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Jyoti Chauhan
AE-1710
SUMMARY
In India, commodity derivatives are traded on exchanges that are separate and distinct from the
exchanges on which financial derivatives are traded. The commodity futures market in India went
through a transformation between 2000 and 2003 with significant regulatory liberalization and
creation of three new national, electronic exchanges, each listing scores of products. The first of these
new National, electronic exchanges was the National multi-commodity exchange of Ahmadabad
(NMCE), which started November 2002 and then a year later, Multi-Commodity exchange (MCX)
and the national commodity derivatives exchange( NCDEX) started, which is partially owned by the
NSE.
The Forward markets commission notes 153 different products as being listed and available for
trading on India’s 23 commodity exchanges. The agricultural and non-agricultural commodities with
listed products in Indian exchange are shown in Table1.
Table1: Commodities and listed products on Indian exchange
In India, about a quarter of the volumes in commodity derivatives market is agricultural. The
remaining volume comes from non-agricultural products mainly gold, silver and energy and this can
be seen in Table2
Table2: Average daily volume on Indian Financial Markets, March 2007
Out of the National electronic exchanges, MCX and NCDEX account for 14 of the 15 most active
contracts, as shown in table3. The National board of trade of Indore (NBOT) has a soy contract that
trades roughly the same volume as NCDEX. This is NBOT’s only active contract and NBOT is not a
national electronic exchange. MCX’s gold, silver, copper, zinc, nickel and crude oil contracts
accounted for 71% of all commodity futures trading.
Table3: Top 15 Futures on Physical Commodities: Average Daily Value of Trading for June 1–15,
2007
There are various agricultural contracts that are uniquely Indian. The agricultural contracts in the top
15 accounted for 29% of the total volume. In agriculture, uniquely Indian traded contracts are for
commodities like Jeera, Guar, Chana, Rapeseed- mustard seed.
Contract specifications vary with the underlying commodity. But, some of the common features are:
a. Exchanges trade only commodity futures, there are no commodity options traded in India.
b. The shortest maturity contracts are one month contracts. The longest possible contracts listed
are 12- month contracts.
c. NCDEX has almost all its expiration date on the 20th of the months and MCX on the 5th, 15th
or 20th.
d. All commodity contracts today have mandatory delivery for parties who hold their position
beyond expiration.
Other important aspects of contract design are the size and grade of commodity.
Traditionally, instead of one exchange trading multiple commodities, each commodity would have
multiple exchanges. Today, these markets are very different due to liberalization in the underlying
product markets and the reform in the financial sector. Also, there were local open outcry exchanges
generally focusing on a single commodity whereas now there are three electronic exchanges which
offer a single trading and clearing platform across the nation. These exchanges are unlike the
traditional exchange in almost every aspect. They are owned by financial entities rather than by
brokers. Also, a single entity can own more than 10% equity in an exchange. So, there is foreign
ownership as well.
At NCDEX, there are processes to gather Spot market price in a timely manner and at frequent
intervals within the day. The price polling mechanism is not new one- price polling is used to
calculate the London inter-bank offer rate (LIBOR). Unlike LIBOR, which is polled by British
bankers association, the spot price polling process in India is outsourced to third-party information
vendors like CRISIL, CMIE and NCMSL.
In India, the equity derivatives were trading at low volumes for two years after their start in 2000. But
now liquidity for a specific product tends to accrue to one specific exchange. For e.g.: Bullion and
metal contracts are the top trades at MCX while NCDEX, Bombay is the agricultural futures
exchange. Table4 shows total trading volumes in the top commodity exchanges, as well as the top
traded products on the exchange.
Table4: Monthly Volumes on the Top Commodity Exchanges, March 2007
Trading volume falls off sharply beyond the two top national, multi commodity exchanges. MCX is
the top exchange with volumes of around USD 60 billion in March 2007, with NCDEX clearly below
with about a third of the volumes at around USD 20 billion
If we look at volume and open interest in the front month as a percent of volume and open interest in
all months combined, this gives us some feeling for how speculative the market is. Table5 shows
these ratios for the five most important non-agricultural commodities as well as the five biggest
agricultural commodities.
Table5: Patterns in Near Month Contract Open Interest (OI) and Traded Volumes (TV) as a Fraction
of the Open Interest and Traded Volumes Summing across Contracts of all Maturities, March 2007
Improvements
This book has been published in 2007 and since then many changes have occurred in the commodities
exchange market. For instance, 99.88% of the total trading in commodities occurs in the following
national-level commodity exchanges (as opposed to 23 in the book):
We see that there is a fall in the number of exchange markets in commodity trading (from 23 to 6).
