Commodity makets warehousing trading & settlement

WAREHOUSING TRADING
AND SETTLEMENT
Asst Prof. Medline Rozario
St.Annes Degree College for Women, Halasuru

INTRODUCTION
• Among the investment avenues, commodity futures trading is a fast
growing sector with huge untapped potential, along with the
financial markets.
• The major difference between commodity and financial markets is
that, in commodities futures physical delivery takes place where as
in the capital market it does not.
• In these markets, there are farmers, industrialists, warehouses,
consumers, dealers and traders, who buy and sell commodities.
• There are warehouses, which stores commodities and there are
consumers, who consume them eventually.
• warehouses are necessary for the commodity sector and
commodity future.
• Warehousing forms the basic platform of delivery based trading in
commodity futures. Warehouses play an important role in
commodities futures, as most of trades are settled with delivery.

When the role of warehouse is necessary
• The role of a warehouse is most necessary in the spot market
where a farmer after having harvested his crop sells them to
commission agents who in turn sells them to a Mandi.
• The Traders in Mandi may then sell it to a large consumer or to a
trader who in turn will sell it to some other consumer, industry,
exporter or miller at the right time and right price.
• The Goods during this period are stored in the warehouse.
• 80% of the warehousing capacity is used by the Government for
storing various commodities under the Public Distribution
System and for storing fertilizers.
• Commodities form almost 58 percent of India's Gross Domestic
Product out of which 22 percent is agriculture.
• Warehousing forms the basic platform of delivery based trading
in commodity futures.

WAREHOUSE RECEIPTS:
A warehouse receipt, which may be either in writing or in electronic form,
shall be a document of title to goods in writing if it contains all the
following particulars, namely:
(a) Receipt number;
(b) Warehouse registration number and date up to which it is valid;
(c) Name of the warehouse and its complete postal address;
(d) Name and address of the person by whom or on whose behalf the
goods are deposited;
(e) Date of issue of the warehouse receipt;
(f) Statement that the goods received shall be delivered to the holder
thereof, or that the goods shall be delivered to the order of a named
person;
(g) Rates of storage charges and handling charges;

(h) Description of the goods or of the packages containing them with
particulars of quantity and quality or grade;
(I) Market value of the goods at the time of deposit.
(j) private marks of depositor on the goods or packages, if any, except in the
case of fungible goods;
(k) Name of the insurance company indemnifying for fire, flood, theft,
burglary, misappropriation, riots, strikes or terrorism;
(l) Whether the warehouse receipt is negotiable or non-negotiable;
(m) Statement of the amount of any advance made and of any liability
incurred for which the warehouseman claims his lien;
(n) Date and signature of the warehouseman or his authorized agent;
(o) Declared shelf-life of goods;
(p) The fact that the warehouseman holds the lien on the goods deposited
for his storage and handling charges;
(q) That the receipt would be valid only till the date of expiry of declared
shelf- life of the goods for which it is issued.

NEGOTIABILITY OF WAREHOUSE RECEIPTS:
Negotiable warehouse receipts allow transfer of ownership of that
commodity stored in a warehouse without having to deliver the physical
commodity. These receipts are issued in negotiable form, making them
eligible as collateral for loans.
Warehouses in commodity futures work as:
• Independent third party
• Providing sufficient storage places
• Assuring quality and quantity
• Acceptable geographical location
• Preservation and certification
• The Warehouse receipt is used for Commodity finance as e-pledge.
• Manage all kinds of Commodity risk like quality risk, quantity risk etc.

ESSENTIALS OF GOOD STORAGE:
1. It should be easy to clean.
2. It should provide protection from rodents, birds and other animals.
3. It should be waterproof and moisture proof.
4. It should protect the food grains against variations of temperature
and humidity. 5. It should have provision for periodical inspection.
6. It should have provision for application of pesticides through
spraying or fumigation.
7. It should be located far away from possible sources of infection such
as kilns, flour mills, and bone crushing mills, garbage rumps, tanneries,
slaughter houses and chemical industries.
8. It should be located at a convenient place from where it is easy to
receive issue and transport the food gains. This explains why most of
the storage structures are located near railway stations or on highways.

