Mercantile Exchange Nepal Limited: A Commodity Derivative Exchange

Group Members

• Arogya Joshi• Erika Shakya• Karna Bahadur Lama• Manita Budhathoki• Saroj Shrestha• Sunita Guragain• Umesh Pant

Table of Contents1. Derivative Market2. Mercantile Exchange Nepal3. Strategic Plan4. Functions Performed by MEX5. Major Types of Commodity Derivatives in MEX6. Market Structure7. Types of Membership8. Membership Admission Process9. Market Mechanism10. Risk Management11. Contribution to National Economy12. Problems and Challenges of Derivative Market in Nepal13. Risk associates with Derivative Market14. Present Scenario of Derivative Market15. Conclusions and Recommendation

Derivative Market• A derivative is a security with a price that is dependent upon

or derived from one or more underlying assets. 

• Derivatives either be traded over-the-counter (OTC) or on an exchange.

.• Buyers use these to avoid the risks associated with the price

fluctuations of the product or raw material, while sellers try to lock in a price for their products.

Mercantile Exchange Nepal Limited(MEX)

• Established on 14th August, 2007 and started operation from 5th January, 2009.

• MEX commenced futures and Spot trading in precious metal, energy, base metal and agro commodities.

• Trading mechanism of MEX is the pure order-matching model with the state-of -the-art technology.

• Being an ISO 9001:2008 certified exchange, the quality of services that MEX offers have been of superior standard.

• It has also started delivery of gold and silver.

VisionTo envelope the market fundamentals of Nepali commodity eco-system, incorporating active and meaningful market participation to generate a full-fledged, transparent and a collaborative market base to eliminate curtailing prevalent in the commodity business

and ensure fair pricing for the farming community.

MissionTo facilitates electronic derivatives trading through robust and tested trading platform, Automated Trading System (ATS).To establish fair price discovery mechanism.To stand for market integrity and price transparency.To establish global standard in exchange trading.To establish an efficient Clearing and a guaranteed settlement system.

Goals To make trading, hedging and risk management easier for

anyone with exposure to the markets. Enable sellers and buyers to protect price risk of the

commodity from the adverse effects of price volatility in the market.

Opportunity to profit in a wide variety of commodities available around the world.

To diversify investment portfolio. To participate in trading round the clock trading Genuine and transparent price discovery mechanism. Variety of contract size and period available as per the

necessity and capacity of traders /investors.

Strategic Plan Promoting local commodity products Efficient supply chain management Introduction of option Focus on customer interest Raising awareness of derivative market Adopting sophisticated technology Easy market access, transparency and flexibility Increase the market penetration Achieving quality management system

Functions Performed by MEX• Discovery of future as well as current prices.

• Helps to transfer risks

• Margining, monitoring and surveillance of the activities of various participants

• To provide the platform of efficient trading

• Encourage to increase savings and investment in the long run

Organizational StructureCEO

Committees

Member Service Department

(MSD)

Research and Development Department

Compliance Department

Accounts Department

Clearing and Settlement

Department

BOD

Major Types of Commodity Derivatives in MEX

– Agricultural products: Cocoa, Coffee, Corn, Cotton, Mini Cotton, Soybean, Soybean oil, Sugar, Wheat etc.

– Energy Product: Brent Crude, Crude oil, Mini crude oil, Heating oil, Natural gas, Mini natural gas etc.

– Special Metals Product: Gold, Mini gold, Small gold, Silver, Mini silver, Small silver, Micro silver, Platinum, Palladium etc.

– Base Metal Product: Copper, Mini copper etc.

Market Structure

Types of Membership

Membership

Clearing Membership(CM) Market Maker(MM)

Membership Admission Process

Risk Management Initial Margin

Mark to Market (MTM) Margins

Daily Price Limit

Daily and Final Settlement

Settlement Guarantee Fund (SGF)

Market Mechanism

How Bid and Ask prices are determined?

Contribution to National Economy

• Employment opportunity

• Platform to trade the commodity

• Pool price and exchange risk

• Marketability and liquidity

Problems and Challenges of Derivative Market in Nepal

– Lack of Regulatory authority and provisions

– Lack of knowledge among participants

– Technological difficulties– Lack of Perfect market– Lack of Capital and Human

Resources

Risk Associated with Derivative Market

Present scenario of Derivative Market in Nepal

Premature Market

No regulatory body

Lack of awareness

Misconception

Conclusion• Through the use of derivative products, it is possible to

partially or fully transfer price risks by locking in asset prices

• There are no sufficient financial instruments for trading

• The investors are motivated towards earning abnormal profits from speculation

• Commodity derivative market has vital share to surge the national economy

Recommendation

• Regulatory provision• Focus on varieties of commodities• Awareness• Training and Development• Promote the efficient and transparent trading• Increase the market participants

ccvggggggggggggggggg