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Commodity market

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Commodity market

  1. 1. Presenters: Ankur Jain Gaurab Buragohian Surjeet Randhir Singh Dhaka 25-01-2015 IABM, BIAKNER 1
  2. 2. Contents Introduction and Evolution Derivative markets and its structure Commodity exchanges in India Participants of commodity markets Forward Markets Commission (FMC) Some facts and figures Challenges & Conclusion 25-01-2015 IABM, BIAKNER 2
  3. 3. INTRODUCTION • “Organized futures markets in India are now 134 years old, with the first such organization – the Bombay Cotton Trade Association Ltd.– been set up in 1875”. The commodity market in India comprises of all palpable markets that we come across in our daily lives. Such markets are social institutions that facilitate exchange of goods for money 25-01-2015 IABM, BIAKNER 3
  4. 4. Top Global Commodity Futures Exchanges Performances Commodity Future Exchange Volume (Mn Contracts)# 1 CME Group- incl. CBOT & NYMEX – U.S.A. 352.96 2 ZCE- Zhengzhou Commodity Exchange- CHINA 217.58 3 ICE- Intercontinental Exchange – U.S.A., U.K. & CANADA 159.09 4 SHFE- Shanghai Futures Exchange- CHINA 128.54 5 MCX- INDIA 127.77 6 DCE- Dalian Commodity Exchange- CHINA 123.88 7 LME- London Metal Exchange- U.K. 64.52 25-01-2015 IABM, BIAKNER 4 # Note: Numbers of contracts in Jan- Jun 2011
  5. 5. Evolution of Commodity Future Markets  Internationally  In 1848, the Chicago Board of Trade, or CBOT, was established to bring farmers and merchants together. A group of traders got together and created the 'to-arrive' contract that permitted farmers to lock in to price upfront and deliver the grain later. These to- arrive contracts proved useful as a device for hedging and speculation on price changes.  Today, derivative contracts exist on a variety of commodities such as corn, pepper, cotton, wheat, silver, etc.  Domestically 25-01-2015 IABM, BIAKNER 5
  6. 6. Commodity COMMODITY “A commodity may be defined as an article, a product or material that is bought and sold”. Or A “ underlying asset ”. COMMODITY MARKET “A market where commodities are traded is referred to as a commodity market”. 25-01-2015 IABM, BIAKNER 6
  7. 7. Commodity Derivatives? Derivatives are the tools used to hedge the risk that arises during the course of buying & selling of assets.” Key Words : Hedge Risk Buying & Selling Assets 25-01-2015 IABM, BIAKNER 7
  8. 8. Commodity Exchanges classified in to… The five National level multi-commodity exchanges are: (NCDEX) Mumbai, (MCX) Mumbai, (NMCE) Ahmadabad (ICEX) , Gurgaon and (ACE), Mumbai 25-01-2015 IABM, BIAKNER 8
  9. 9. NMCE First demutualised electronic commodity exchange 26th Nov, 2002. Promoters: CWC, NAFED, GAICL, GSAMB, NIAM and Neptune Overseas Ltd. (NOL). Main equity holders are PNB. Head Office: Ahmadabad. Commodity trades on NMCE Platform: Agro and non-agro commodities. 25-01-2015 IABM, BIAKNER 9
  10. 10. MCX Demutualised nation wide electronic commodity future exchange. Head office : Mumbai. Nov,2003. Set up by Financial Technologies (India) Ltd. permanent recognition from government of India for facilitating online trading, clearing and settlement operations for future market across the country. Promoters: NYSE, State Bank of India and its associated, NABARD, NSE, LIC, Bank of India, Bank of Baroda, Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank, etc. MCX is well known for bullion and metal trading platform. 25-01-2015 IABM, BIAKNER 10
  11. 11. • Public limited co. Dec 15, 2003. Promoters: LIC, NABARD and NSE . Other shareholders : Canara Bank, Goldman Sachs, Intercontinental Exchange (ICE), IFFCO and PNB. Head office: Mumbai. Currently facilitates trading in 57 commodities mainly in Agro product. 25-01-2015 IABM, BIAKNER 11