WAREHOUSE AND STORAGE FACILITIES IN INDIA:
Three public sector agencies are involved in building large-scale storage and
warehousing capacities in the country, These are:
• The Food Corporation of India (FCI) - External website that opens in a new
window,
• Central Warehousing Corporation (CWC) - External website that opens in a
new window
• State Warehousing Corporations (SWCs). (17 nos)
• FCI uses its warehouses mainly for storing food grains, the storage capacities
with CWC and SWCs are used for the storage of food grains as well as other
items.
USES OF WAREHOUSES:
• Scientific storage of produce from the vagaries of weather, rodents, insects
and pests. They prevent quality and quantity losses.
• Meeting the financial needs of people who store the produce by providing
value for the goods stored.
• Regulating price levels by regulating the supply of goods in the markets. More
goods from the buffer are released when supplies are less and less is released
when supplies are more in the markets.
• Offering market intelligence in the form of price, supply and demand
information so that market users may develop selling and buying strategies.

KEY RISK AREAS – STORAGE AT WAREHOUSE
• Protecting Ownership Rights in goods: Prudent owners must enquire correctly.
• Co-Mingling: In case of insolvency by one trader to another to save cost and space.
• Insurance: Failure to disclose a material fact may entitle the insurer to terminate the
policy and avoid payment in the event of a claim.
• Financing: Loan on Goods stored or goods will be kept as a security. E. Pledge
Security: Retaining ownership and pledging with certain conditions.
• Warehouse Documents: If documents are wrong and misrepresentations.
• Legal risk management: Laws, Terms and Conditions, Rules & Regulations.
SIGNIFICANT GROWTH DRIVERS:
• Growth in GDP and changing demographics
• Demand for high-end services and infrastructure
• Growing external trade
• Rising share of organized retail
• GST implementation
• Key players: DHL, Safexpress, Continental Warehousing, Indo Arya, MJ Logistics,
Allcargo, Nippon Express, etc. are the major players in industrial warehousing.

TYPE OF WAREHOUSES:
1. Private Warehouses: The private warehouses are owned and
operated by big manufacturers and merchants to fulfil their own storage
needs. A big manufacturer or wholesaler may have a network of his own
warehouses in different parts of the country.
2.Public Warehouses: A public warehouse is a specialised business
establishment that provides storage facilities to the general public for a
certain charge. It may be owned and operated by an individual or a
cooperative society. It has to work under a license from the government in
accordance with the prescribed rules and regulations. Public warehouses
provide storage facilities to small manufacturers and traders at low cost.
3.Bonded Warehouses: Bonded warehouses are licensed by the
government to accept imported goods for storage until the payment of
custom duty. They are located near the ports. These warehouses are either
operated by the government or work under the control of custom
authorities. The warehouse is required to give an undertaking or ‘Bond’
that it will not allow the goods to be removed without the consent of the
custom authorities.

4.Automated Warehouse : With advances in computer and robotics
technology many warehouses now have automated capabilities. The level of
automation ranges from a small conveyor belt transporting products in a
small area all the way up to a fully automated facility where only a few
people are needed to handle storage activity for thousands of
pounds/kilograms of product.
5.Climate-Controlled Warehouse: Warehouses handle storage of many
types of products including those that need special handling conditions such
as freezers for storing frozen products, humidity-controlled environments
for delicate products, such as produce or flowers, and dirt-free facilities for
handling highly sensitive computer products.
6.Distribution Center: There are some warehouses where product
storage is considered a very temporary activity. These warehouses serve as
points in the distribution system at which products are received from many
suppliers and quickly shipped out to many customers. In some cases, such
as with distribution centers handling perishable food (e.g., produce), most
of the product enters in the early morning and is distributed by the end of
the day.

Central warehousing corporation (CWC)
• (CWC) a premier warehousing Agency in India, instituted during 1957
CWC operates 432 Warehouses across the country with a storage
capacity of 9.96 million tonnes providing warehousing services
• (CWC) providing logistics support to the agricultural sphere is one of the
largest public warehouse operators in the country extending logistics
services to various groups of clients. Warehousing services are
providing a broad scope of products wandering from agricultural
development to sophisticated industrial production.
• Warehousing activities of CWS include food grain warehouses,
industrial storage, custom bonded warehouses, container freight
stations, inland clearance depots and air cargo complexes.
• Apart from storage and handling, CWC also offers services in the area of
clearing and forwarding, handling and transportation, procurement and
distribution, disinfestations services, fumigation services and other
ancillary activities.
• CWC also offers consultancy services and training for construction of
warehousing infrastructure to different agencies.