This shows that SEBI has been having a good control over the market since 2007, thus regulating the
market by having proper governmental control. Reduction in exchange markets leads to more
transparency as well.
The products in which trading occurs has changed over the course of time. In non-agricultural
products, trading of ferrous metals and polymers has been discontinued along with tin. Even the
trading in agricultural products has changed if we compare the table 7.1 and the two tables above.
Currently, MCX has had the highest daily turnover of Rs. 1,19,940 crore and a market share of 91.4%.
The daily turnover amounts to Rs. 21,123 crores. The volume of trading in 2017 of agricultural
commodities accounts to 1.3 billion contracts.
This amount has significantly declined from 27% in 2007 (refer table 7.2) to 5% for agricultural
products and increased from 73% in 2007 to 95% for non – agricultural products.
For the year 2017-18, following is the summary statistics calculated from the detailed report of MCX
annual reports.
Comparing the above two snapshots with table 7.3 we can see changes in the most active commodities
traded.
Chapter 7 talks about the daily trade hours between 10:30 am to 3:30 pm whereas the current updated
timings are as follows:
Table 7.4 suggests the position limit of Gold Futures contracts on MCX are 2 metric tons. A snapshot
of the updated position limit from MCX has been updated to 5 metric tons.
Compared to table 7.5, following are the revisions in the membership fees on MCX. We can see that
the fees have significantly increased over the span of 10 years.
Total value of agro commodities traded in the year 2018 are as follows:
F12 shows the total sum in lacs for the year 2018, i.e 8629546.68 lacs is the total amount spend in
trading agro commodities in 2018.
Lastly, checking the open interest and traded volumes in October 2018,
This is the latest data of Open Interest of October 2018. If we compare this with table 7.7, we see
that increase in open interest along with an increasein price is said to confirm an upward trend.
b) Government regulatory bodies ensuring that there are no payment crisis and the commodities
futures markets will continue to grow
c) The three month contracts to continue and other longer term contracts being introduced
d) Reduction in the commodity transaction tax (CTT) which the government introduced in this
budget.
Currently, NSE and BSE do not trade in commodity future derivatives.NSE will launch its commodity
derivatives segment. NSE has plans to launch derivatives trading in non-agriculture commodities in
the initial phase, followed by agriculture commodities, subject to SEBI approval. This would achieve
integration of trading in commodity derivatives market with other segments of the securities market at
exchange level. NSE said it has conducted multiple road shows and engaged leading industry
associations to create awareness among the participants and held mock trading sessions with active
participation from prospective participants. The market regulator had said the country would have a
unified exchange regime wherein stock exchanges would be allowed to offer trading in commodities
derivatives. The move will not have an immediate impact on the commodity market segment. It is not
necessary that it would create additional liquidity or result in more volume in the commodity markets.
It has been to see how the two exchanges roll out the products and implement them to have an impact
on the commodity markets. Currently, commodity derivatives are largely traded on MCX and
NCDEX. The regulator, government and stock exchanges are taking various steps to promote the
agricultural commodity derivative segment so that the benefits of agricultural commodity derivative
are passed on to the farmers and Farmers Producer Organizations (FPOs). The SEBI board decided
that instead of levying regulatory fee at the prescribed turnover-based slab rates, a nominal regulatory
fee at a flat rate of Rs 1 lakh per exchange would be levied on turnover arising from agricultural
commodity derivatives.
The entry of BSE and NSE into commodity derivatives trading is expected to give a fillip to the
market as the broker and client base will expand. Brokers, however, say equity exchanges will have to
innovate to make inroads into the commodity space. The foray of equity exchanges will intensify the
competition in the commodity derivatives space. Both the NSE and BSE would be vying to grab
market share from the existing commodity exchanges such as Multi Commodity Exchange (MCX)
and National Commodity & Derivatives Exchange (NCDEX), while the incumbent players will try to
protect their turf. Industry experts say production innovation would be the key. While adding some
new delivery centres, MCX and NCDEX will try to protect against migration of trade volumes. The
system of a single screen with all the three trading classes -- equity, commodity and currency --
already exists. Liquidity would be a prime driver for trading volume. For clients, nothing will change
with the entry of new players into commodity futures as they chose trading platforms. For brokers,
however, exchange-wise collateral will not be required if clients want to trade in all asset classes on
one platform. Product innovation would be the key for the success of BSE and NSE.