Commodity Market

STUDY OF COMMODITIES MARKET
MARWADI SHARE & FINANCE LIMITED
INTRODUCTION
Instability of commodity prices has always been a major concern of the producers as well as the consumers in an agriculture -dominated country like India. Farmers direct exposure to price fluctuations, for instance, makes it too risky for many farmers to invest in otherwise profitable activities. There are various ways to cope with this problem. Apart from increasing the stability of the market, various factors in the farm sector can better manage their activities in an environment of unstable prices through derivative markets. These markets serve a risk -shifting function, and can be used to lock -in prices instead of relying on uncertain price developments. There are a number of commodity-linked financial risk management instruments, which are used to hedge prices through formal commodity exchanges, over -the-counter (OTC) market and through intermediation by financial and specialized institutions who extend risk management services. (see UNCTAD, 1998 for a comprehensive survey of instruments) These instruments are forward, futures and option contracts, swaps and commodity linked -bonds. While formal exchanges facilitate trade in standardized contracts like futures and options, other instruments like forwards and swaps are tailor made contracts to suit to the requirement of buyers and sellers and are available over-the counter. In general, these instruments are classified (as shown in figure-1.1) based on the purpose for which they are primarily used for price hedging, as part of a wider marketing strategy, or for price hedging in combination with other financial deals. While forward contracts and OTC options are trade related instruments, futures, exchange traded options and swaps between banks and customers are primarily price hedging instruments. In the case of swaps between intermediaries and producers, and
commodity linked loans and bonds (CL&BS) price hedging are combined with financial deals. Forwards contracts are mostly OTC agreements to purchase or sell a specific amount of a commodity on a predetermined future date at a predetermined price. The terms and conditions of a forward contract are rigid and both the parties are obligated to give and take physical delivery of the commodity on the expiry of contract. The holders of forward contracts face spot (ready) price risk. When the prevailing spot price of the underlying commodity is higher than the agreed price on expiry of the contract, the buyer gains and the seller looses. The futures contracts are refined version of forwards by which the parties are insulated from bearing spot risk and are traded in organize exchanges. A detailed discussion on the futures contracts is presented in the next chapter. Both forwards and futures contracts have specific utility to commodity producers, merchandisers and consumers. Apart from being a vehicle for risk transfer among hedgers and from hedgers to speculators, futures markets also play a major role in price discovery.
Typology of risk management instruments
The price risk refers to the probability of adverse movements in price s of commodities, services or assets. Agricultural products, unlike others, have an added risk. Many of them being typically seasonal would attract only lower price during the harvest season. The forward and futures contracts are efficient risk management tools, which insulate buyers, and sellers from unexpected changes in future price movements. These contracts enable them to lock-in the prices of the products well in advance. Moreover, futures prices give necessary indications to producers and consumer s about the likely future ready price and demand and supply conditions of the commodity traded. The cash market or ready delivery market on the other hand is a time-tested market system, which is used in all forms of business to transfer title of goods.
2.1 MCX BECOME FIRST EXCHANGE TO COMMENCE WORLD'S FIRST FUTURES CONTRACT IN KING OF RICE "BASMATI" The multi-billion Rice industries is a key sector in the Indian economy. With its characteristic such as long-grain, subtle aroma and delicious taste, India is the largest producer & exporter of Basmati Rice in the world. MCX has become the first exchange in the world to launch Basmati Futures Contract so that the exporters, traders, producers, consumers etc. can get opportunities to widen the scope of the industry and can achieve synergies between local and global commodity markets. After creating several benchmarks MCX has now become the Worlds first exchange to launch the King of Rice "Basmati Futures Trading" to enable the farming community, processing industry, producers, consumers and exporters to manage their price risk and take advantage of the market driven price discovery mechanism. MCX Basmati Rice futures price is expected to act as a benchmark for the entire industry. Shri Ekanath K. Thakur, M.P. (Rajya Sabha) and President, Maharashtra Chamber of Commerce & Industry, put the first symbolic trade in the Basmati Rice contract in the presence of Shri K. S. Money, Chairman, Agricultural & Processed Food Products Export Development Authority (APEDA) in the SAARC RICE EXPO 2004 - International Conference on Rice on 9 th December, 2004 at World Trade Centre, Mumbai. Commenting on this occasion Mr. Joseph Massey, Dy. MD, MCX said, "The launch of these futures contracts will aid Basmati trade and industry in scores of traditions. The contract has been planned keeping in mind the soaring inter and intraseasonal variation. Considering this the availability of futures markets for this segment will open immense opportunity for the consumers to cover their price risk and will help them to safeguard themselves against any adverse price movement.
Same insight and materialistic output has been demonstrated by MCX in many of other contracts as well." Basmati rice is best known for its characteristic long-grain, subtle aroma and delicious taste. India is the largest producer & exporter of basmati rice in the world and produces annually around 10-15 lakh tons of basmati of which around two-thirds is exported. Basmati is grown exclusively in northern part of Western Punjab (on both sides of the Indo-Pakistan border), Haryana, Uttaranchal and Western Uttar Pradesh. In 2001-02, basmati rice accounted for 0.89 % of Indias total exports, 6.24% of agricultural exports, 36.96% of food grain exports and 58.14% of rice exports, which underlines the importance of basmati in the Indian commodity basket. Gulf region is the major market for Indian basmati and inside Gulf, Saudi Arabia accounts for the major chunk of basmati imports from India. The multi-billion Rice industries is a key sector in the Indian economy. The Basmati prices are subjected to high inter and intra-seasonal variations, due to profound influence of weather & monsoon, fluctuating import demands from various countries, Governments export import policy, economic performance of importing countries, overall sentiments in domestic rice market and supply of fragrant rice from other countries. The launch of this futures contract will give support to Basmati trade and industry in numerous methods. The traders and dealers keeping stock would be able to sell futures contract at MCX in advance and therefore, they would not lose any money even if the price goes down. In case of any price fall, such dealers would get profit from their sale position in the futures contract.
To start with MCX has launched January, February and March 2005 contracts with contract duration of 4 months. Basmati Rice contract has several unique features, which would enable the players in the Basmati industry to efficiently mitigate their price risk. Trading and delivery unit has been kept as 10 MT to encourage participation from all sections of the trading community. Price has been quoted per quintal Ex-Delhi, which is the benchmark price for the industry. A small tick-size would facilitate factoring of small variations in the supply & demand of Basmati and the delivery would be in 50 Kg new jute bag, machine stitched only which ensures that the Rice remains in good and high quality and the delivery would be at the exchange approved warehouse at Delhi. 2.2 LEADER SPEAK Turmoil on the bourses, in the recent past, left every one high and dry. Increased volumes and investor interest, on the other hand, energized the commodities derivative markets. Our attempt towards better understanding of commodities derivative market, its potential in India and an overall perspective on commodities trading in India led us to National Commodity & Derivatives Exchange Ltd (NCDEX), the recently incorporated commodities derivatives exchange that facilitates trading of fifteen commodities - some of them being Gold, Silver, soybean, refined soybean Oil. Mr. Sabnavis is a post-graduate in Economics from Delhi School of Economics and BA (Hons) in Economics from St.Stephens College, Delhi. He was associated with L&T Ltd. and ICICI Bank as Chief Economist, between 2002-2003 and 1999-2002 respectively. Apart from his current association with NCDEX, he is also Co-Chairman of Economic and Industrial Affairs Committee, Bombay Chamber of Commerce and Industry. If we look at the potential of commodity markets globally, we have seen a multiple of 3 to 4 times the equity markets. We see a similar potential in India. This
would take 3 to 5 years before this potential could be achieved in the Indian Scenario. The commodity base is a percentage of GDP 45-50 percent. This is inclusive of agriculture, base metals, bullion, energy based products such as electricity, crude oil. Weather
Key participants currently (Trader Profile)

There are two kinds, Traditional Commodity Brokers who had to move away from commodities when the ban was imposed on commodity trading in the sixties and who may have operated in the unorganized sector. The Traditional Equity Broker is diversifying his portfolio and entering into commodities. We are also seeing a lot of retail participants too though this would be in an indirect manner. There is 40:60 ratio of traditional commodity broker to equity broker.
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Opportunity for retail Investor

The retail level is saying that commodities are offering profitable returns as compared to equity markets. Of course, Gold is giving you 10-15 % on a conservative basis compared with equity markets returns for 15-20 %on an annual basis, but it is less risky than your equity markets. The initial margins in commodities are lower and are in the range of 4-5-6 % compared with 25-40% for equity markets. That is one factor that would enable retail investor to come in the market.
Trading volume
Of the total turnover 50 % is bullion market and 50 % are agro-based commodities. We are seeing a spurt in volumes in Soya Oil, Pepper, Chana, and Guar seeds. Traditionally; commodity players use it as a hedge mechanism. Another way, it is used is to make money. For e.g. in the bullion markets, Players hedge their risks by using futures Euro-dollar fluctuations and International prices affect it. However in case of Soya oil, only Soya-oil dealers are trading in the commodity. This market is
based on economic fundamentals and is subject to less market manipulation. You can do the guesswork by looking at the Monsoon, the import-export figures, prices etc to make conjectures.
Views on delivery based trading

There is a common misconception that people feel we are a spot market. We make provision for delivery. Delivery is a part of all futures contracts. Both Buyers and Sellers have the option of taking hold of the product that has been certified by us. We guarantee quality of produce, weight of produce in our accredited warehouses, everything is guaranteed by NCDEX. What we have seen is because of institutional issues, we have had very few deliveries so far. There are a lot of hassles such as octroi duty, logistics. If there is a broker in Mumbai and a broker in Kolkotta, transportation costs, octroi duty, logistical problems prevent trading to take place. Exchanges are used only to hedge price risk on spot transactions carried out in the local markets. Deliveries are 3-4 % of total volume. Market trend is changing. We are setting up an entire warehousing system. A collateral management company is looking at it on our behalf. There should be a system that is able to hedge the farmers position. When the produce is harvested, farmers sell it at lower prices, and the buyer sells it at a higher price 2 months hence. With our accredited warehouses, farmers would be able to get loans from banks, and after 2 months will be able to sell his produce at a higher price, and pay off the loan.
3.1 TITLE OF THE PROJECT:

A study of commodity market
3.1.1 OBJECTIVES:
To analyze the view of commodity traders. To make understand the process of future commodity trading in India. To know the investment pattern of commodity traders and government servants.
3.2 SCOPE:
To analyze the trading pattern and investment pattern of commodity traders and government servants. The study was limited to whole Rajkot city.
3.2.1 TIME SCOPE