CWC offers services in the field of authorizing, and forwarding, handling
and transportation, procurement and distribution, disinfestation services,
fumigation services and other ancillary activities are:
1. To establish warehouses: They acquire and build godowns and
warehouses at such suitable and useful places in India as it deems it.
2. Run warehouses: After establishing warehouses at suitable places the
next function is to run warehouses for the storage of agricultural produce,
seeds, manures, fertilizers, agricultural implements and notified
commodities offered by individuals, cooperative societies and other
institutions.
3. Provide assistance to agriculturists: They also needs to arrange facilities
for the transport of agriculture products, seeds, manures, fertilizers,
agricultural implements and notified commodities to and from
warehouses.
4. Assisting state warehousing corporation: Being a supreme government
body in this field Central Warehousing Corporation is also supposed to
assist and direct State Warehousing Corporations. It also has o subscribe to
the share capital of State Warehousing Corporation.

5. Act as an agent of government: Sometimes central warehousing
corporation has also to serve as an agent of the Government for the
purpose of purchase, sale, storage and distribution of agricultural produce,
seeds, manures, fertilizers agricultural implements and notified
commodities.
6. Disinfestations services: The corporation may, at the request of parties
concerned, undertake disinfestations service outside its warehouses in
respect of agricultural produce or notified commodities.
7. Act as an agent of its discretion: CWC may, act at its directions, act as
agent for the purpose of purchase, sale, storage and distribution of
agricultural produce, seeds, manures, fertilizers, agricultural implements
and notified commodities on behalf of the company as defined in the
Companies Act, 1956, or a body corporate established by an Act of
Parliament or a State Legislature or a co-operative society.
8. Follow the instruction of the Government: Being a government
organization the corporation has to follow instructions from the central
government. So, it also ahs to carry out such other functions as may be
prescribed by the Government from time to time.

• It is one of the largest corporations in India and probably the
largest supply chain management in Asia (Second in world) it
operates through 5 Zonal offices and 24 Regional offices.
• Each year, the Food Corporation of India purchases roughly 15
to 20 per cent of India's wheat output and 12 to 15 per cent of
its rice output. The purchases are made from the farmers at the
rates declared by the Govt. of India. This rate is called as MSP
(Minimum Support Price).
• There is no limit for procurement in terms of volume; any
quantity can be procured by FCI (Food Corporation of India)
provided the stock satisfies FAQ (Fair Average Quality)
specifications with respect to FCI. The Government policy of
procurement of Food grains has broad objectives of ensuring
MSP to the farmers and availability of food grains to the weaker
sections at affordable prices.
• It also ensures effective market intervention thereby keeping
the prices under check and also adding to the overall food
security of the country.

Organization Structure
• Food Corporation of India operates through its Depot headed by
Manager (Depot). Every district has few depots to cater to the
requirement of the district's rural population.
• The depot reports to District Office, headed by an Assistant
General Manager, designated as Area Manager. Assistant General
Manager (Quality Control) is also posted who is looking after the
QC work.
• Under Area Manager control, there are Managers to deal with
each and every section viz., Depot, Sales, Contracts, Procurement,
SL-TL, Movement, Establishment, Quality Control (QC),
Operational accounts etc., who consolidate the field level
operations and through the area managers' authorization, they
transmit the necessary information and periodical statements to
Regional Offices of their respective regions.
• Under Managers are Assistant Grades Level -1, Level -2 and Level -
3 who help managers in day-to-day operations of the
organization.

• FCI has been divided into 5 zones viz. North, South, East, and
West & North-East with a Zonal Office in each zone.
• Each zone is further divided into regions with a regional office in
one region.
• All the Regional Offices are under the control of Zonal Offices
which are headed by an Executive Director, who in most of the
cases is from Indian Administrative Service or Indian Revenue
Service under deputation.
• Under his control three or more than three General Managers co-
ordinate with all Regional Offices of their particular zone through
subordinate officers like Deputy General Managers and Assistant
General Managers dealing with their allotted operational
sections in their zone.
• All the Zonal Offices are under the control of Headquarters,
located at New Delhi, which is headed by Chairman and
Managing Director

