2. Historical Perspective
Forward Markets Commission established1953
FCRA passed, ban on cotton futures removed1952
Cotton derivatives banned by Govt1939
Gold and silver futures trading started in Mumbai1920
Futures trade in oilseeds started1900
Bombay Cotton Trade Association established1875
3. Historical Perspective
Govt extended the list of commodities allowed for futures trading2001
Kabra committee recommended removal of ban on futures trading for most
commodities
1994
Govt removed ban on selected commodities like cotton, Jute, potatoes etc1980
Futures trading in most commodities banned by Govt1966
Gold and silver futures trading banned by Govt1955
Commodity markets revived in India after 4 decades.
2002 Licenses issued for setting up national level multi-
commodity exchanges
4. 4
Regulatory Structure in India
Banking /
NBFCs
RBI
Ministry of Finance
SEBI
Capital
Markets
NABARD
Co-operative Banks &
Regional Rural Banks
Ministry of Consumer
Affairs
FMC
Commodity
Exchanges
Insurance Regulatory
Development Authority
(IRDA)
Insurance
Pension
Funds
SIDBI
State Financial
Institutions
National
Housing Bank
Housing Finance
Companies
Company
Law Board
Corporates
Pension Funds Regulatory
Development Authority
(PFRDA)
Banking /
NBFCs
RBI
Ministry of Finance
SEBI
Capital
Markets
NABARD
Co-operative Banks &
Regional Rural Banks
Ministry of Consumer
Affairs
FMC
Commodity
Exchanges
Insurance Regulatory
Development Authority
(IRDA)
Insurance
Pension
Funds
SIDBI
State Financial
Institutions
National
Housing Bank
Housing Finance
Companies
Company
Law Board
Corporates
Pension Funds Regulatory
Development Authority
(PFRDA)
5. NCD
EX
5
Structure of Indian Commodity
Exchanges
Other Regional
ExchangesNMCE
Commodity Exchanges
ICEX
National
Exchanges
Regional
Exchanges
FMC (Forward Markets
Commission)
NBOT
NCDEX MCX ACE
6. Objectives of an Exchange
īŽ Platform for fair price discovery through: Wide
participation
īŽ Real time information dissemination
īŽ Platform for price risk management
īŽ Exchange neutral to process of price discovery
īŽ Ensure orderly functioning of markets through:
Various Checks & Controls
7. NCD
EX
7
Futures
īŽ A futures contract is essentially an exchange-traded
version of a forward contract
īŽ It is an agreement to buy or sell a specified quantity in
a designated future month at a price agreed upon by
the buyer and the seller
īŽ Terms of each contract are âstandardizedâ in a legal
document called the âcontract specificationâ
īŽ Types of futures contracts:
īŽ Commodity futures
īŽ Financial futures
īŽ Index futures
9. How are commodities traded?
īŽ Futures â Commodity futures are traded on an Exchange
platform
īŽ National Commodity & Derivatives Exchange (NCDEX)
īŽ Multi Commodity Exchange (MCX)
īŽ National Multi Commodity Exchange (NMCE)
īŽ Indian Commodity Exchange (ICEX)
īŽ ACE Commodity Exchange
īŽ Options â Lower risk for market participants, approval
awaited for the FCRA Amendment Bill
10. 10
Indian Agriculture
īŽ Commodities valued at 33% of GDP
īŽ ~14% of GDP from Agriculture
īŽ India ranks second worldwide in farm output
īŽ Farm based economy, particularly in rural areas
īŽ Agro-based industries â Textile, Paper, Starch, Poultry,
Food Processing, Oil Extraction, Beverages, Alcohols and
Spirits etc.