For completing this project we have taken a time period of three month with our study of the 4th semester.
3.3 SAMPLE DESIGN:

3.3.1 Sampling type
In this project convenient sampling method is used for the selection of customer.
3.3.2 Sampling unit

To define sampling unit, one must answer the question that who is to be surveyed. In this project sampling units are commodity traders and government servants.
3.3.3 Sample size

The sample size of the survey was 300 people.
3.4 METHODS OF DATA COLLECTION

3.4.1 Primary methods
1. Questionnaire
3.4.2 Secondary methods

1. Magazines.
2. Newspapers 3. Websites 4. Books 5. Other projects.
3.5 FIELDWORK:
In order to gather the primary data associated with our survey commodity traders and government servants over a selected hub of areas in Rajkot, we have undergone an extensive fieldwork. The basic purpose of the fieldwork was, obviously, to record responses of target people.
3.6 LIMITATIONS
Our survey was restricted to Rajkot city. The sample size for the survey of people was limited to 300 respondents, which might not be representing the whole country. The results are totally derived from the respondents answers. There might be a difference between the actual and projected results. Research also depends on surveyors bias & his/her ability to analyze the data & draw conclusion. The time duration to carry out the survey of all the areas of Rajkot was very short.
4.1 INTRODUCTION TO DERIVATIVES

The term Derivative indicates that it has no independent value, i.e. its value is entirely derived from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pro determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real of financial asset of to an index of securities. Derivatives in mathematics, means a variable derived from another variable. Similarly in the financial sense, a derivative is a financial product, which has been derived from a market for another product. Without the underlying product, derivatives do not have any independent existence in the market. Derivatives have come into existence because of the existence of risks in business. Thus derivatives are means of managing risks. The parties managing risks in the market are known as HEDGERS. Some people/organizations are in the business of taking risks to earn profits. Such entities represent the SPECULATORS .The third player in the market, known as the ARBITRAGERS take advantage of the market mistakes.
4.2 THE NEED FOR A DERIVATIVES MARKET

The derivatives market performs a number of economic functions: They help in transferring risk from risk aware people to risk oriented people. They help in the discovery of future as well as current prices. They catalyze entrepreneurial activity. They increase the volume traded in markets because of participation of risk-averse people in greater numbers. They increase savings and investment in the long run.
4.3 FACTORS DRIVING THE GROWTH OF FINANCIAL DERIVATIVES

Increased volatility in asset process in financial markets, Increased integration of national financial markets with the international markets, Marked improvement in communication facilities and sharp decline in their costs, Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher Returns, reduced risk as well as transactions cost as compared to individual financial assets. A derivative is a financial instrument whose value depends on the value of other, more basic underlying variables.
4.4 THE MAIN INSTRUMENTS UNDER THE DERIVATIVE ARE:

Forward contract Future contract Options Swaps
4.4.1 Forward contract:

A forward contract is a particularly simple derivative. It is an agreement to buy or sell an asset at a certain future time for a certain price. The contract is usually between two financial institutions of between a financial institution and one of its corporate clients. It is not normally traded on an exchange.
One of the parties to forward contract assumes a long position and agrees to buy he underlying asset on a specified future date for a certain specified price. The other party assumes a position and agrees to sell the asset on the same date for the same price. The specified price in a forward contract will be referred to as delivery price. The forward contract is settled at maturity. The holder of the short position delivers the asset to the holder price. A forward contract is worth zero when it is first entered into. Later it can have position or negative value, depending on movements in the price of the asset.
4.4.2 Future contract: A futures contract is an agreement between two parties to buy or sell an asset
at a certain time in the future for a certain price. Unlike forward contracts, futures contract are normally traded on an exchange. To make trading possible, the exchange specifies certain standardized features of the contract. As the two parties to the contract do not necessarily know each other the exchange also provides a mechanism, which gives the two parties a guarantee that the contract will be honored. One-way in which future contract is different from a forward contract is that an exact delivery date is not specified. The contract is referred to by its delivery month, and the exchange specifies the period during the month when delivery must be made. Difference between forward and futures contracts We may now differentiate between forward and future contracts. Broadly, a future contract is different from a forward contract on the following counts:
1) Standardization: A forward contract is a tailor-made contract
between the buyer and the seller where the terms are settled in mutual agreement between the parties. On the other hand, a future contract is standardized in regards to the quality, quantity, place of delivery of the asset etc. Only the price is negotiated.
2) Liquidity: There is no secondary market for forward contracts while
futures contracts are traded on organized exchanges. Accordingly, futures contracts are usually much more liquid than the forward contracts .
3) Conclusion of contract:
A forward contract is generally
concluded with a delivery of the asset in question whereas the future contracts are settled sometimes with delivery of the asset and generally with the payment of the price differences. One who is long a contract can always eliminate his/her obligation by subsequently selling a contract for the same asset and same delivery date, before the conclusion of contract one holds. In the same manner, the seller of a futures contract can buy a similar contract and offset his/her position before maturity of the first contract. Each one of these actions is called offsetting a trade.
4) Margins: A forward contract has zero value for both the parties
involved so that no collateral is required for entering into such a contract. There are only two parties involved. But in a futures contract, a third party called Clearing Corporation is also involved with which margin is required to be kept by both parties.
5) Profit/Loss Settlement: The settlement of a forward contract
takes place on the date of maturity so that the profit/loss is booked on maturity only. On the other hand, the futures contracts are marked to market daily so that the profits or losses are settled daily.
Difference between the Forward and Futures:

DIFFERCENCE BETWEEN FORWARD AND FUTURES CONTRACT
DIFFERCENCE Size of contract Price of contract
FORWARDS
FUTURES
Decided by buyer and seller Remains fixed till maturity
Standardized in each contract Changes every day Mark to market every day Margins are to be paid by both buyers and sellers Not present Highly liquid Exchange traded Standardized
Mark to market Not done Margin Counterparty risk Liquidity Nature of Market Mode of delivery
No margin required Present No liquidity Over the counter Specifically decided.
4.4.3 Options:
An option is a contract, which gives the buyer the right, but not the obligation, to buy or sell specified quantity of the underlying assets, at a specific (strike) price on or before a specified time (expiration date). The underlying may be commodities like wheat/rice/cotton/gold/oil/ or financial instruments like equity stocks/ stock index/bonds etc. There are basic two types of options. A call options gives the holder the right to buy the underlying asset by a certain date for a certain price. A put option gives the holder the right to sell the underlying asset by a certain date for a certain price.
A Call Option is an option to buy a stock at a specific price on or before a certain date. In this way, Call options are like security deposits. If, for example, you wanted to rent a certain property, and left a security deposit for it, the money would be used to insure that you could, in fact, rent that property at the price agreed upon when you returned. If you never returned, you would give up your security deposit, but you would have no other liability. Call options usually increase in value as the value of the underlying instrument rises. When you buy a Call option, the price you pay for it, called the option premium, secures your right to buy that certain stock at a specified price called the strike price. If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium. Put Options are options to sell a stock at a specific price on or before a certain date. In this way, Put options are like insurance policies If you buy a new car, and then buy auto insurance on the car, you pay a premium and are, hence, protected if the asset is damaged in an accident. If this happens, you can use your policy to regain the insured value of the car. In this way, the put option gains in value as the value of the underlying instrument decreases. If all goes well and the insurance is not needed, the insurance company keeps your premium in return for taking on the risk. With a Put Option, you can "insure" a stock by fixing a selling price. If something happens which causes the stock price to fall, and thus, "damages" your asset, you can exercise your option and sell it at its "insured" price level. If the price of your stock goes up, and there is no "damage," then you do not need to use the insurance, and, once again, your only cost is the premium. This is the primary function of listed options, to allow investors ways to manage risk. Technically, an option is a contract between two parties. The buyer receives a privilege for which he pays a premium. The seller accepts an obligation for which he receives a fee.
4.4.4 Swaps:
Swaps are private agreements between two companies to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts.
4.4.5 Warrants:
Options generally have lives of up to one year, the majority of options traded on options exchange having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the counter.
4.4.6 Leaps:
The scronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of up to three years.
4.4.7 Baskets:
Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. Equity index options are a form of basket options.
4.5 COMMODITY DERIVATIVES IN INDIA