  12. 12. ACE The company was founded in 1952 and is based in Mumbai, India. Operates as a screen based online derivatives exchange for commodities in India. It offers futures trading in various commodity groups, such as agricultural products, bullion, base metals, and energy. The company provides an online multi-commodity platform; and clearing and settlement infrastructure that supports the process of trade intermediation, including registration of trades, settlement of contracts, and mitigation of counter-party risk. 25-01-2015 IABM, BIAKNER 12
  13. 13. ICEX ICEX is latest commodity exchange of India. Started Function from 27 Nov, 2009. Head office: Gurgaon (Haryana). It is jointly promote by India bulls Financial Services Ltd. and MMTC Ltd. and has Indian Potash Ltd. KRIBHCO and IFC. 25-01-2015 IABM, BIAKNER 13
  14. 14. Strength with respect to Product Segments of Different National Multi Commodity Derivative Exchanges 1. NMCE - It is the Pioneer for starting Commodity Future Exchange in India. It started Operations in 2002. Currently 24 commodities are actively traded on it. Its Strength is Agricultural commodities. During the year 2009-10 it clocked a turnover of ` 4,55,802.97 crores, 69% was contributed by Agriculture, 22% was contributed by metals and 9% was contributed by Bullions. 2. MCX – It is the largest commodity exchange in India. Currently 26 commodities are actively traded on it. Its strength is Bullions, Metals and Energy. During the year 2009-10 it clocked a turnover of ` 1,27,86,603.86 crores, 1% was contributed by Agricultural commodities, 48% by Bullions, 24% by energy and 27% by Metal Stocks. 3. NCDEX – Currently 26 commodities are actively traded on it. Its strength is Agricultural commodities. During the year 2009-10 it clocked a turnover of ` 18,35,169.57 crores, 98% was contributed by Agriculture, 1.3% by Bullions and Metals and 0.70 % by Energy. 4. ICEX – It has just started its operations in Dec-09. Only 8 commodities are actively traded on it. It is more active in Bullions and metals. 25-01-2015 IABM, BIAKNER 14
  15. 15. Commodity Ecosystem 25-01-2015 IABM, BIAKNER 15 Exchange
  16. 16. Market Participants HEDGERS  Have underlying interest in the Commodity  Use futures market to insure against adverse price fluctuations. They face risk associated with the price of an asset and use future contracts to reduce this risk. ARBITRAGEOURS  They are in business to take advantage of a discrepancy between prices in two different markets. Futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. SPECULATORS They bet on future movements in the price of an asset. Futures contracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture. 25-01-2015 IABM, BIAKNER 16
  17. 17. Participants in Commodity Futures Farmers/ Producers Merchandisers/ Traders Importers Exporters Consumers/ Industry Commodity Financers Agriculture Credit providing agencies Corporate having price risk exposure in commodities 25-01-2015 IABM, BIAKNER 17
  18. 18. FARMERS PARTICIPATION IN COMMODITY FUTURES MARKET “ Price discovery and price risk mitigation are the main objectives of commodity futures markets, which enables the farmers to take rational decisions about cropping and marketing of their produce to increase their farm income”. This creates incentives and resources for investment in agricultural operations to improve productivity. 25-01-2015 IABM, BIAKNER 18
  19. 19. REGULATOR : FMC  Regulator: Forward Markets Commission (FMC)  Statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952  Headquarter at Mumbai  Overseen by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India. 25-01-2015 IABM, BIAKNER 19
  20. 20. FORWARD MARKETS COMMISSION Vision: Price discovery and risk management in an efficient and transparent way in futures trading in commodities. Objectives: “To ensure smooth and orderly development of the commodity futures markets to enable it to perform the economic functions of the Price discovery and price risk management efficiently, through effective Regulation of the market”. 25-01-2015 IABM, BIAKNER 20
