commodity exchange revised (1)

7/30/2019 Commodity Exchange Revised (1)

1/34

What are

commodityexchanges?


2/34

Exchanges are where buyer & sellers meetto interchange their possessions based on

certain criterion.

Commodityis An article of commerce or a

product that can be used for commerce.

Commodity Exchanges are exchanges for

buying & selling ofCommodities for delivery.


3/34

Evolution of Global Commodity

Exchanges

Development of modern futures trading began inUS in early 1800s.

The Chicago Board of Trade (CBOT) was officiallyfounded in 1848.

Earliest recorded contract on CBOT was on March13,1851.

By mid 19th century, futures markets had developedan effective mechanism for managing counter party

& price risks. New Exchanges were formed in late 19th & early

20th centuries as trading started in non-agriculturalcommodities.


4/34

CommodityExchange

Indian Scenario


5/34

India is among top five producers of the

commodities in the world.Agriculture contributes about 20% to the

Indian GDP and employs 70% population.

India is largest consumer of Gold in the

world. India is leading producer of other

commodities including plantation, metals,minerals etc.

However the trading activities ofcommodities in the country is in naissancestage


6/34

Evolution of Indian

Commodity ExchangeOrganised trading in commodity derivatives

started in 1875 with setting up of Bombay

Cotton Trade Association Ltd.Bombay Cotton Exchange Ltd established in

1893.

Hapur Chamber of commerce was

established in 1913 for Wheat

Calcutta Hessian Exchange was established

in 1919 for Jute.


7/34

The Forward Contract (Regulation) Act was

enacted in 1952. Forward trading in commodities is regulated

under the provisions of above act in India.

Forward Market Commission was setup in1953. FMC, headquartered at Mumbai, is aregulatory authority under Ministry ofConsumer Affairs and Public Distribution,Govt. of India.

Trading in futures & forwards ofcommodities either suspended or prohibitedin the 1970s.


8/34

Khusro Committee in 1980 recommendedre-introduction of futures trading based on

which trading in potato in Punjab & UP was

initiated in later half of 1980s.

Following Kabra Committee report in 1994,future trading was permitted in most

commodities.

In 2003, govt issued notifications permittingfutures trading in all commodities.


9/34

Commodity Exchange

At present there are 21 recognized commodityexchanges. These came into existence from 2003onwards.

National Exchanges. Multi Comm Exchange (MCX)

National Commodity & Derivatives Exch. (NCDEX) National Multi Comm Exch of India Ltd (NMCE)

Indian Commodity Exchange (ICEX)