Commodity derivatives have a crucial role to play in the price risk management process especially in any agriculture dominated economy. Derivatives like forwards, futures, options, swaps etc are extensively used in many developed and developing countries in the world. The Chicago Mercantile Exchange; Chicago Board of Trade; New York Mercantile Exchange; International Petroleum Exchange, London; London Metal Exchange; London Futures and Options Exchange; Marche a
Terme International de France; Sidney Futures Exchange; Singapore International Monetary Exchange; The Singapore Commodity Exchange; Kuala Lumpur Commodity Exchange ; Bolsa de Mercadorias & Futuros (in Brazil), the Buenos Aires Grain Exchange; Shanghai Metals Exchange; China Commodity Futures Exchange; Beijing Commodity Exchange, etc are some of the leading commodity exchanges in the world engaged in trading of derivatives in commodities. However, they have been utilized in a very limited scale in India Although India has a long history of trade in commodity derivatives, this segment remained underdeveloped due to government intervention in many commodity markets to control prices. The government controls the production, supply and distribution of many agricultural commodities and only forwards and futures trading are permitted in certain commodity items. Free trade in many commodity items is restricted under the Essential Commodities Ac, 195, and forward and futures contracts are limited to certain commodity items under the Forward Contracts (Regulation) Act, 1952. The first commodity exchange was set up in India by Bombay Cotton Trade Association Ltd., and formal organized futures trading started in cotton in 1875. Subsequently, many exchanges came up in different parts of the country for futures trade in various commodities. The Gujrati Vyapari Mandali came into existence in 1900, which has undertaken futures trade in oilseeds first time in the country. The Calcutta Hessian Exchange Ltd and East India Jute Association Ltd were set up in 1919 and 1927 respectively for futures trade in raw jute. In 1921, futures in cotton were organized in Mumbai under the auspices of East India Cotton Association. Many exchanges came up in the agricultural centers in north India before world war broke out and engaged in wheat futures until it was prohibited. The exchanges in Hapur, Muzaffarnagar, Meerut, Bhatinda, etc were established during this period. The futures trade in spices was firs organized by IPSTA in Cochin in 1957.
Futures in gold and silver began in Mumbai in 1920 and continued until the government prohibited it by mid-1950s. Later, futures trade was altogether banned by the government in 1966 in order to have control on the movement of prices of many agricultural and essential commodities. Options are though permitted now in stock market, they are not allowed in commodities. The commodity options were traded during the pre-independence period. Options on cotton were traded until the along with futures were banned in 1939. However, the government withdrew the ban on futures with passage of Forward Contract (Regulation) Act in 1952. After the ban of futures trade many exchanges went out of business and many traders started resorting to unofficial and informal trade in futures. On recommendation of the Khusro Committee in 1980 government reintroduced futures on some selected commodities including cotton, jute, potatoes, etc.
Further in 1993 the government of India appointed an expert committee on forward markets under the chairmanship of Prof. K.N. Kabra and the report of the committee was submitted in 1994 which recommended the reintroduction of futures already banned and to introduce futures on many more commodities including silver. In tune with the ongoing economic liberalization, the National Agricultural Policy 2000 has envisaged external and domestic market reforms and dismantling of all controls and regulations in agricultural commodity markets. It has also proposed to enlarge the coverage of futures markets to minimize the wide fluctuations in commodity prices and for hedging the risk emerging from price fluctuations. In line with the proposal many more agricultural commodities are being brought under futures trading. In India, currently there are 15 commodity exchanges actively undertaking trading in domestic futures contracts, while two of them, viz., India Pepper and Spice Trade Association (IPST), Cochin and the Bombay Commodity Exchange (BCE) Ltd.
have been recently upgraded to international exchanges to deal in international contracts in pepper and castor oil respectively. Another 8 exchanges are proposed and some of them are expected to start operation shortly. There are 4 exchanges, which are specifically approved for undertaking forward deals in cotton. More detailed account of these exchanges has been presented. The proposed study is primarily based on the visit of seven leading exchanges viz., IPST Cochin, which deal in domestic and international contracts in pepper; BCE Ltd., a multy-commodity international exchange where futures in castor oil, castor seed, sunflower oil, RBD Palmolein etc are traded; The East India Cotton Association (EICA) Ltd., Bombay, which is a specialized exchange dealing in forwards and futures in cotton; South India Cotton Association (SICA , Coimbatore which deals in forward contracts in cotton; Coffee Futures Exchange India Ltd., (COFEI) Bangalore which undertakes coffee futures trading; Kanpur Commodity Exchange (KCE) which deals with futures contracts in mustard oil and gur; and The Chamber of Commerce, Hapur which undertakes futures trading in gur and potatoes.
4.6 MECHANICS OF FUTURES TRADING

Futures are a segment of derivative markets. The value of a futures contract is derived from the spot (ready) price of the commodity underlying the contract. Therefore, they are called derivatives of spot market. The buying and selling of futures contracts take place in organized exchanges. The members of exchanges are authorized to carryout trading in futures. The trading members buy and sell futures contract for their own account and for the account of non-trading members and other clients. All other persons interested to trade in futures contracts, as clients must get themselves registered with the exchange as registered non-members.
4.6.1
What is a Commodity Futures Exchange?
Exchange is an association of members, which provides all organizational support for carrying out futures trading in a formal environment. These exchanges are managed by the Board of Directors, which is composed primarily of the members of the association. There are also representatives of the government and public nominated by the Forward Markets Commission. The majority of members of the Board have been chosen from among the members of the Association who have trading and business interest in the exchange. The chief executive officer and his team in day-to-day administration assist the Board. There are different classes of members who capitalize the exchange by way of participation in the form of equity, admission fee, security deposits, registration fee etc. a. Ordinary Members: They are the promoters who have the right to have own account transactions without having the right to execute transactions in the trading ring. They have to place orders with trading members or others who have the right to trade in the exchange. b. Trading Members: These members execute buy and sell orders in the trading ring of the exchange on their account, on account of ordinary members and other clients. c. Trading-cum-Clearing Members: They have the right to trade and also to participate in clearing and settlement in respect of transactions carried out on their account and on account of their clients. d. Institutional Clearing Members: They have the right to participate in clearing and settlement on behalf of other members but do not have the trading rights.
e. Designated Clearing Bank: It provides banking facilities in respect of pay-in, payout and other monetary settlements. The composition of the members in an exchange however varies. In so me exchanges there are exclusive clearing members, broker members and registered non -members in addition to the above category of members.
4.6.1 What is Commodity Futures Contract?
Futures contracts are an improved variant of forward contracts. They are agreements to purchase or sell a given quantity of a commodity at a predetermined price, with settlement expected to take place at a future date. While forward contracts are mainly over-the-counter and tailor-made which physical delivery futures settlement standardized contracts whose transactions are made in formal exchanges through clearing houses and generally closed out before delivery. The closing out involves buying a different times of two identical contracts for the purchase and sale o the commodity in question, with each canceling the other out. The futures contracts are standardized in terms of quality and quantity, and place and date of delivery of the commodity. The commodity futures contracts in India as defined by the FMC has the following features: (a) Trading in futures is necessarily organized under the auspices of a recognized association so that such trading is confined to or conducted through members of the association in accordance with the procedure laid down in the Rules and Bye-laws of the association. (b) It is invariably entered into for a standard variety known as the basis variety with permission to deliver other identified varieties known as tender able varieties. (c) The units of price quotation and trading are fixed in these contracts, parties to the contracts not being capable of altering these units.
(d) The delivery periods are specified. (e) The seller in a futures market has the choice to decide whether to deliver goods against outstanding sale contracts. In case he decides to deliver goods, he can do so not only at the location of the Association through which trading is organized but also at a number of other pre-specified delivery centers. (f) In futures market actual delivery of goods takes place only in a very few cases. Transactions are mostly squared up before the due date of the contract and contracts are settled by payment of differences without any physical delivery of goods taking place. The terms and specifications of futures contracts vary depending on the commodity and the exchange in which it is traded. The major terms and conditions of contracts traded in six sample exchanges in India. These terms are standardized and applicable across the trading community in the respective exchanges and are framed to promote trade in the respective commodity For example, the contract size is important for better management of risk by the customer. It has implications for the amount of money that can be gained or lost relative to a given change in price levels. I also affect the margins required and the commission charged. Similarly, the margin to be deposited with the clearing house has implications for the cash position of customers because it blocks cash for the period of the contract to which he is a party the strength and weaknesses of contract specifications are discussed under constraints and policy options.
4.6.2 Who are the Participants in Futures Market?
Broadly, speculators who take positions in the market in an attempt to benefit from a correct anticipation of future price movements, and hedgers who transact in futures market with an objective of offsetting a price risk on the physical market for a particular commodity make the futures market in that commodity. Although it is difficult to draw a line of distinction between hedgers and speculators, the former
category consists of manufacturing companies, merchandisers, and farmers. Manufacturing companies who use the commodity as a raw material buy futures to ensure its uninterrupted supply of guaranteed quality at a predetermined price, which facilitates immunity against price fluctuations. While exporters in addition to using the price discovery mechanism for getting better prices for their commodities seek to hedge against their overseas exposure by way of locking-in the price by way of buying futures contracts, the importers utilize the liquid futures market for the purpose of hedging their outstanding position by way of selling futures contracts. Futures market helps farmers taking informed decisions about their crop pattern on the basis of the futures prices and reduces the risk associated with variations in their sales revenue due to unpredictable future supply demand conditions. Above all, there are a large number of brokers who intermediate between hedgers and speculators create the market for futures contracts.
4.6.3 Commodity Orders
The buy and sell orders for commodity futures are executed on the trading floor where floor brokers congregate during the trading hours stipulated by the exchange. The floor brokers/trading members on receipt of orders from clients or from their office transmits the same to others on the trading floor by hand signal and by calling out the orders (in an open outcry system they would like to place and price. After trade is made with another floor broker who takes the opposite side of the transaction for another customer or for his own account, the details of transactions are passed on to the clearing house through a transaction slip on the basis o which the clearinghouse verifies the match and adds to its records. Following the experiences of stock exchanges with electronic screen based trading commodity exchanges are also moving from outdated open outcry system to automated trading system. Many leading commodity exchanges in the world including Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT),
International Petroleum Exchange (IPE), London, have already computerized the trading activities. In India, coffee futures exchange, Bangalore has already put in place the screen based trading and many others are in the process of computerization. To add to modernization efforts, the Bombay Commodity Exchange (BCE) has initiated for a common electronic trading platform connecting all commodity exchanges to conduct screen based trading. In electronic trading, trading takes place through a centralized computer network system to which all buy and sell orders and their respective prices are keyed in from various terminals of trading members. The deal takes place when the central computer finds matching price quotes for buy and sell. The entire procedural steps involved in electronic trading beginning from placing the buy/sell order to the confirmation of the transaction have been shown in figure -2.1 below.
4.6.4 Role of Clearing House
Clearinghouse is the organizational set up adjunct to the futures exchange which handles all back-office operations including matching up of each buy and sell transactions, execution, clearing and reporting of all transactions, settlement of all transactions on maturity by paying the price difference or by arranging physical delivery, etc., and assumes all counterparty risk on behalf of buyer and seller. It is important to understand that the futures market is designed to provide a proxy for the ready (spot) market and thereby acts as a pricing mechanism and not as part of, or as a substitute for, the ready market. The buyer or seller of futures contracts has two options before the maturity of the contract. First, the buyer (seller) may take (give) physical delivery of the commodity at the delivery point approved by the exchange after the contract matures. The second option, which distinguishes futures from forward contracts is that, the buyer (seller) can offset the contract by selling (buying) the same amount of commodity and squaring off his position. For squaring of a position, the buyer (seller) is not obligated to sell (buy) the original contract. Instead, the clearinghouse may substitute any contract of the same specifications in the process of daily matching. As delivery time approaches, virtually all contracts are settled by offset as those who have bought (long) sell to those who have sold (short). This offsetting reduces the open position in the account of all traders as they approach the maturity date of the contract. The contracts, if any, which remain unsettled by offset until maturity date are settled by physical delivery. The clearinghouse plays a major role in the process explained above by intermediating between the buyer and seller. There is no clearinghouse in a forward market due to which buyers and sellers face counterparty risk. In a futures exchange
all transactions are routed through and guaranteed by the clearinghouse which automatically becomes a counterpart to each transaction. It assumes the position of counterpart to both sides of the transaction. It sells contract to the buyer and buys the identical contract from the seller. Therefore, traders obtain a position vis --vis the clearing house. It ensures default risk-free transactions and provides financial guarantee on the strength of funds contributed by its members and through collection of margins (discussed in section 2.3), marking-to-market all outstanding contracts, position limits imposed on traders, fixing the daily price limits and settlement guarantee fund. The organizational structure and membership requirements of clearinghouses vary from one exchange to the other. The Bombay Commodity Exchange and Cochin pepper exchange have set up separate independent corporations (namely, Prime Commodities Clearing Corporation of India Ltd, and First Commodities Clearing Corporation of India Ltd., respectively) for handling clearing and guarantee of all futures transactions in the respective exchanges. While coffee exchange has clearing house as a separate division of the exchange, many other exchanges like Chamber of Commerce, Hapur; Kanpur Commodity Exchange and cotton exchange in Bombay run in-house clearinghouse as part of the respective exchanges. The clearing and guaranty are managed in these exchanges by a separate committee (normally called the Clearing House Committee). The membership in the clearinghouse requires capital contribution in the form of equity, security deposit, admission fee, registration fee, guarantee fund contribution in addition to net worth requirement depending on its organizational structure. For example, in the Bombay Commodity Exchange the minimum capital requirement for membership in its clearinghouse as applicable to trading-cum-clearing members is Rs.50,000 each toward equity and security deposit, Rs. 500 as annual subscription , and additionally, members are required to have net worth of Rs.3 lakhs. Similarly, coffee exchange prescribed Rs.5 lakh each towards equity and guarantee fund
contribution and Rs.40,000 towards admission fee for a trading-cum-clearing member. However, in exchanges where clearing house is a part of the exchange the payment requirements are lower. For example, Kanpur Commodity Exchange prescribed only Rs.25,00,000 Rs.1000 and Rs.500 respectively towards security deposit, registration fee and annual fee for a clearing cum-trading member. For ensuring financial integrity of the exchange and for counterparty risk -free trade position (exposure) limits have been imposed on clearing members. These limits which are stringent in some cases and are liberal in other cases are normally linked to the members contribution towards equity capital or security deposit or a combination of both and settlement guarantee fund. In Bombay Commodity Exchange the exposure limit of a clearing member is the sum of 50 times the face value of contribution to equity capital of the clearinghouse and 30 times the security deposit the member has maintained with the clearinghouse. While coffee exchange prescribes the limit of 80 times the sum of members equity investment and the contribution to the guarantee fund, the cotton exchange, Bombay, has stipulated a liberal exposure limit on open positions. It has a limit of 200 and 1500 units (recall that one contract unit is equivalent to 93.5 quintals respectively for composite and institutional members. The Cochin pepper exchange has fixed a net exposure limit of 60 units (equivalent to 1500 quintals) for domestic contract and 90 units (equivalent to 2250 quintals) for international contract. Moreover, setting up of settlement guarantee fund ensures enough financial strength in case the clearinghouse faces default. The Kanpur Commodity Exchange maintains a trade guarantee fund with a corpus of Rs.100 lakhs while the coffee exchange in addition to a guarantee fund the exchange has substituted itself as party to clear all transactions.
Yet another check on the possible default is through prescribing maximum price fluctuation on any trading day, which helps limit the probable profit/loss from each unit of transaction. The relevant data on permitted price limit has been presented. Its clear from the table that the maximum profit/loss potential from trade in each contract unit varies from as low as Rs. 800 for potato futures in Chamber of Commerce, Hapur to as high as Rs. 15,000 in pepper exchange, Cochin. Similarly, given the permissible open position of 200 units for a trading-cum-clearing member and maximum price fluctuation of Rs. 150 per 100 kg for cotton futures in the cotton exchange, Bombay, the maximum potential loss/profit in a trading day works out to be Rs.28.05 lakhs!
4.6.5 Margins
Margins (also called clearing margins) are good -faith deposits kept with a clearinghouse usually in the form of cash. There are two types of margins to be maintained by the trader with the clearinghouse: initial margin and maintenance or variation margins. Initial margin is a fixed amount per contract and does not vary with the current value of the commodity traded. Margins are deposited with the clearing house in advance against the expected exposure of the trading member on his account and on account of the clients. The member who executes trade for them in turn collects this amount from the clients. Generally, the margin is payable on the net exposure of the member. Net exposure is the sum of gross exposure (buy quantity or sale quantity, whichever is higher, multiplied by the current price of the contract) on account of trades executed through him for each of his clients and gross exposure of trades carried out on his own account. However, for squaring-off transactions carried out only at the clients level, fresh margins are not required. The margin is refundable after the client liquidates his position or after the maturity of the contract. Maintenance margin which usually ranges from 60 to 80 per cent of initial margin is also required by the exchange. Variation margin is to compensate the risk borne by
the clearinghouse on account of price volatility of the commodity underlying the contract to which it is a counterparty. A debit in the margin account due to adverse market conditions and consequent change in the value of contract would lead to initial margin falling below the maintenance level. The clearinghouse restores initial margin through margin calls to the client for collecting variation margin. In case of an increase in value of the contract, marking-to-market ensures that the holder gets the payment equivalent to the difference between the initial contract value and its change over the lifetime of the contract on the basis of its daily price movements. If the member is not able to pay the variation margin, he is bound to square off his position or else the clearinghouse will be liquidating the position. The margins have important bearing on the success of futures. As they are noninterest bearing deposits payable to the clearinghouse up-front working capital of any trading entity gets blocked to that extent. While a higher margin requirement prevents traders from participating in trading, a lower margin makes the clearinghouse vulnerable to any default due to its weak financial strength otherwise. Internationally, many developed exchanges maintain a low margin on positions due to their better financial strength along with massive volume of trade resulting in large income accruing to them. However, this has not been the case with many exchanges in India. For example, as shown in table 2.2 the initial margin liability for transacting the minimum lot size in pepper is Rs.30, 000 for domestic contracts and US$ 312.50 for international contracts .Similarly, the volume of transactions. These clearinghouses deal in many exchanges in India is abysmally low making their existence financially unviable. Most of the exchanges in additions to keeping mandatory margins maintain a settlement guarantee fund. The fund set up with the contribution from members of clearing house is used for guaranteeing financial performance of all members. This fund absorbs losses not covered by margin deposits of the defaulted member. The
clearinghouse ensures this by settling the default transactions by properly compensating the traders paying the amount of difference at the closing out rate.
4.6.6 How does Futures Contract Facilitate Hedging
against Price Risk?

