information technology to know the latest market
prices and trends.
The turnover of PMEX can be significantly increased by establishing trading and clearing
platforms at the district level.
Further, to encourage farmers to sell their produce through a commodity exchange, the
PMEX should design financial incentives and promote its working in the rural areas where
the middleman usually exploits farmers.
In addition to this, the government should help the PMEX to establish its trading centres in
the agricultural areas of central Punjab, interior Sindh and KP. It should also facilitate
farmers in accessing the latest price information.
Pakistan trade commission
Pakistan Mercantile Exchange (formerly National Commodity Exchange Limited - NCEL)
initially started trading in Gold only. This listing was followed by the first gold physical
delivery in August 2007. Additional Products were subsequently launched – IRRI -6 rice in
March 2008 Palm Olien futures in June 2008 and KIBOR futures in Jan 2009. Crude Oil and
Silver contracts were listed in Nov 2009. Recently the Sugar contract was also added in June
27, 2011.
The main commodities traded on the Exchange have been Gold, Silver and Crude Oil. There
are various contracts in each. Gold has eight contracts namely Gold 1 ounce, Gold 100
ounce, Gold 1 Tola, Gold 50 Tola, Gold 100 tola, Gold Kilo, Gold 100 g, and Minigold 10 g.
Tola gold and minigold are deliverable contracts. Furthermore, there are two contracts in
Silver – 100 ounce and 500 ounce and two contracts in Crude Oil – 10 barrels and 100

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barrels. The smaller lot sizes for Silver and Crude Oil were introduced very recently in June
2011.