Operation
• The Food Corporation of India procures rice and wheat from
farmers through many routes like paddy purchase centres/mill
levy/custom milling and stores them in depots.
• FCI maintains many types of depots like food storage depots and
buffer storage complexes and private equity godowns and also
implemented latest storage methods of silo storage facilities which
are located at Hapur in Uttar Pradesh and Elavur in Tamil Nadu.
• The stocks are transported throughout India and issued to the state
government nominees at the rates declared by the Government of
India for further distribution under the Public Distribution System
(PDS) for the consumption of the ration card holders.
• (FCI itself does not directly distribute any stock under PDS, and its
operations end at the exit of the stock from its depots).
• FCI by itself is not a decision-making authority; it does not decide
anything about the MSP, imports or exports. It just implements the
decisions made by the Ministry of Consumer Affairs, Food and
Public Distribution and Ministry of Agriculture.

Growth, Capacity and Utilization of FCI:
• The storage function assumes paramount importance in
organization such as Food Corporation of India because of its
requirement to hold huge inventory of food grains over a
significant period of time.
• Storage plan of FCI is primarily to meet the storage requirement
for holding stocks to meet the requirements of Public
Distribution System and Other Welfare Schemes undertaken by
the Government of India.
• Also, buffer stock is to be maintained for ensuring food security
of the nation.
• Adequate scientific storage is pre-requisite to fulfill the policy
objectives assigned to the Food Corporation of India for which
FCI has a network of strategically located storage depots
including silos all over India.

•Besides having own storage capacity, FCI has hired
storage capacities from Central Warehousing
Corporation, State Warehousing Corporations, State
Agencies and Private Parties for short term as well as
for guaranteed period under Private Entrepreneurs
Guarantee Scheme.
•New Godowns are being constructed by FCI mainly
through Private Participation under Private
Entrepreneurs Guarantee Scheme.
•FCI is also augmenting and modernizing its storage
capacity in the form of silos through Public Private
Partnership.

Warehousing Development and Regulatory Authority
• Warehousing plays a very vital role in promoting rural banking and
financing.
• With a view for overall growth and development of warehousing
sector and to promote efficiency in conduct of warehousing
business, the Government of India has introduced a negotiable
warehouse receipt system in the country. Parliament has enacted
the Warehousing (Development and Regulation) Act, 2007 (37 of
2007).
• As per the provisions of the Act, a Warehousing Development and
Regulatory Authority (WDRA) comprising of one Chairman and two
full time members has been setup by the Government of India
from 26th October, 2010 for implementing the provisions of the
Act.
• The negotiable warehouse receipt system has been formally
launched by Prof. K. V. Thomas, Hon’ble Minister (Independent
Charge), Consumer Affairs, Food and Public Distribution on
26.04.2011.

• The main objectives of the Warehousing (Development and
Regulation) Act, 2007 are to make provisions for the
development and regulation of warehouses, to promote
professional organisations connected with the warehousing
business, negotiability of warehouse receipts, establishment of a
Warehousing Development and Regulatory Authority (WDRA)
and related matters.
• The Negotiable Warehouse Receipts (NWRs) issued by the
warehouses registered under this Act would help farmers to
seek loans from banks against NWR to avoid distress sale of their
agricultural produce.
• It will also be beneficial for a number of other stakeholders such
as banks, financial institutions, insurance companies, trade,
commodities exchanges as well as the consumers.

Powers and Functions of Authority:
(1) Subject to the provisions of this Act and any other law for the
time being in force, the Authority shall have the duty to
regulate and ensure implementation of the provisions of this
Act and promote orderly growth of the warehousing business.
(2) Without prejudice to the generality of the foregoing
provisions, the powers and functions of the Authority shall
include the following, namely:
a) To issue to the applicants fulfilling the requirements for
warehousemen a certificate of registration in respect of
warehouses, or renew, modify, withdraw, suspend or cancel such
registration;
(b) To regulate the registration and functioning of accreditation
agency, renew, modify, withdraw, suspend or cancel such
registration, and specify the code of conduct for officials of
accreditation agencies for accreditation of the warehouses;

c) To specify the qualifications, code of conduct and practical
training for warehousemen and staff engaged in warehousing
business;
(d) To regulate the process of pledge, creation of charges and
enforcement thereof in respect of goods deposited with the
warehouse; (e) To promote efficiency in conduct of warehouse
business;
(f) To make regulations laying down the standards for approval of
certifying agencies for grading of goods;
g) To promote professional organizations connected with the
warehousing business;
(h) To call for information from, undertaking inspection of,
conducting enquiries and investigation including audit of the
warehouses, accreditation agencies and other organizations
connected with the warehousing business;