The futures contracts are designed to deal directly with the credit risk involved in locking-in prices and obtaining forward cover. These contracts can be used for hedging price risk and discovering future prices. For commodities that compete in world or national markets, such as coffee, there are many relatively small producers scattered over a wide geographic area. These widely dispersed producers find it difficult to know what prices are available, and the opportunity for producer, processor, and merchandiser to ascertain their likely cost for coffee and develop long range plans is limited. Futures trading, used in the Midwest for grains and similar farm commodities since 1859, and adapted for coffee in 1955, provides the industry with a guide to what coffee is worth now as well as todays best estimate for the future. Moreover, since all transactions are guaranteed through a central body, clearing house, which is the counter party to each buyer and seller ensuring zero default risk, market participants need not worry about their counterparts creditworthiness. Hedge is a purchase or sale on a futures market intended to offset a price risk on the physical (ready) market. It involves establishing a position in the futures market again ones position or firm commitments in the physical market. The producers who seek to protect themselves from an expected decline in prices of their commodity in future go for short hedge (also called sell hedge). He undertakes the following operations in the market to lock-in the price in advance which he is going to receive after the product. I ready for physical sale. We assume that the producer anticipates a harvest of 5 metric tones (equivalent to 2 units of contracts in Cochin pepper exchange) of pepper in March, the futures price for March delivery of the specific
variety of pepper is Rs.8400 per quintal (Rs.2.10lakh per unit, and the prevailing (say, October) ready market price is Rs.8100 per quintal. a) In October, the producer goes short (sells) in the futures market selling 2 March futures contracts at Rs.8400 per quintal. This is called price fixing. b) In the delivery month, futures prices dropped to Rs.8200 per quintal and the producer sells pepper in the ready market for Rs.8200. c) Simultaneously, he closes out his short position in futures by buying (long position) 2 March futures contracts at Rs.8200 per quintal. The result is that the producer sold futures contract at Rs.8400 and bought the same futures contract at Rs.8200 per quintal making a net gain of Rs.200 per quintal or Rs.5000 per contract. For the physical sale, the producer received the market price of Rs.8200 prevailing on the day of the sale and the gain of Rs.200 per quintal from closing-out of futures contracts makes him to realize Rs.8400 per quintal as initially locked -in by pricefixing. If the price realized in the ready market is lower than the price in future contract, the loss on the physical market is compensated by the higher price realized on the future contract. On the other hand, if the price in the ready market is higher than in futures contract, the gain in the ready market is offset by the loss on the repurchase of the futures contract. Since futures market prices move in tandem with the ready market prices over the course of time tending to converge as the contract matures, a gain in the futures market in a developed commodity market under normal conditions, will be offset by a loss in the ready market, or vice versa. However, market imperfections will lead to the basis risk emerging from the mismatch between the gain/loss from the futures market not compensated by loss/gain in the ready market.
COMMODITY FUTURES EXCHANGES THE PROFILE AND REGULATORY ENVIRONMENT
4.7 The Profile of Futures Exchanges (mcx and ncdex)
4.7.1 Overview of MCX