Regional Exchanges Major National Board of Trade (NBOT), Indore

East India Jute & Hessian Exch, Kolkata The Bombay Commodity Exch Ltd, Mumbai

The Chamber of Commerce, Hapur

First Commodity Exch of India Ltd, Kochi


10/34

Major Commodities

TradedExchange Commodities tradedMCX Gold, Silver, Copper, Lead,

Nickel, Zn, Crude oil, natural gas,

furnace oil, mentha oil, kapas

NCDEX Chilli, guar gum, guar seed, gur,

jeera, mustard seed, pepper,

soyabean, sugar, brent crude oilNMCE Gur, crude palm oil, sunflower

seed, sunflower oil, mustard

seed, soybean, sugar, pepper


11/34

ICEX Crude oil, Copper cathode,

Silver, Gold, Mustard seed,

SoyabeanNBOT Mustard seed, mustard oil,

soybean, crude palm oil

Bombay Comm

Exchange

Sunflower oil, cotton seed,

castor seed, rice bran,

ground nut, crude palmoil


12/34

Structure of Indian

ExchangesFMC

Commodity Exchange

National Exchanges Regional Exchanges

NCDEX NBOT

MCX 15 other regional exch

ICEX

NMCE


13/34

Commodities permitted

Fiber Shankar KapasRaw Jute

NCDEXNMCE, ICEX

Spices Corriander

Turmeric

MCX, NCDEX

MCX, NCDEX, NMCE

Edible Oil/Oilseed/ oil

cakes

RM SeedSoyabean

ICEX, NCDEXICEX, NCDEX, MCX

Pulses Chana NCDEX, MCX, ICEX,

NMCE

Bullion / Metal Gold, Silver

Copper, Crude

MCX, NCDEX, ICEX,

NMCE

Sample list only


14/34

Functions of an

ExchangePrice Discovery

Price Dissemination

Risk Management

Market Surveillance

Clearing & Settlement


15/34

Market ParticipantsFarmers / Producers

Hedgers

Speculators

Arbitrageurs

End Users


16/34

An Exchange designs a contract, which alone

would be traded on the Exchange. it isstandardized.

The Exchange also provides a trading platform,which converges the bids and offers emanatingfrom geographically dispersed locations. Thiscreates competitive conditions for trading.

The Exchange also provides facilities for clearing,settlement, arbitration facilities.

The Exchange may also provide financially secureenvironment by putting in place suitable riskmanagement mechanism (margining system etc.),and guaranteeing performance of contract throughthe process of novation.


17/34

The commodity should have a suitable demand andsupply conditions i.e. volume and marketablesurplus should be large.

Price should be volatile to necessitate hedgingthrough futures trading in this case persons with aspot market commitment face a price risk. As aresult there would be a demand for hedgingfacilities.

The commodity should be free from substantialcontrol from Govt. regulations (or other bodies)imposing restrictions on supply, distribution andprices of the commodity.

The commodity should be homogenous or,alternately it must be possible to specify a standard.


18/34

Other Benefits The growth in commodity futures trade has

spawned an upsurge in interest in a wholelot of associated fields, like research,

education and training activities incommodity markets, commodity reportingfor print and visual media, collateralmanagement, commodity finance and ware-housing.

The market and the related fields whichwere almost non-existent seven years agonow attract significant mind-share nationallyand internationally.


19/34

Commodity Group-wise value of

trade

Commodity

group

2004-

05

2006-07 2009-

10

2010-

11

Bullion &

Metal

1.8

(31.47)

21.29

(57.9)

49.66

(63.95)

81.82

(68.47)

Agriculture 3.90

(68.18)

13.17

(35.82)

12.18

(15.69)

14.56

(12.19)

Energy 0.02

(0.35)

3.21

(6.28)

15.78

(20.32)

23.11

(19.34)

Total 5.72

(100)

36.77

(100)

77.62

(100)

119.49

(100)

Rs. In lac cr


20/34

Agricultural vs other

commoditiesAgricultural commodities led the initial spurt, and

constituted the largest proportion of the total valueof trade till 2005-06 (55.32%).

Bullion and metals overtook from 2006-07. Thegrowth in 2006-07 was almost wholly (88.7%)accounted for by bullion and metals, withagricultural commodities contributing a smallfraction (10.7%).

This was partly due to the stringent regulations, likemargins and open interest limits, imposed onagriculture commodities and the dampening ofsentiments due to suspension of trade in fewcommodities.


21/34

Commodities

suspendedTur 23.1.2007

Urad 23.1.2007

Rice 27.2.2007

Sugar 26.5.2009 to 31.12.2009

& no future contract till

30.9.2010

Wheat 27.2.2007 to 15.5.2009


22/34

Four commodities (wheat, rice, urad and tur)

were de-listed for futures trading . This de-listing has been held responsible in

many circles for the recent general downturn infutures trading in agricultural commodities.

But these four de-listed commodities togetheraccounted for only 6.65% of the total value offutures trading in all agricultural commodities in2006-07.

Thus, although this may have affected marketsentiments adversely, the delisting did nothave any major direct contribution to thedecline in trading observed from 2007-08.


23/34

Abhijit Sen Report

2008Current evidence available does not provide

any conclusive evidence about whetherthere is any causal relationship between

futures trading and rise in prices of theagricultural commodities.