(i) To determine the rate of, and levy, the fees and other
charges for carrying out the provisions of this Act;
(j) To regulate the rates, advantages, terms and
conditions that may be offered by warehousemen in
respect of warehousing business;
(k) To specify, by regulations, the form and manner in
which books of account shall be maintained and
statement of accounts shall be rendered by
warehousemen;
(l) To maintain a panel of arbitrators and to nominate
arbitrators from such panel in disputes between
warehouses and warehouse receipt holders;

(m) To regulate and develop electronic system of holding
and transfer of credit balances of fungible goods
deposited in the warehouses;
(n) To determine the minimum percentage of space to be
kept reserved for storage of agricultural commodities in a
registered warehouse;
(o) To specify the duties and responsibilities of the
warehouseman;
(p) To exercise such other powers and perform such other
functions as may be prescribed.

PROCEDURE FOR REGISTRATION OF WAREHOUSES:
i. The warehouse has to first get an accreditation certificate from an
approved Accreditation Agency of the WDRA.
The list of approved Accreditation Agencies is available on the
website of the WDRA.
Application form for grant of accreditation certificate from an
Accreditation Agency and the checklist for the accreditation of
warehouses are available in the Warehouse Manual. The Manual is
also available on the website.
ii. The accreditation fee for the warehouses is as follows: For
warehouses of Primary Agricultural Cooperative Credit Societies
(PACS), the accreditation fee is Rs. 5,000/-.
iii. The warehouseman may make an application to the authority for
registration of his warehouse in Form A1 available on the website of
the WDRA. iv. A person desirous of carrying on the business of
warehousing in more than one warehouse shall submit a separate
application for registration in respect of each warehouse.

•Registration Fee and Security Deposit are as Follows:
• Fee – Application fee for registration of warehouse or
renewal thereof is as follows and payable by way of
bank draft or bankers cheque or through ECS of any
scheduled commercial bank in favour of the
Warehousing Development and Regulatory Authority
payable at New Delhi:
•(i) State Capital cities ----------------Rs. 2.50 per ton
•(ii) District Headquarters ------------Rs. 1.50 per ton
•(iii) For rural and other areas--------Rs. 1.00 per ton The
fee is subject to a minimum amount of Rs. 7500 for
each warehouse. However, in case of Primary
Cooperative Societies, there is no such minimum fee.

Security Deposit –
Security deposit for registration of warehouse is as follows and payable
by way of bank draft or banker’s cheque or ECS of any scheduled
commercial bank in favour of the Warehousing Development and
Regulatory Authority payable at New Delhi:
(i) State Capital cities -------------Rs .2.50 per ton
(ii) (ii) District Headquarters ----------Rs.1.50 per ton
(iii) (iii) For rural and other areas ------Rs.1.00 per ton
(iv) The security deposit is subject to a minimum amount of Rs.7500 for
each warehouse. However, in case of Primary Cooperative Societies,
there is no such minimum security deposit.
(v) The WDRA has notified 123 agricultural commodities and 26
horticultural commodities for issuance of NWRs. The list is available
on the website of the WDRA. An applicant should specify the names
of commodities to be stored in the warehouse. Immediately upon
receipt of its registration certificate, the warehouseman shall display
the same and keep it pasted until suspended or revoked, in a
conspicuous place in the principal place of its business.