MCX an independent and de-mutulised multi commodity exchange has permanent recognition from Government of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country. Key shareholders of MCX include Financial Technologies (I) Ltd., State Bank of India (Indias largest commercial bank) & associates, Fidelity International, National Stock Exchange of India Ltd. (NSE), National Bank for Agriculture and Rural Development (NABARD), HDFC Bank, SBI Life Insurance Co. Ltd., Union Bank of India, Canara Bank, Bank of India, Bank of Baroda and Corporation Bank.
Headquartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. Through the integration of dedicated resources, robust technology and scalable infrastructure, since inception MCX has recorded many first to its credit.
Inaugurated in November 2003 by Shri Mukesh Ambani, Chairman & Managing Director, Reliance Industries Ltd, MCX offers futures trading in the following commodity categories: Agri Commodities, Bullion, Metals- Ferrous & Non-ferrous, Pulses, Oils & Oilseeds, Energy, Plantations, Spices and other soft commodities. MCX has built strategic alliances with some of the largest players in commodities eco-system, namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana, United Planters Association of India and India Pepper and Spice Trade Association. Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors, Traders, Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives, Industry Associations, amongst others MCX being nation-wide commodity exchange, offering multiple commodities for trading with wide reach and penetration and robust infrastructure, is well placed to tap this vast potential.
4.7.2 Vision and Mission
The vision of MCX is to revolutionize the Indian commodity markets by empowering the market participants through innovative product offerings and business rules so that the benefits of futures markets can be fully realized .Offering 'unparalleled efficiencies', 'unlimited growth' and 'infinite opportunities' to all the market participants.
Commodities
Gold, Gold HNI, Gold M, I-Gold, Silver, Silver HNI, Silver M Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cottonseed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli (Cottonseed Oilcake), Mustard /Rapeseed Oil, Mustard Seed (Sirsa), RBD Palmolein, Refined Soy Oil, Refined Sunflower Oil, Sesame Seed, Soymeal, Soy Seeds Cardamom, Jeera, Pepper, Red Chilli Aluminium, Copper, Lead, Nickel, Sponge Iron, Steel Flat, Steel Long (Bhavnagar), Steel Long (Gobindgarh), Tin, Zinc Cotton Long Staple , Cotton Medium Staple, Cotton Short Staple, Cotton Yarn, Kapas Chana, Masur, Tur, Urad, Yellow Peas,
Basmati Rice, Maize, Rice, Sarbati Rice,
Wheat
Brent Crude Oil, Crude Oil, Furnace Oil Middle East Sour Crude Oil Arecanut, Cashew Kernel, Rubber High Density Polyethylene (HDPE), Polypropylene (PP), PVC Guar Seed, Guar gum, Gurchaku, Mentha Oil, Potato, Sugar M-30, Sugar S-30,
4.7.3 Benefits to Participants

The mark of a true exchange market is that it provides equal opportunities to all participants without any bias. This is the central belief of MCX and towards that it shall be our endeavor to provide all our participants with equally rewarding opportunities. MCX would harmoniously meet the requirements of all the stakeholders in the commodity ecosystem in the most impartial manner.
Benefits to Industry

Hedging the price risk associated with futures contractual commitments. Spaced out purchases possible rather than large cash purchases and its storage. Efficient price discovery prevents seasonal price volatility. Greater flexibility, certainty and transparency in procuring commodities would aid bank lending. Facilitate Informed lending Hedged positions of producers and processors would reduce the risk of default faced by banks Lending for agricultural sector would go up with greater transparency in pricing and storage. Commodity Exchanges to act as distribution network to retail agri-finance from Banks to rural households. Provide trading limit finance to Traders in commodities Exchanges.
Benefits to Exchange Members
Access to a huge potential market much greater than the securities and cash market in commodities. MCX would leverage on the vast experience of NSE in the capital markets and NABARD for its strong presence in the rural agricultural markets Robust, scalable, state-of-art technology deployment.
Member can trade in multiple commodities from a single point, on real time basis.
Traders would be trained to be Rural Advisors and Commodity Specialists and through them multiple rural needs would be met, like bank credit, information dissemination, etc.
4.7.4 Winning Edge Value Proposition - MCX's most important differentiator and
strength is that it is an independent and a de-mutualized exchange since inception. This is further strengthened by participation from different constituents of the market, such as banks, financial institutions, warehousing companies and other stakeholders of the marketplace. Moreover, experienced professionals with deep knowledge of the commodity markets as well as exchange management experience manage MCX.
Neutral Image - MCX has de-mutualized status from inception

that allows formation of a broad, collaborative business partnership.
Strategic Equity Partnerships
MCX has consolidated it
base by entering into strategic equity partnership with leading nationalized banks like State Bank of India, HDFC Bank, National Stock Exchange (NSE), National Bank for Agriculture and Rural Development (NABARD), State Bank of Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank Of India, Bank Of Baroda, Canara Bank, Corporation Bank.
Trade Support - MCX has already tied up exclusively with some

of the largest players in this eco-system, namely, Bombay Bullion Association,
Bombay Metal Exchange, Solvent Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana, United Planters Association of India and India Pepper and Spice
-
Trade
Association.
FTIL: Technology Partner
It is here that MCX gets the
strategic advantage of having Financial Technologies (India) Ltd. as its technology partner for delivering technologically advanced solutions to market participants. FTIL's proven class of end-to-end Exchange Trading technologies addressing Trading / Surveillance / Clearing and Settlement operations would deliver a cutting-edge to the MCX Trade Life Cycle i.e. Pre-Trade, Trade and Post-Trade operations. In addition to its (technology) technological capabilities, FTIL also brings to MCX its deep engagements with technology giants such as Microsoft / Intel and HP which would be used to gain the competitive edge in gaining foothold in global markets.
4.7.5 Operations
Trading The trading system of MCX is state-of-the-art, new generation trading platform that permits extremely cost effective operations at much greater efficiency. The Exchange Central System is located in Mumbai, which maintains the Central Order Book. Exchange Members located across the country are connected to the central system through VSAT or any other mode of communication as may be decided by the Exchange from time to time. The Exchange would gradually also consider providing an internet based access. The controls in the system are system driven requiring minimum human intervention. The Exchange Members places orders through the Traders Work Station (TWS) of the Member linked to the Exchange, which matches on the Central System and sends a confirmation back to the Member.
Risk Management The macro objective of MCX's Risk Management System is to financially secure the marketplace and its participants at all times, without increasing the operational cost or compliance overheads of market participants. Some of the basic parameters of Risk Management are as follows: Risk Management parameters
Real-time Margining. Quantity (position) limits. Exposure limits linked to value of outstanding positions and the capital deployed. Daily Loss Limits. Daily Price Limits. Special Margins.
Settlement The Clearing and Settlement System of the Exchange is system driven and rule based. Clearing Bank Interface Exchange maintains electronic interface with its Clearing Bank. All Members of the Exchange are having their Exchange operations account with the Clearing Bank. All debits and credits are affected electronically through such accounts only.
Delivery and Final Settlement
All contracts on maturity are for delivery. MCX specifies tender and delivery periods. For example, such periods can be from 8th working day till the 15th day of the month where 15th is the last trading day of the contract month - as tender and/or delivery period. A seller or a short open position holder in that contract may tender documents to the Exchange expressing his intention to deliver the underlying commodity. Exchange would select from the long open position holder for the tendered quantity. Once the buyer is identified, seller has to initiate the process of giving delivery and buyer has to take delivery according to the delivery schedule prescribed by the Exchange.
4.7.6 Technology Edge

Exchange markets and operations will undergo a paradigm shift in their behavior and would be increasingly driven for providing integrated processes and services to the trading community. Moreover, Exchanges today need to deliver highest levels of service backed by strong technology to bring increased participation at lowest possible costs .It is here that MCX gets the strategic advantage of having Financial Technologies (India) Ltd. as its technology partner for delivering technologically advanced solutions to market participants. FTIL's proven class of endto-end Exchange Trading technologies addressing Trading / Surveillance / Clearing and Settlement operations would deliver a cutting-edge to the MCX Trade Life Cycle i.e. Pre-Trade, Trade and Post-Trade operations.
4.8 NCDEX PROFILE
4.8.1 Profile
National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed online multi commodity exchange promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). Punjab National Bank (PNB), CRISIL Limited (formerly the Credit Rating Information Services of India Limited), Indian Farmers Fertilizer Cooperative Limited (IFFCO) and Canara Bank by subscribing to the equity shares have joined the initial promoters as shareholders of the Exchange. NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a bouquet of benefits, which are currently in short supply in the commodity markets. The institutional promoters of NCDEX are prominent players in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills. NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It has commenced its operations on December 15, 2003. NCDEX is a nation-level, technology driven de-mutualized on-line commodity exchange with an independent Board of Directors and professionals not having any vested interest in commodity markets. It is committed to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency.
Forward Market Commission regulates NCDEX in respect of futures trading in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on its working.
NCDEX is located in Mumbai and offers facilities to its members in more than 550 centers throughout India. The reach will gradually be expanded to more centers. NCDEX currently facilitates trading of 45 commodities - Cashew, Castor
Seed, Chana, Chilli, Coffee - Arabica, Coffee - Robusta, Common Parboiled Rice, Common Raw Rice, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Groundnut (in shell), Groundnut Expeller Oil, Grade A Parboiled Rice, Grade A Raw Rice, Guar gum, Guar Seeds, Guar, Jeera, Jute sacking bags, Indian 28 mm Cotton , Indian 31 mm Cotton , Lemon Tur, Maharashtra Lal Tur, Masoor Grain Bold, Medium Staple Cotton, Mentha Oil , Mulberry Green Cocoons , Mulberry Raw Silk , Rapeseed - Mustard Seed, Pepper, Raw Jute, RBD Palmolein, Refined Soy Oil , Rubber, Sesame Seeds, Soy Bean, Sponge Iron, Sugar, Turmeric, Urad (Black Matpe), V-797 Kapas, Wheat, Yellow Peas, Yellow Red Maize, Yellow Soybean Meal, Electrolytic Copper Cathode, Mild Steel Ingots, Sponge Iron, Gold, Silver, Brent Crude Oil, Furnace Oil. At subsequent phases trading in more commodities would be facilitated.
NCDEX PRODUCTS
Agro Products
Cashew Chana Coffee - Arabica Common Raw Rice Crude Palm Oil Expeller Mustard Oil Grade A Raw Rice Groundnut Expeller Oil Guar Seeds Jeera Lemon Tur Indian Raw Rice Indian 31 mm Cotton Masoor Grain Bold Mentha Oil Mulberry Raw Silk Pepper Rapeseed-Mustard Seed Oilcake Refined Soy Oil Sesame Seeds Sugar Turmeric V-797 Kapas Yellow Peas
Base Metals
Castor Seed Chilli Coffee - Robusta Common Parboiled Rice Cotton Seed Oilcake Grade A Parboiled Rice Groundnut (in shell) Guar gum Gur Jute sacking bags Indian Parboiled Rice Indian 28 mm Cotton Maharashtra Lal Tur Medium Staple Cotton Mulberry Green Cocoons Mustard Seed Raw Jute RBD Palmolein Rubber Soyabean Yellow Soybean Meal Urad Wheat Yellow Red Maize
Electrolytic Copper Cathode Mild Steel Ingots Sponge Iron