  21. 21. What is the need for regulating futures market? Regulation needed to :  Create competitive conditions: Benefits of futures markets accrue in competitive conditions  Ensure appropriate risk management system. Absence of such a system : a major default could create a chain reaction. The resultant financial crisis in a futures market could create systemic risk.  Ensure fairness and transparency in trading, clearing, settlement and management of the exchange : To protect and promote the interest of various stakeholders, particularly non-member users of the market. a. Absence of regulation: Unscrupulous participants could use these leveraged contracts for manipulating prices. b. Could have undesirable influence on the spot prices, thereby affecting interests of society at large. 25-01-2015 IABM, BIAKNER 21
  22. 22. What are the regulatory measures prescribed by the FMC?  FMC provides regulatory oversight in order to ensure  Financial Integrity : To prevent systematic risk of default by one major operator or group of operators),  Market Integrity : To ensure that futures prices are truly aligned with the prospective demand and supply conditions  Protect & Promote interest of customers /non-members. Regulatory Measures Prescribed  Limit on open position of an individual operator to prevent over trading;  Limit on price fluctuation (daily/weekly) to prevent abrupt upswing or downswing in prices;  Special margin deposits to be collected on outstanding purchases or sales to curb excessive speculative activity.  Minimum/maximum prices to be prescribed to prevent future prices from falling below the levels that are un remunerative and from rising above the levels not warranted by genuine supply and demand factors.  Daily Mark-to mark settlement of contracts  Penalize delivery defaults obligations 25-01-2015 IABM, BIAKNER 22
  23. 23. Some important facts and figures • During 2010-11, forward trading was regulated in commodities at 21 recognized exchanges. The break up of the total value of commodities traded stood as under- • Bullion - ` 54.94 lakh crore (45.98%). • Base metals - ` 26.88 lakh crore (22.50%). • Energy products - ` 23.11 lakh crore (19.34%). • Agricultural commodities- ` 14.56 lakh crore (12.19%). 25-01-2015 IABM, BIAKNER 23
  24. 24. The share of various Exchanges in the total value of trade in 2010-11. Value of the recognized Exchanges during 2010-11 Name of the Exchanges Value in ` Cr. % share to the total value of the commodities traded during 2010-11. MCX 98,41,502.90 82.36 NCDEX, Mumbai 14,10,602.21 11.81 NMCE, Ahmedabad 2,18,410.90 1.83 ICEX, Gurgaon 3,77,729.88 3.16 ACE, Ahmedabad 30,059.63 0.25 NBOT, Indore 51,662.06 0.43 Total of six Exchanges 1,19,29,967.58 99.84 Others 18,974.77 0.16 Grand Total 1,19,48,942.35 100 25-01-2015 IABM, BIAKNER 24
  25. 25. Challenges of Commodity Markets In India • Commodity Options • Warehousing and Standardization • Lack of Economy of Scale • Market size of the commodity • Price of the commodities always fluctuating • Policies of govt. are not stable 25-01-2015 IABM, BIAKNER 25
  26. 26. CONCLUSION As majority of Indian investors are not aware of organized commodity market. Many of them have wrong impression about commodity market in their minds. Concerned authorities have to take initiative to make commodity trading process easy and simple. Along with Government efforts NGOs should come forward to educate the people about commodity markets and to encourage them to invest in to it. There is no doubt that in near future commodity market will become Hot spot for Indian farmers . 25-01-2015 IABM, BIAKNER 26
  27. 27. References  Government Of India, Forward Markets Commission (Ministry Of Consumer Affairs) Food And Public Distribution, Department Of Consumer Affairs, Annual Report 2010-11  http//www.mcx.com  http//www.ncdex.com  http//www.nmce.com 25-01-2015 IABM, BIAKNER 27
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