NATIONAL COLLATERAL MANAGEMENT SERVICES LIMITED NCML offers
modern, scientific and IT enabled storage and preservation services for the
entire range of agri and non - agri commodities. Warehouses are spread
across the country in 12 states and over 50 locations, and deal with as many
as 42 agricultural commodities. Warehouses strictly adhere to scientific
norms, and are accredited by the National Commodity and Derivatives
Exchange (NCDEX) for accepting physical deliveries of commodities traded in
the commodity futures market.
Following are the scope of services we can provide with last mile delivery
anywhere in India:
• Order management, Warehouse management, Transportation
management, Replenishment management
• Inventory management, Buyer Consolidation management, Retail supply
chain management
• System Integration services, Distribution management, Shelf life
management
• Information management, kitting/ Re-packaging/ labeling services, Return
and re-work services
• Packaging and Preservation, Replenishment management, Billing and
Account receivables

TRADING ON COMMODITY EXCHANGE
The commodities market works just like any other market. It is a
physical or a virtual space, where one can buy, sell or trade various
commodities at current or future date. One can also do
commodity trading using futures contracts.
PROCEDURE TO INVEST IN A COMMODITY MARKET:
1. An investor can transact a business with the approved clearing
member of Commodity Exchanges. The investor can ask for the
details from the Commodity Exchanges about the list of approved
members.
2. When investor approaches Clearing Member, the member will
ask for identity proof. For which Xerox copy of any one of the
following can be given
a) PAN card number
b) Driving License
C) Vote ID
d) Passport

3. The front page of Bank Pass Book and a cancelled cheque of a
concerned bank. Otherwise the Bank Statement containing details
can be given.
4. In order to ascertain the address of investor, the clearing
member will insist on Xerox copy of Ration Card or the Pass Book/
Bank Statement the address of investor is given.
5. The clearing member will ask the client to sign a) Know your
client Form b) Risk Discloser Document.
THE EXCHANGE PLATFORM:
The Commission allows commodity trading in 22 exchanges in
India, of which 6 are national. On 28 September 2015 the FMC was
merged with the Securities and Exchange Board of India (SEBI).
India has six commodity exchanges they are as fallows Multi
Commodity Exchange (MCX), National Commodities and
Derivatives Exchange (NCDEX), National Multi Commodity
Exchange, Indian Commodity Exchange, ACE Derivatives Exchange
and the Universal Commodity Exchange.

MEMBERSHIP OF THE MULTI COMMODITY EXCHANGE
There are four types of membership of the Multi Commodity
Exchange, each having their own specific rights and responsibilities:
1. Trading Member (TM): Trading members of the Multi
Commodity Exchange may trade on behalf of themselves and
clients, but may not clear such trades: this has to be done by
members with clearing privileges. Individuals, partnerships, trading
organisations and Hindu Undivided Families (HUFs) are eligible for
this grade of membership. Applicants must also have a minimum
net worth: Rs.10 Lakh in the case of private individuals, RS.25 Lakh
in the case of organisations.
2. Professional Clearing Member (PCM): these members have the
right to trade, and to clear their trades and those of clients through
MCX’s clearing house. Any company or similar organisation is
eligible for PCM membership, though financial institutions and
banks are most common. Minimum net worth is RS.500 Lakh.

3.Trading-cum-Clearing Member (TCM):
These members have the right to trade on the exchange and to
clear those trades, but cannot clear the trades of others.
Available to individuals, partnerships, associations, co-
operatives, companies, banks, financial institutions and Hindu
United Families (HUFs). Minimum net worth for applicants is
Rs.75 Lakh.
4.Institutional Trading-cum-Clearing Member (ITCM):
These members have the same rights as standard TCMs, with the
additional ability to be able to appoint subsidiary organisations
and individuals as traders (though the ITCM will have to clear
these trades). Membership of this type is generally only available
to larger organisations and institutions such as commodity
brokers or brokerages, commodity exchanges, stock exchanges,
co-operatives and the like.

MEMBERSHIP ELIGIBILITY CRITERIA
To become a member of Commodity Exchange the person
should comply with the following Eligibility Criteria.
1. He should be Citizen of India.
2. He should have completes 21 years of his age.
3. He should be Graduate or having equivalent qualification.
4. He should not be bankrupt.
5. He has not been debarred from trading in Commodities by
statutory/regulatory authority.