Precious Metals
Gold Silver
4.8.2 The Shareholders
ICICI Bank is India's largest private sector bank and the second largest bank in the country, with total assets of over Rs. 1 trillion. ICICI Bank's equity shares are listed at various stock exchanges in India and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). ICICI Banks long-term foreign currency debt is rated one notch higher than the sovereign rating for India by Moodys, the international rating agency.
National Stock Exchange (NSE) was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992, with the objective of establishing a nation-wide trading facility for equities, debt instruments and hybrids, by ensuring equal access to investors all over the country through an appropriate communication network. It also provides a fair, efficient and transparent securities market to investors using electronic trading systems. NSE enables shorter settlement cycles and book entry settlements systems, and meeting the current international standards of securities markets.
CRISIL Limited (formerly The Credit Rating Information Services of India Limited) was incorporated in 1987. CRISIL offers a comprehensive range of integrated product and service offerings - real time news, analyzed data, incisive insights and opinion, and expert advice - to enable investors, issuers, policy makers de-risk their business and financial decision making, take informed investment decisions and develop workable solutions. CRISIL helps to precisely understand measure and calibrate
myriad risks - financial and credit risks, price and market risks, exchange and liquidity risks, operational, strategic and regulatory risks.
An Act of Parliament, Life Insurance Corporation of India Act, 1956, established Life Insurance Corporation of India (LIC). It took over 244 private life insurance business companies then existing. It is a wholly government owned organization with an initial capital of Rs.5 Crores contributed by the GOI. Its mission is to ensure and enhance the quality of life of people through financial security by providing Life Insurance products and services of high quality, and by providing resources for economic development. LIC is the largest life insurer in the country.
Established in 1895 at Lahore, then undivided India, Punjab National Bank (PNB) has the distinction of being the first Indian bank to have been started solely with Indian capital. The bank was nationalized in July 1969 along with 13 other banks. From its modest beginning, the bank has grown in size and stature to become a front-line banking institution in India at present. It has more than 4000 branches and over 400 extension counters. Strong correspondent banking relationship, which it maintains with over 200 leading international banks all over the world, enhances its capabilities to handle transactions worldwide. More than 50 renowned international banks maintain their Rupee Accounts with PNB.
National Bank for Agriculture and Rural Development (NABARD) was established on 12 July 1982 with an initial capital of Rs. 100 crore. The capital is enhanced to Rs.2000 crore subscribed by Govt. of India and Reserve Bank of India.
During mid- sixties, the co-operative sector in India was responsible for distribution of 70 per cent of fertilizers consumed in the country. This Sector had adequate infrastructure to distribute fertilizers but had no production facilities of its own and hence dependent on public/private Sectors for supplies. To overcome this lacuna and to bridge the demand supply gap in the country, a new cooperative society was conceived to specifically cater to the requirements of farmers. It was an unique venture in which the farmers of the country through their own co-operative societies created this new institution to safeguard their interests. The numbers of co-operative societies associated with IFFCO have risen from 57 in 1967 to more than 36,000 now.
Founded as 'Canara Bank Hindu Permanent Fund' in 1906, by late Sri Ammembal Subba Rao Pai, a philanthropist, this small seed blossomed into a limited company as 'Canara Bank Ltd.' in 1910 and became Canara Bank in 1969 after nationalization. Canara Bank is one of the premier banks in the country, accredited with umpteen distinctions. The present stature of the Bank is due to its strong fundamentals and quality customer orientations. Profit making organization since inception, the Bank today epitomizes a perfect blend of commercial and social banking.
Presently, 15 exchanges are in operation in India carrying out futures trading activities in as many as 30 commodity items (details are given in table-3.1). Moreover, permission has been given to another two exchanges viz., The First Commodities Exchange of India Ltd, Kochi (for copra/coconut, its oil and oilcake), and Keshav Commodity Exchange Ltd., Delhi (for potato), where futures trading is expected to start soon. The government has also permitted four exchanges viz., East India Cotton Association, Mumbai; The Central Gujarat Cotton Dealers Association, Vadodara; The South India Cotton Association, Coimbatore; and The Ahmedabad Cotton Merchants Association, Ahmedabad, for conducting NTSD contracts (explained below) in cotton. Lately, as part of further liberalization of trade in agriculture and dismantling o Essential Commodities Act (ECA), 1955 futures trade in sugar has been permitted and three new exchanges viz., e-Commodities Limited, Mumbai; NCS InfoTech Ltd., Hyderabad; and eSugar India.Com, Mumbai, have been given approval for conducting sugar futures.
A brief profile of the exchanges which are currently in operation has been presented. Many of these exchanges have become weaker in spite of considerable membership strength and potential for large volume of trade. Some of the observations drawn on the basis of visit to six of these exchanges have been presented in the later part of this paper. The number of members who are actively involved in trading in all these exchanges is abysmally low. Any attempt to revive the exchanges and rejuvenate the futures market in India needs an investigation into why members shy away from trading. It is interesting to note that even in case of commodities in which very active domestic and international ready market exists with volatile prices, futures trade in those commodities are no attraction to the merchandisers. The pepper exchange located in Cochin which is known for futures trade in spices for over five decades has not attracted many traders. It is the only exchange in the world engaged in trading of futures in pepper. Kerala being the producer of lions share (around 95
per cent) of pepper in India and Cochin being the port city where majority of pepper exporters are operating the existing futures exchange is expected to have a larger role to play. However, in spite of having more than 150 members in the exchange, only around 10 members cubicles in the trading ring found to have the presence of their representatives during the trading hour. A further inquiry in to the issue reveals that these members have been trading for generations and no new member is coming forward to the business. The members of the exchange still choose to retain the status of the exchange as a single-commodity exchange! The Bombay Commodity Exchange arguably the richest exchange in India in terms of it infrastructure is also facing the problem of empty trading ring. Though he exchange has membership strength close to 600, only less than 5 members are actively trading. It is clear from the data given in table-3.1 that the volume in castor seed futures declined from 2.53 lakh tonnes during 1996-97 to just 10,000 tonnes during 2000-01. The cotton exchange in Mumbai which is one of the oldest exchanges in the country has a different story to tell. Cotton has a long tradition of futures trading in India. Cotton futures started in 1857 and continued until it was suspended in 1966. Cotton has large potential for futures trading due to its uncontrolled and uncertain supply and variability of prices. While prices within a crop season fluctuate between 7.5 to 26.2 per cent in the last decade, its output varied as much as 14 percent from one year to the next. It has a very strong domestic and international market. India is the third largest producer and the second largest consumer of cotton in the world. Moreover, cotton is placed under OGL list with zero import duty, and quota system for its exports is likely to be dismantled by 2005. Nevertheless, the present status of cotton exchange and the Indian cotton futures contract is no different from other exchanges. Although the exchange has membership strength over 400, not more than 10 members actively trade in the exchange. It is often argued by the exchange authorities that the governments indirect control on supply of cotton and on prices by its procurement makes the futures market unattractive. Futures market in many other commodities indeed shows that there is
scope for the rejuvenation of this sector in the country. The buoyant trading activities in the newly started National Board of Trade at Indore, the old exchanges like the Chamber of Commerce, Hapur; Viajai Beopar Ch amber, Muzaffarnagar; Ahmedabad Commodity Exchange; Bhatinda oil exchange; The East India Jute Exchange, Calcutta, etc., are the indications of prospects of futures trade in agricultural commodities.
4.9 Regulation of Commodity Futures

Merchandising and stockholding of many commodities in India have always been regulated through various legislations like the Essential Commodities Act, 1955 (ECA, 1955) and Forward Contracts (Regulation) Act, 1952, (FCRA, 1952) and Prevention of Black marketing and Maintenance of Supplies of Commodities Act, 1980. The ECA, 1955 gives powers to control production, supply, distribution, etc. of essential commodities for maintaining or increasing supplies and for securing their equitable distribution and availability at fair prices. Using the powers under the ECA, 1955 various Ministries/Departments of the Central Government have issued control orders for regulating production/distribution/quality aspects/movement etc. pertaining to the commodities which are essential and administered by them. The FCRA, 1952 provided for 3-tier regulatory system for commodity futures trading in India: (a) An association recognized by the Government of India on the recommendation of Forward Market Commission, (b) The Forward Markets Commission and (c) The Central Government Stock exchanges and futures markets being a part of the Union list their regulation is the responsibility of the central government.
All types of forward contracts in India are governed by the provisions of the FCRA, 1952. The Act divides commodities into three categories with reference to extent of regulation. (a) The commodities in which futures trading can be organized under the auspices of recognized association, (b) The commodities in which futures trading is prohibited and (c) The free commodities which are neither regulated nor prohibited. While options in goods are prohibited by the FCRA, 1952, the ready delivery contracts remain outside its purview. The ready delivery contract as defined by the Act is the one which provides for the delivery of goods and payment of a price therefore, either immediately or within a period not exceeding eleven days after the date of the contract. All ready delivery contracts where the delivery of goods and/or payment for goods is not completed within eleven days from the date of the contract are forward contracts. The Act classified forward contracts into two: (a) Specific delivery contracts and (b) Other than specific delivery contracts or futures contracts. Specific delivery contract means a forward contract which provides for the actual delivery of specific qualities or types of goods during a specified time period at a price fixed thereby or to be fixed in the manner thereby agreed and in which the names of both the buyer and the seller are mentioned. The specific delivery contracts are of two types: transferable and nontransferable. The distinction between the transferable specific delivery (TSD)
contracts and non - transferable specific delivery (NTSD) contracts is based on the transferability of the rights or obligations under the contract. Forward trading in TSD and NTSD contracts are regulated by the government. As per the section 15 of the FCRA, 1952 every forward contract in notified goods (currently 36 commodity items) which is entered into except those between members of a recognized association or through or with any such member is treated as illegal or void (see appendix I for the list). As per the section 17(1) of the Act, 82 items are prohibited for forward contract (see appendix II for the list). The section 18(1) of the Act exempts the NTSD contracts from the regulatory provisions. However, over the years the regulatory provisions of the Act were applied to the NTSD contracts and 79 commodity items are currently prohibited for NTSD contracts under section 17 of the Act (see appendix III for the list). Moreover, another 15 commodity items are brought under the regulatory provisions of the section 15 of the Act out of which trading in the NTSD contract has been suspended in 12 items (see appendix IV for the list). At present, the NTSD contracts in cotton, raw jute and jute goods are permitted only between, through or with the members of the associations specifically recognized for the purpose. Subsequent to the report of the Committee on Forward Markets (known as the Kabra Committee) submitted in 1994 the government has so far permitted futures trading in nearly 35 commodities under the auspices of 23 commodity exchanges located in different parts of the country. The commodities in which futures trading is permitted are: pepper, turmeric, gur, castorseed, Hessian, jute sacking, cotton, potato, castor oil soyabean and its oil and cake, coffee, mustardseed and its oil and oilcake, ground nut and its oil, sunflower oil, copra/coconut and its oil and oilcake, cottonseed and its oil and oilcake, kapas, RBD palmolein, rice bran and its oil and oilcake, sesame seed and its oil and oilcake, safflower seed and its oil and oilcake, and sugar. This list may get enlarged
with the repeal of ECA, 1955 and with further liberalization of farm sector as envisaged in the National Agricultural Policy, 2000 and the Union Budget, 2002-03. The exchanges are required to get prior approval of the FMC for opening of each contract in commodities which are notified under the relevant sections in FCRA 1952. Regulation is essential especially in a private ownership and market oriented system to ensure the necessary checks and balances in the system. However, stringent and continuous regulation for long period of time would do no good to the system. The initial stringent regulation should ensure that a foolproof and growth oriented control system in terms of set up of the exchange and its sound management, a clearinghouse which can promote trade and its financial integrity, sound and facilitating contract terms and conditions, etc. is in place. The exchanges are already assumed to be self-regulatory agencies. Their role must get strengthened further along with FMC minimizing its role as a facilitator making the existing regulation an appropriate regulation.
4.9.1 Futures Trading Commodity Exchanges and Forward Markets Commission.

