Commodity market

Presenters:

Ankur Jain

Gaurab Buragohian

Surjeet Randhir Singh Dhaka

25-01-2015 IABM, BIAKNER 1

Contents

Introduction and Evolution

Derivative markets and its structure

Commodity exchanges in India

Participants of commodity markets

Forward Markets Commission (FMC)

Some facts and figures

Challenges & Conclusion


INTRODUCTION

• “Organized futures markets in India are now 134

years old, with the first such organization – the

Bombay Cotton Trade Association Ltd.– been set up

in 1875”. The commodity market in India comprises

of all palpable markets that we come across in our

daily lives. Such markets are social institutions that

facilitate exchange of goods for money


Top Global Commodity Futures

Exchanges

Performances Commodity Future Exchange Volume (Mn Contracts)#

1 CME Group- incl. CBOT & NYMEX –U.S.A.

352.96

2 ZCE- Zhengzhou Commodity Exchange-CHINA

217.58

3 ICE- Intercontinental Exchange –U.S.A., U.K. & CANADA

159.09

4 SHFE- Shanghai Futures Exchange-CHINA

128.54

5 MCX- INDIA 127.77

6 DCE- Dalian Commodity Exchange-CHINA

123.88

7 LME- London Metal Exchange- U.K. 64.52


# Note: Numbers of contracts in Jan- Jun 2011

Evolution of Commodity Future Markets

Internationally

In 1848, the Chicago Board of Trade, or CBOT, was established to bring farmers and

merchants together. A group of traders got together and created the 'to-arrive' contract

that permitted farmers to lock in to price upfront and deliver the grain later. These to-

arrive contracts proved useful as a device for hedging and speculation on price changes.

Today, derivative contracts exist on a variety of commodities such as corn, pepper,

cotton, wheat, silver, etc.

Domestically


Commodity

COMMODITY “A commodity may be defined as an

article, a product or material that is bought and sold”.

Or A “ underlying asset ”.

COMMODITY MARKET “A market where

commodities are traded is referred to as a commodity

market”.


Commodity Derivatives?

Derivatives are the tools used to hedge the risk that

arises during the course of buying & selling of assets.”

Key Words : Hedge Risk Buying & Selling Assets


Commodity Exchanges classified in to…

The five National level multi-commodity exchanges are:

(NCDEX) Mumbai, (MCX) Mumbai, (NMCE)

Ahmadabad (ICEX) , Gurgaon and (ACE), Mumbai


NMCE

First demutualised electronic commodity exchange 26th

Nov, 2002. Promoters: CWC, NAFED, GAICL,

GSAMB, NIAM and Neptune Overseas Ltd. (NOL).

Main equity holders are PNB. Head Office:

Ahmadabad. Commodity trades on NMCE Platform:

Agro and non-agro commodities.


MCX

Demutualised nation wide electronic commodity futureexchange. Head office : Mumbai. Nov,2003. Set up byFinancial Technologies (India) Ltd. permanentrecognition from government of India for facilitatingonline trading, clearing and settlement operations forfuture market across the country. Promoters: NYSE,State Bank of India and its associated, NABARD, NSE,LIC, Bank of India, Bank of Baroda, Union Bank ofIndia, Corporation Bank, Canara Bank, HDFC Bank,etc. MCX is well known for bullion and metal tradingplatform.


• Public limited co. Dec 15, 2003. Promoters: LIC,

NABARD and NSE . Other shareholders : Canara

Bank, Goldman Sachs, Intercontinental Exchange

(ICE), IFFCO and PNB. Head office: Mumbai.

Currently facilitates trading in 57 commodities

mainly in Agro product.


ACE

The company was founded in 1952 and is based in

Mumbai, India. Operates as a screen based online

derivatives exchange for commodities in India. It offers

futures trading in various commodity groups, such as

agricultural products, bullion, base metals, and energy.

The company provides an online multi-commodity

platform; and clearing and settlement infrastructure that

supports the process of trade intermediation, including

registration of trades, settlement of contracts, and

mitigation of counter-party risk.


ICEX

ICEX is latest commodity exchange of India. Started

Function from 27 Nov, 2009. Head office: Gurgaon

(Haryana). It is jointly promote by India bulls Financial

Services Ltd. and MMTC Ltd. and has Indian Potash

Ltd. KRIBHCO and IFC.


Strength with respect to Product Segments of Different

National Multi Commodity Derivative Exchanges

1. NMCE - It is the Pioneer for starting Commodity Future Exchange in India. It started

Operations in 2002. Currently 24 commodities are actively traded on it. Its Strength is

Agricultural commodities. During the year 2009-10 it clocked a turnover of ` 4,55,802.97

crores, 69% was contributed by Agriculture, 22% was contributed by metals and 9% was

contributed by Bullions.

2. MCX – It is the largest commodity exchange in India. Currently 26 commodities are actively

traded on it. Its strength is Bullions, Metals and Energy. During the year 2009-10 it clocked a

turnover of ` 1,27,86,603.86 crores, 1% was contributed by Agricultural commodities, 48%

by Bullions, 24% by energy and 27% by Metal Stocks.