īŽ Derivatives of above industries serve a wider range of
enterprises and industries
īŽ Indian agriculture continues to provide livelihood to more
than 60% of population, directly and indirectly
īŽ Consumption is one of the key drivers of Indian economy
11. About NCDEX
īŽ Owned by distinguished national and global entities
īŽ The shareholders bring with them expertise in areas of
agriculture, banking with focus on rural finance,
commodity and stock markets, physical markets,
investment banking and institution building
īŽ Demutualised- the Exchange is professionally managed
and neither Directors nor management have any vested
interest in trading on the Exchange
12. Stake Holders
Sr. No. Name % of
total
1. Jaypee Capital 22.38
2. Shree Renuka Sugars 12.50
3. National Stock Exchange of India Limited (NSE) 11.1
4. Life Insurance Corporation of India (LIC) 11.1
5. National Bank for Agriculture and Rural Development
(NABARD)
11.1
6. Indian Farmers Fertiliser Cooperative Ltd (IFFCO) 8.88
7. Punjab National Bank (PNB) 7.29
8. Canara Bank 6.03
9. CRISIL Ltd 3.70
10. InterContinental Exchange (ICE) 2.96
11 Goldman Sachs Investments (Mauritius) I Limited 2.96
Total 100
20. Strengths of NCDEX
īŽ Credibility and respect in the market
īŽ Have been the preferred exchange for trading in
agricultural commodities
īŽ Have set benchmark prices for several commodities
īŽ Have a strong, professionally managed board. Directors
have domain expertise in various fields
īŽ Management team comprises a team of well qualified
and experienced members
īŽ Neither the management nor employees have any
investment in commodity futures assuring neutrality
22. 22
Intention Matching
īŽ In case of Intention matching, request from both the buyers
and sellers are sought
īŽ The Intentions should match for
īŧ Quantity â only the minimum quantity of the request will
be matched &
īŧ Warehouse Location
īŽ If the intentions do not match both the
request are cash settled with the final
settlement price
23. 23
Compulsory Delivery
īŽ In case of compulsory delivery all the open position on the
expiry needs to be settled through physical delivery
īŽ Sellers need to deliver
īŽ Buyers need to accept the delivery
24. 24
Sellers Option
īŽ In case of sellers option the seller can opt to deliver at the
warehouse location of his choice
īŽ Seller has the following options
īŧ Warehouse Location
īŧ Quantity
īŽ The buyer can give the intention for preferential warehouse
īŽ The buyer is not guaranteed of delivery at the warehouse
given as preference if there are no sellers available from that
particular location
25. 25
Staggered delivery
īŽ The tender period shall start on 5th of every month in which
the contract is due to expire.
īŽ In case 5th happens to be a Saturday, Sunday or a holiday
then the tender period will start from the next working day.
īŽ Seller shall have an option of marking an intention of delivery
on any day during tender period up to expiry of contract and
corresponding buyer matched by the allocation process put in
place by the exchange will have to take the delivery on T+2
day from the delivery centre where the seller has delivered
the commodity.
īŽ The settlement price for any delivery allocation during the
staggered period( i.e. up to one day prior to expiry) would be
the last available spot price displayed by the exchange.