1.
Futures trading perform two important functions of price discovery
and price risk management with reference to the given commodity. It is useful to all segments of the economy. It is useful to the producer because he can get an idea of the price likely to prevail at a future point of time and therefore can decide
between various competing commodities, the best that suits him. It enables the consumer in that he gets an idea of the price at which the commodity would be available at a future point of time. He can do proper costing and also cover his purchases by making forward contracts .Futures trading is very useful to the exporters as it provides an advance indication of the price likely to prevail and thereby help the exporter in quoting a realistic price and thereby secure export contract in a competitive market. Having entered into an export contract, it enables him to hedge his risk by operating in futures market. 2. Forward/futures trading involve a passage of time between entering
into a contract and its performance making thereby the contracts susceptible to risks, uncertainties, etc .Hence the need for the regulatory functions to be exercised by the Forward Markets Commission (FMC). 3. Trading is Presently futures trading are permitted in all the commodities. taking place in about 78 commodities through 25
Exchanges/Associations as given in the table- I below:-
Table-I. Exchanges and Commodities in which futures contracts are traded.
No. 1.
Exchange India Pepper & Spice Trade Association, Kochi (IPSTA)
COMMODITY Pepper (both domestic and international contracts)
2.
Vijai Beopar Chambers Ltd., Muzaffarnagar Rajdhani Oils & Exchange Ltd., Delhi Oilseeds
Guar, Mustard seed Guar, Mustard seed its oil & oilcake
3.
4.
Bhatinda Om & Oil Exchange Ltd., Bhatinda The Chamber of Commerce, Hapur The Meerut Agro Commodities Exchange Ltd., Meerut The Bombay Commodity Exchange Ltd., Mumbai
Guar
5.
Guar , Potatoes and Mustard seed
6.
Guar Oilseed Complex
7.
* Castor oil international contracts Castor seed, Groundnut, its oil & cake, cottonseed, its oil & cake, cotton (kapas) and RBD palmolein. Castorseed, cottonseed, its oil and oilcake Hessian & Sacking
8.
Rajkot Seeds, Oil & Bullion Merchants Association, Rajkot
9.
The Ahmedabad Commodity Exchange, Ahmedabad The East India Jute & Hessian Exchange Ltd., Calcutta The East India Cotton Association Ltd., Mumbai The Spices & Oilseeds Exchange Ltd., Sangli. National Board of Trade, Indore
10.
11.
Cotton
12. 13.
Turmeric Soya seed, Soyaoil and Soya meals. Rapeseed/Mustardseed its oil and oilcake and RBD Palmolien ( Also granted in-
principle approval of Nation wide Multi-commodity Exchange Status)See para 8) 14. The First Commodities Exchange of India Ltd., Kochi Central India Commercial Exchange Ltd., Gwalior E-sugar India Ltd., Mumbai National Multi-Commodity Exchange of India Ltd., Ahmedabad Coffee Futures Exchange India Ltd., Bangalore Surendranagar Cotton Oil & Oilseeds , Surendranagar E-Commodities Ltd., New Delhi 20 21** 22.** National Commodity & Derivatives , Exchange Ltd., Mumbai Multi Commodity Exchange Ltd., Mumbai Bikaner commodity Exchange Ltd., Bikaner Haryana Commodities Ltd., Hissar Bullion Association Ltd., Jaipur Copra/coconut, its oil & oilcake
15.
Guar and Mustard seed
16.
Sugar Several Commodities (Please see the site of the Exchange at www.nmce.com)
**17
18.#
Coffee Cotton, Cottonseed, Kapas Sugar (trading commence) yet to
19
23 24 25
Several Commodities (Please see the site of the Exchange at www.ncdex.com) Several Commodities (Please see the site of the Exchange at www.mcx.com) Mustard seed its oil & oilcake, Gram. Guar seed. Guar Gum Mustard seed complex Mustard seed Complex
4. In-principle approval for trading in the specified commodities has been given to the following Exchanges/proposed Exchanges:Serial . No. 1. 2.
3.
Name of the Association

M/s. NCS InfoTech Ltd., Hyderabad Unites Planters Association of South India, Connors (u/s 14B) SGI Commodity Exchange, Mumbai
Commodities
Sugar Tea Soya bean Ground nut their oils and oilcakes.
These Associations/Exchanges are at different stages of completing the procedural formalities for setting up the exchange/commencing trading. 5. After assessing the market situation and taking into account the
recommendations made by the Board of Directors of the Exchange, the FMC prescribes various regulatory measures from time to time, for prudential regulation of futures/forward trading. 6. Under a World Bank aided Grant Scheme to support development
of commodity futures markets in India, a number of consultancy assignments, training programmes, study tours, office automation of FMC etc. have been undertaken. The project was successfully completed on 31 st October, 2000. A Plan Scheme under the 10th Five Year Plan for generating awareness about the activities, mechanism and benefit of futures trading among farmers is being implemented. 7. Under a USAID Technical Co-operation programmed on
Commodity Futures, the Government of India has entered into an agreement with USAID for capacity building in Indian commodities derivatives market. The capacity building includes training, seminars, consultancy studies and visits to
foreign regulators and exchanges. The short term component of this programmes likely to be completed by the end of November, 2004. 8. In enhancing the institutional capabilities for futures trading the
idea of setting up of National Commodity Exchange(s) has been pursued since 1999. Three such Exchanges, viz, National Multi-Commodity Exchange of India Ltd., (NMCE), Ahmedabad, National Commodity & Derivatives Exchange (NCDEX), Mumbai, and Multi Commodity Exchange (MCX), Mumbai have become operational. National Status implies that these exchanges would be automatically permitted to conduct futures trading in all commodities subject to clearance of bye-laws and contract specifications by the FMC. While the NMCE, Ahmedabad commenced futures trading in November, 2002, MCX and NCDEX, Mumbai commenced operations in October/ December, 2003 respectively. 9. The Government has proposed to initiate steps to integrate the
commodities markets and securities markets. A Working Group set up in this connection has submitted its report to the Government indicating the road map for convergence of securities and commodities derivatives markets and their regulatory systems.
4.10 Commodity Futures Markets in India: present scenario

Major reforms have been initiated in commodity futures markets in India since the last few years. An article1 by this author in this Journal compared the growth trajectories being followed by the commodity derivatives market vis--vis the securities derivatives markets in India at the dawn of the millennium. It was observed that though derivatives trading commenced in the securities market only in June 2000
it was growing at great speed while the commodity derivatives markets which were operational for about 48 years by then was only gradually waking up. However, subsequent few years have witnessed major changes in the commodity spectrum despite the several institutional constraints in which commodity derivatives markets still function. Commodity futures trading in India was in a state of hibernation for four decades, which was marked by suspicion on the benefits of futures trading. This is replaced by policy, institutional and market activism in the last few years. This is partly a response to the predominant role being assigned to the market forces in price determination and the consequent need for providing market-based derisking tools. It is also the result of a growing awareness that derivatives trading do perform substantial risk mitigating functions to the stakeholders. This resurgence of interest in commodity derivatives is timely since global commodity cycle is on the upswing, and experts have predicted that we are in the decade of the commodities. Concomitant to the newfound policy initiatives the market has responded by setting up modern institutions (Nation-wide Multi-Commodity Exchanges, (NMCE) and adapting some of the best practices such as electronic trading and clearing. The projections of commodity derivatives trading, though widely variant in the range of Rs. 30-50 trillion and needs to be calibrated with sound assumptions, indicate the enormous potential of this sector not only in terms of trading but also in terms of the opportunities for developing value-added services in terms of quality warehousing, gradation and certification services, financial intermediation, modern marketing practices, modern clearing and settlement mechanism. Once the market becomes liquid the old complaint, that the Indian commodity derivatives markets do not meet the basic objectives of price discovery (with many studies indicating backwardation common place) and risk management may also vanish. The most important changes that have taken place in the commodity futures space were the removal of prohibition on futures trading in a large number of commodities
and the facilitation of setting up modern, demutualised exchanges by the Government of India. These two initiatives together are becoming instrumental in changing the contours of the commodity futures markets in India in terms of both participation and practices. There are, however, still a number of obstacles in fully exploiting the opportunities available to the commodity eco-system. The views expressed and the approach suggested in this paper is of the author and not necessarily of NSE. 1. Securities Market and Commodity Derivatives Markets Rush vs. Slow Growth? (NSE News, December 2001). A comparative profile of the commodity derivatives markets with that of the nascent securities derivatives market was made since no comparison of the Indian derivatives markets would be useful with any counter part. This was because of the chequered history of Indian commodity derivatives trading from that of a flourishing market formally started in 1875 with the setting up of the Bombay Cotton Association but which went into disrepute during the scarcity decades of the 1960s and 70s. A comparison revealed that the rapid strides made by the securities derivatives segment in a short span was because of its sound institutional frame work in the spot side while the spot market acted as a drag on the progress of the derivatives markets in commodities. 2. The NMCEs marked a major paradigm shift in the institutional structure and market architecture of commodity futures markets. Drawing heavily from the NSE model in the securities markets these institutions are expected to unleash a chain of value added functions in the commodity derivatives markets as well as in the commodity spot market through a host of extra functions they are expected to perform. These include warehouse receipt based deliveries which would require transferability and negotiability of warehouse receipts and its de-materialization, entry of corporate, banks, financial institutions and FIIs in commodity futures trading, dissemination of information relating to the physical markets and prices, adoption of the best technology in trading, clearing and settlement and so on. The NMCEs have
started exhibiting a penchant for innovations as reflected in their attempts at co-opting warehousing agencies, bringing about transferability and de-mating of warehouse receipts account, though in a limited manner (because of the absence of a legal frame work) association of banks (for other than trading activities as trading in commodities is still prohibited for banks) polling of price information from the spot markets(from mandies)commencement of evening trading session to align domestic markets with the global markets and so on(see Economic Survey 2003-04). 3. Several studies particularly by Jain & Naik (1999), Thomas (2003), Sahadevan (2002) etal have indicated that only in a few cases the commodity futures markets performed its basic objective of discovering efficient prices. While the studies focus were different the general picture emerging was that only in the case of commodities with reasonable volumes of trading, like castor seed and pepper, the markets achieved the objective of price discovery to some extent. However, since the markets in general were too shallow the results were not unexpected.
5.1 PESTEL FRAMEWORK