However, there are concerns andapprehensions about futures trading leadingto price rise. This is in fact true not only inIndia but also in the rest of the world.


24/34

Although there is a large body of literature

which indicates that futures trading isassociated with low volatility of spot prices-intra seasonal, inter year and long term, andhelp in production planning of thesecommodities, more recent evidence is

mixed even in the US. In view of these markets having a potentially

important role in efficiency of the market infree and liberalized economy, it is important

to take steps to contain potential adverseimpact on spot prices and also to dispel thenegative perception about the market.


25/34

Farmers can derive benefit fromfutures markets as follows:

By participating directly/indirectly in the

market to hedge their price risks.

To take benefit of prices discovered on

the platform of commodity exchanges

by taking rational and well informed

cropping /marketing decisions


26/34

Change in prices

2007Oct

2008Nov

2009Sept

2010Nov

2011July

urad 24500 25310 38500 43250 37000

toor 27750 29000 51000 31500 29000

moong 25200 34000 43500 43500 50000

Y peas 17200 18000 14300 15210 21250

masoor 32750 41250 43250 31250 25250

Rs. PMT


27/34

05-06 06-07 07-08 08-09 09-10

pulses 13.39 14.2 14.76 14.57 16.5

tur 2.73 2.31 3.08 2.26 3.14

urad 1.25 1.44 1.46 1.17 1.25

moong 0.95 1.12 1.52 1.04 0.73

Production of pulses ( mn tonnes)


28/34

Way Forward -

AgricultureIndian farmers are price takers and

not price settlers in APMC markets.

Indian farmers barely realize 25% to365% of the final consumer price.Difference goes to middlemen &wastage due to logistics problems.

Of the total food grain, only a fractionis produced at MSP especially cereals.


29/34

Farmers true empowerment lies in

timely dissemination of all relevant info

and multiplying his options to sell itsproduce rather then forced to sell at

APMC only.

Farmers company, coopratives, privatemandis, spot exchanges, future

exchanges are some of the options.


30/34

DOs & Donts for

dealing in

commodity futures


31/34

Dealing with

exchangesDOs Read the FMC/

Exchange guidelines

and circulars.

Refer to Forward

Contracts

(Regulation) Act,

1952 before dealingin futures trading in

commodities.

Donts Do not fall prey to

market rumors and

tips.

Do not act based on

bull/bear run of market

sentiment in the

market.


32/34

Dos Go through all rules,

regulations, bye-laws &circulars issued by theExchange.

Keep track ofGovernment Policyannouncements.

Collect/pay mark-to-market margins onyour futures positionon a daily basis from/to

your Trading Memberas per the Exchangerules and regulations

Donts Do not go by any explicit/

implicit promise made byanalysts/ advisors/experts until convinced.

Do not trade based onlong-term price

prospects of thecommodity withoutunderstanding yourshort-term risk bearingcapacity

Do not miss on keepingtrack of your financialand contractualobligations against yourpositions.


33/34

DOs Trade only through

Exchange RegisteredMember and always insiston contract note.

Insist on filling up a KYCForm and on getting a

Unique Client ID.

Donts Do not undertake off-

market transactions incommodities.

Do not deal withunregisteredintermediaries. Ask for

their regulatoryapproval reference(UMC) before tradingthrough theintermediary.


34/34

Dos Go through details of Client

Member TradingAgreement to know yourrights and duties vis--visthose of Member-Brokers.

Pay required margin in timeand understand theconsequences of nonpayment.

Donts Do not start trading before

reading and understandingthe Risk Disclosure

Agreement.

Do not give authority to theMember of the Exchange tomake sale and purchasedecisions on your behalfand also do not surrenderthe right of receivingcontract notes on a daily

basis. PortfolioManagement Schemes(PMS) are not allowed incommodity market.

commodity exchange revised (1)

Documents