26. NCD
EX
26
Contract Specification - RMSEED
Parameters Details
Basis Ex-warehouse Jaipur(exclusive of VAT/sales tax)
Additional Delivery
centers
Alwar, Kota, Sri Ganganagar, Hapur, Bikaner & Agra
Unit of trading 10 MT
Delivery unit 10 MT
Quatation Rs per quintal
Tick size Re 1
28. Contract Specification - RMSEED
NCD
EX
28
Parameters Basis Quality allowances
Moisture content 5% basis īŽ 5% to 6.5% at 1:1 discount or part there of
īŽ Above 6.5 % rejected
Oil content
(at 5% moisture
content level)
42% basis īŽ 42% to 37% at 1:1 discount or part there of
īŽ More than 42% accepted at 1:1 premium or part there of
īŽ Below 37% rejected
FFA 1.5 max None
Foreign Matters 0.25%
basis
īŽ 0.25% to 2% at 1:1 discount or part there of
īŽ Above 2% rejected
29. Precautions
īŽ Trade through registered members only
īŽ Learn the fundamentals of the commodity yourself,
before taking positions
īŽ Study large research reports
īŽ Thoroughly read contract specs and product note of the
commodity you trade in
īŽ Use stop-losses to limit your losses and trailing stop-
losses to protect your profits
īŽ Do not misuse margin leverage
32. Market Participants
īŽ Hedgers(Farmers,Processors)
īŽ Face risk associated with the price of an asset
īŽ Use futures market to reduce a particular risk they
face
īŽ Lock in a price using derivatives
īŽ Speculators
īŽ Wish to bet on future movements in the price of an
asset
īŽ Derivatives offer them leverage
īŽ Arbitragers
īŽ Take advantage of discrepancy between prices of the
same product across different markets
īŽ Eg. Futures price and spot price
33. Hedgers
īŽ Usually people related to physical markets
īŽ They use it as a tool to hedge against price risk
īŽ Sole objective is to âLock-intoâ a price, which they
consider to be their âOptimum priceâ
34. Arbitragers
īŽ Spot Price + Cost of Carry + Interest on Capital =
Futures Price
īŽ Any deviation from this provides an opportunity for
Arbitrage
īŽ Arbitragers take advantage of the price difference between
contracts of two different months of the same commodity,
or two different markets.
īŽ Two types of Arbitrage:
īŽ Cash and Carry
īŽ Calendar Spread
35. Cash and Carry Arbitrage & Calendar
Spread
īŽ Spot to Future:
īŽ Buy Physical goods in Spot
īŽ Sell Futures on NCDEX
īŽ Get the physical goods assayed, deposited in exchange
WH and dematted
īŽ Deliver the dematted goods on expiry of futures contract
īŽ Future to Future:
īŽ Buy Near Month Futures & Sell Far Month Futures on
NCDEX
īŽ Receive demat delivery on expiry of near month
īŽ Deliver the same on expiry of far month
īŽ Do check the FEDwise stock positions for any risk of
getting expired goods
36. Arbitrage
īŽ Buying in spot, selling on futures and giving
deliveries
īŽ Example:
īŽ Spot price of soya bean = Rs.2500/quintal
īŽ Cost of carry (1 month, incl. warehousing,
assaying, demat charges, interest cost etc.) =
Rs.60/qunital
īŽ Near month soya bean price = Rs.2600/quintal
īŽ Profit = 2600-(2500+60) = Rs.40/quintal
īŽ Profit % = Rs.1.56% per month
36
37. Spreads
īŽ Spread - Spread is the difference between
prices of two futures contracts of the same
underlying commodity.
īŽ Calendar Spread - Buying a futures contract
in one month and selling in a different month
for the same commodity.
37
38. Why are Spreads
īŽ Cost of Carry - The cost of carry of a
commodity is the sum of all the costs
including interest (financing costs), insurance,
storage costs and other miscellaneous costs.
Usually the price of a commodity future in the
exchange is the spot prices plus cost of carry.
īŽ Future expectations - Expected
increase/decrease in prices due to reasons like
fresh arrivals, rainfall, government
interventions, prices of substitutes , short
term demand/supply.
38
39. Spread Margin
īŽ It is half of the margin on the higher side of
the spread position.
īŽ Spread margin does not include special
margin, cash margin or additional margin.
39
40. Type Of Spreads
īŽ Bull Spread: Buying the near month
futures contract and simultaneously selling
the far month futures contract.
īŽ Bear Spread: Selling the near month
futures and buying the far month contract
40
41. Things that an Investor/ Speculator should
study first
īŽ Crop Cycle
īŽ Domestic Production/ Consumption Scenario
īŽ Export & Import Policies
īŽ Trade Dynamics
īŽ International Price Linkages
īŽ Open Interest
īŽ FED Stocks in Exchange WHs/ Info on website