Now, in a particular geographic region, the environment there affects the retailers in the region in various ways. We have studied the effects under the following heads: 1. Political factors 2. Economic factors 3. Social (Socio-Cultural) factors 4. Technological factors 5. Environmental factors 6. Legal factors
5.1.1 Political Factors

With the liberalization of economy, many commodities are imported and exported. Commodities market is directly affected with government by applying octroi duty, stamp duty, import export duty etc. Now-a-days government is also planning for going to introduce compulsory deliveries who are entered into future contracts. This kind of thinking will definitely affect the daily volume (turnover) of exchanges. One of the major factor is quota system which is applied in various commodities like sugar, textile etc.
5.1.2 Economic Factors
The type of economic system (capitalism or socialism etc.) existing in a country has a direct bearing on the potential for and the development of the commodities industry in that country. An investor cannot escape from the effects of the factors in the macroeconomic and microeconomic environment, be it domestic or global that influences the local market. Inflation, duties, interest rates, tax levels and the GDP are some aspects of the economy, which an investor must cope with. Real growth makes more income available to investors who then tend to spend more, leading to higher risks and more profits for their investment. As the economy expands, higher demand levels lead more investors into the market, trying to fulfill their ROI.
5.1.3 Social Factors

The demographic trend and lifestyle patterns, of the society that an investor intends to serve, decide the investments strategy. The investors, who are dealing in the equity market, will go to learn the terminology of derivatives and gradually show the interest in commodities market. Secondly, those people who are already doing business as a grain merchant and commission agent for various commodities are also going to take part in commodities market because of recent market situation and past experience will going to help them a lot. They can also predict future movement toward particular commodities and get profit out of them. Thirdly, those who are dealing in metal industry like gold, silver, etc. traditionally known as jewelers, soni are also taking interest in commodities market because of their blood business.
5.1.4 Technological Factors
Technology is probably the most dynamic change agent for the commodity industry. Earlier system was used which was known as barter system. After words a renewed system was introduced by government which was known as currency system. In this system, people are buying and selling goods and services respectively by giving or receiving currency instead. But drastic change is done when computerize system is introduced. In this particular system, investors can make trade in any commodities at any place any time (during market hours) by only pressing one key. Computerize system is very customize for each and every investor who can select group of commodities in which he or she wants to deal on their computer. It makes the investors life a lot easier by facilitating the use and developments of various software like ODIN.
5.1.5 Environmental Factors

In recent market scenario, there are many commodities which are depends on various season like winter, monsoon and summer respectively. There are many agro commodities which are based their crop quality and quantities on the rain fall. There are commodities which are trading most frequently during their seasonal duration and visa-a-versa. In this particular situation, commodities price and volume may going to rise or fall.
5.1.6 Legal Factors

Commodity market is ever affecting industry by legal factors. There are many entities which are regulated by governing bodies like FMC (Forward Market Commission), SEBI (Security Exchange Board of India), MCX (Multi Commodity Exchange), NCDEX (National Commodity & Derivatives Exchange), NMCE
(National Multi Commodity Exchange) etc. These bodies are governing bodies so each and every trader and broker have to follow those guidelines which are building and developed by the governing bodies. They have to precise in taking and maintain initial margin, brokerage, stamp duties, demat charges etc.
CHART ANALYSIS
(1) WHICH OF THE FOLLOWING INVESTMENT MARKET, YOU GENERALLY PREFER FOR INVESTMENT?
Investment Segment Generally Prefered 31% 8% 18% 10% 14% 19% Mutual Fund Government Secutities Own Business
Capital Market Bank Deposits Commodity Market
Here, we can see that 31% businessmen and government employee are invested their income in their own business out of 100% businessmen and government employee. There are 18% businessmen and government employee who are invested in equity markets for doing speculation and investment purposes. There are 10% businessmen and government employee who are invested in mutual funds for doing speculation and investment. There are 19% businessmen and government employees who are invested their income in bank deposits. There are only 8% businessmen and government employee who are invested in commodity market. We can see that there are not as much as awareness as compare to equity markets yet all businessmen and government employee are related to do business in commodities, which are traded on exchange like shares.
(2) ARE YOU INTERESTED TO KNOW ABOUT THE FUTURE COMMODITY TRADING?
Interest To Know About Future Commodity Market 38% 62% Yes No
There are only 38% businessmen and government employee who are interested to know about future commodity market because they are also doing trading in future equity markets. There are 68% businessmen and government employee who are not interested to know about future commodity market because they told that it is all about speculation purpose and also not doing trading in equity market. (3) HOW MUCH % OF PEOPLE PREFER TO DEAL WITH TIPS?
People preferring tips from experts form 36% of the total sample size
(4)IN WHICH SEGMENT PEOPLE WANT TO DEAL?
As small as 6% of the sample size prefer dealing in commodity and 9% in derivatives whereas a huge chunk prefers only cash segment
RESEARCH FINDINGS AND CONCLUSIONS
Commodity derivatives have a crucial role to play in the price risk management process. Especially in any agriculture dominated economy. Derivatives like forwards, futures, options, swaps etc are extensively used in many developed as well as developing countries in the world. However, they have been utilized in a very limited scale in India The production, supply and distribution of many agricultural commodities are controlled by the government and only forwards and futures trading are permitted in certain commodity items. The most things we have seen are that the awareness of future commodity trading is still not there. People who knows, they believe that operators and big players in the market drive this future commodity market. Most of peoples feel that the qualities of the commodities are not as per the requirement. For the process of taking or giving delivery in future commodity market is lengthy, costly, and required so many documents. The option trading is still not allowed in commodity market so the risk management process is incomplete. Because we all know that future trading has its own limits.
The account opening process of future commodity trading is lengthy and requires more documents. The delivery centers of commodities are very less in India compare to other developed countries. People still considering that to invest in commodity market is very risky. People still considering commodity market for speculation rather than business purpose. The whole industry is highly sensitive towards national and internationals environmental and political factors.
Suggestion and recommendation
The FMC should allow Option trading in commodity market in India. The FMC has to take some steps to increase the awareness of future commodity trading India.
The FMC has to encourage the mutual fund companies and institutional investors to invest in commodity market in India. The government has to allow FIIs to invest in commodity market in India. The FMC should have concrete plan to stop Dabba trading in commodity market in India. The FMC should increase the range of commodities in future commodities in commodity market in India. To motivate the commodity business in India the FMC should come up with some rebate in taxes. The FMC should increase the delivery centers of commodities in India. As commodity market is very potential for business, the angel co. should think about various ways to attract the customers.
QUESTIONNAIRE
Name: _______________________________________________________ Address: - _____________________________________________________ Contact No: - __________________________________________________ Profession: - ___________________________________________________ E-mail id: - _____________________________________________________
Where do you invest your fund? Bank Mutual fund Insurance Govt. Bonds Gold/ Silver Investment Decision ? Self analysis Tips from Experts Tips from friends / relatives Business Channels Others (Specify) __________ Duration of attachments with commodity market ? _________ In which of following you deal with: Metal Oil Spices Bullions Which type of trading you prefer to deal with? Square up mode Intraday Delivery based Exchange you prefer to deal with? MCX NCDEX How do you view your self? Short term investor Trader Speculator Arbitrage Hedging Crops cereals & Pulses Energy post office Stock market Real assets IPO others (specify) _______________
9.1 WEBSITES
www.msfpl.com www.mcxindia.com www.ncdex.com www.kitko.com www.commodityindia.com www.indiainfoline.com www.fmc.gov.in www.dgcx.com www.lmcx.com www.cbot.com
9.2 NEWSPAPERS & MAGAZINES

Dalal Street Commodity World Chartered Financial Analyst Economic Times Business News Business Standard

Commodity Market

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STUDY OF COMMODITIES MARKET

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STUDY OF COMMODITIES MARKET

MARWADI SHARE & FINANCE LIMITED

STUDY OF COMMODITIES MARKET

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STUDY OF COMMODITIES MARKET

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Typology of risk management instruments

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STUDY OF COMMODITIES MARKET

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STUDY OF COMMODITIES MARKET

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STUDY OF COMMODITIES MARKET

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Key participants currently (Trader Profile)

Opportunity for retail Investor

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Views on delivery based trading

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3.1 TITLE OF THE PROJECT:

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3.2.1 TIME SCOPE

3.3 SAMPLE DESIGN:

3.3.2 Sampling unit

3.3.3 Sample size

3.4 METHODS OF DATA COLLECTION

3.4.2 Secondary methods

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2. Newspapers 3. Websites 4. Books 5. Other projects.

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4.1 INTRODUCTION TO DERIVATIVES

4.2 THE NEED FOR A DERIVATIVES MARKET

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4.3 FACTORS DRIVING THE GROWTH OF FINANCIAL DERIVATIVES

4.4 THE MAIN INSTRUMENTS UNDER THE DERIVATIVE ARE:

4.4.1 Forward contract:

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2) Liquidity: There is no secondary market for forward contracts while

A forward contract is generally

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Difference between the Forward and Futures:

DIFFERCENCE Size of contract Price of contract

Decided by buyer and seller Remains fixed till maturity

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STUDY OF COMMODITIES MARKET