3. NCDEX – Currently 26 commodities are actively traded on it. Its strength is Agricultural

commodities. During the year 2009-10 it clocked a turnover of ` 18,35,169.57 crores, 98%

was contributed by Agriculture, 1.3% by Bullions and Metals and 0.70 % by Energy.

4. ICEX – It has just started its operations in Dec-09. Only 8 commodities are actively traded on

it. It is more active in Bullions and metals.


Commodity Ecosystem


Exchange

Market Participants

HEDGERS

Have underlying interest in the Commodity

Use futures market to insure against adverse price fluctuations.

They face risk associated with the price of an asset and use future contracts to reduce this risk.

ARBITRAGEOURS

They are in business to take advantage of a discrepancy between prices in two different markets.

Futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.

SPECULATORS

They bet on future movements in the price of an asset. Futures contracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture.


Participants in Commodity Futures

Farmers/ Producers

Merchandisers/ Traders

Importers

Exporters

Consumers/ Industry

Commodity Financers

Agriculture Credit providing agencies

Corporate having price risk exposure in commodities


FARMERS PARTICIPATION IN

COMMODITY FUTURES MARKET

“ Price discovery and price risk mitigation are the main

objectives of commodity futures markets, which enables

the farmers to take rational decisions about cropping

and marketing of their produce to increase their farm

income”. This creates incentives and resources for

investment in agricultural operations to improve

productivity.


REGULATOR : FMC

Regulator: Forward Markets Commission (FMC)

Statutory body set up in 1953 under the Forward Contracts

(Regulation) Act, 1952

Headquarter at Mumbai

Overseen by the Ministry of Consumer Affairs, Food and

Public Distribution, Govt. of India.


FORWARD MARKETS COMMISSION

Vision: Price discovery and risk management in an

efficient and transparent way in futures trading in

commodities.

Objectives: “To ensure smooth and orderly development

of the commodity futures markets to enable it to

perform the economic functions of the Price discovery

and price risk management efficiently, through effective

Regulation of the market”.


What is the need for regulating futures

market?

Regulation needed to :

Create competitive conditions: Benefits of futures markets accrue in competitive conditions

Ensure appropriate risk management system. Absence of such a system : a major default could create a chain reaction. The resultant financial crisis in a futures market could create systemic risk.

Ensure fairness and transparency in trading, clearing, settlement and management of the exchange : To protect and promote the interest of various stakeholders, particularly non-member users of the market.

a. Absence of regulation: Unscrupulous participants could use these leveraged contracts for manipulating prices.

b. Could have undesirable influence on the spot prices, thereby affecting interests of society at large.


What are the regulatory measures

prescribed by the FMC?

FMC provides regulatory oversight in order to ensure

Financial Integrity : To prevent systematic risk of default by one major operator or group of operators),

Market Integrity : To ensure that futures prices are truly aligned with the prospective demand and supply conditions

Protect & Promote interest of customers /non-members.

Regulatory Measures Prescribed Limit on open position of an individual operator to prevent over trading;

Limit on price fluctuation (daily/weekly) to prevent abrupt upswing or downswing in prices;

Special margin deposits to be collected on outstanding purchases or sales to curb excessive speculative activity.

Minimum/maximum prices to be prescribed to prevent future prices from falling below the levels that are un remunerative and from rising above the levels not warranted by genuine supply and demand factors.

Daily Mark-to mark settlement of contracts

Penalize delivery defaults obligations


Some important facts and figures

• During 2010-11, forward trading was regulated in

commodities at 21 recognized exchanges. The break

up of the total value of commodities traded stood as

under-

• Bullion - ` 54.94 lakh crore (45.98%).

• Base metals - ` 26.88 lakh crore (22.50%).

• Energy products - ` 23.11 lakh crore (19.34%).

• Agricultural commodities- ` 14.56 lakh crore

(12.19%).


The share of various Exchanges in the total value of

trade in 2010-11.

Value of the recognized Exchanges during 2010-11

Name of the Exchanges Value in ` Cr. % share to the total

value of the

commodities traded

during 2010-11.

MCX 98,41,502.90 82.36

NCDEX, Mumbai 14,10,602.21 11.81

NMCE, Ahmedabad 2,18,410.90 1.83

ICEX, Gurgaon 3,77,729.88 3.16

ACE, Ahmedabad 30,059.63 0.25

NBOT, Indore 51,662.06 0.43

Total of six Exchanges 1,19,29,967.58 99.84

Others 18,974.77 0.16

Grand Total 1,19,48,942.35 100


Challenges of Commodity Markets In

India

• Commodity Options

• Warehousing and Standardization

• Lack of Economy of Scale

• Market size of the commodity

• Price of the commodities always fluctuating

• Policies of govt. are not stable


CONCLUSION

As majority of Indian investors are not aware of

organized commodity market. Many of them have

wrong impression about commodity market in their

minds. Concerned authorities have to take initiative to

make commodity trading process easy and simple.

Along with Government efforts NGOs should come

forward to educate the people about commodity markets

and to encourage them to invest in to it. There is no

doubt that in near future commodity market will

become Hot spot for Indian farmers .


References

Government Of India, Forward Markets Commission

(Ministry Of Consumer Affairs) Food And Public Distribution,

Department Of Consumer Affairs, Annual Report 2010-11

http//www.mcx.com

http//www.ncdex.com

http//www.nmce.com



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Commodity market

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