MEMBERSHIP PROCESS
Step 1: Receiving of Membership Application Form / Documents
and Payment of Fees
Step 2: Processing of Application Form and Documents
Step 3: Interview of the Member
Step 4: Admission in Exchange and Allotment of Membership
Code
Step 5: Processing Application for registration at Securities &
Exchange Board of India (SEBI)
Step 6: Issue of Registration Certificate by SEBI
Step 7: Activation

Commodity Brokerage
A Commodity Broker is a firm or individual who executes orders
to buy or sell commodity contracts on behalf of clients and
charges them a commission. A firm or individual who trades for
his own account is called a trader.
Commodity contracts include futures, options, and similar
financial derivatives. Clients who trade commodity contracts are
either hedger using the derivatives markets to manage risk, or
speculators who are willing to assume that risk from hedgers in
hopes of a profit.
Types of Intermediaries / Brokers / Membership in Commodity
Exchange
Floor Broker/Trader: an individual who trades commodity
contracts on the floor of a commodities exchange. When
executing trades on behalf of a client in exchange for a
commission he is acting in the role of a broker. When trading on
behalf of his own account, or for the account of his employer, he
is acting in the role of a trader. Floor trading is conducted in the
pits of a commodity exchange via open outcry.

• Futures Commission Merchant (FCM): A firm or individual that
solicits or accepts orders for commodity contracts traded on an
exchange and holds client funds to margin, similar to a securities
broker-dealer. Most individual traders do not work directly with
a FCM, but rather through an IB or CTA.
• Introducing Broker (IB): A firm or individual that solicits or
accepts orders for commodity contracts traded on an exchange.
IBs do not actually hold customer funds to margin. Client funds
to margin are held by a FCM associated with the IB.
• Commodity Pool Operator (CPO): A firm or individual that
operates commodity pools advised by a CTA. A commodity pool
is essentially the commodity equivalent to a mutual fund.
• Registered Commodity Representative (RCR)/Associated
Person (AP): an employee, partner or officer of a FCM, IB, CTA,
or CPO, duly registered and licensed to conduct the activities of
a FCM, IB, CTA, or CPO. This is the commodity equivalent to a
registered representative.

Trading System at Commodity Exchanges
• Members can access real time market depth quotes, charts,
positions and contract related information through the Trading
System.
• It also has variety of user friendly features such as message logs,
profit/loss calculations and watch lists for top gainers and
losers. Market depth window is available in trader workstation
based on price-time priority logic. The Order types are based on
time and price condition.
• Day Order - Any order to buy or sell, which automatically
expires if not executed on the day the order is placed.
• GTC (Good Till Cancelled) - Any order to buy or sell, which lasts
until the order is completed or cancelled by the user. The order
automatically gets expired on the expiry day of the contract.

• GTD (Good Till Date) - GTD orders are cancelled at the close of
the market on the specified day (expiration day).
• IOC (Immediate or Cancel) - An order requiring that all or part of
the order be executed immediately after it has been brought to
the market. Any portions not executed immediately are
cancelled.
• AON (All or None) - The AON order works to safeguard your
purchase by providing the guarantee that you either receive full
quantity that you requested or none at all. If full quantity is not
available, the order gets expired.

Different types of Players in Commodity Futures Market
Hedgers:
• Hedging is an investment strategy used for minimising a risk and
hedgers are the practitioners of this strategy. Generally, hedgers
are producers or consumers who want to transfer the price-risk
on to the market. Commodities derivatives market provide them
an effective hedging mechanism against adverse price
movements.
• They protect themselves from risk associated with the price of
commodity by using derivatives.
• For example, an airline company faces the risk is price rise of fuel.
So they will go for a long position (buy an oil futures contract) to
hedge, just to cover the amount of fuel they expect to buy.
Similarly, gold is the best hedge against inflation.

•Speculators: Speculators are sophisticated leading players in
commodities futures market. They are basically risk takers and
are never associated with any commodity. They generally bet
against the price movement in the hope of making gains.
• They undertake speculative position with respect to anticipating
future price movements with a small margin and square-off
anytime during trading hours. They do either by going long or
going short positions. Buying a futures contract in anticipation
of price increase is known as 'going long". Selling a futures
contract in anticipation of a price decrease is known as 'going
short".
•Arbitrageurs: They are investors who earn from discrepancy
in prices between the two exchanges or between different
maturities of the same commodity.
• Example of arbitraging is simultaneously buying a gold at lower
price from one exchange and selling it on another exchange for
higher price. So they make profit from price difference.

ROLE OF SPECULATOR IN COMMODITY EXCHANGE
• A speculator is a person who trades derivatives, commodities,
bonds, equities or currencies with a higher than average risk in
return for a higher-than-average profit potential.
• Speculators take large risks, especially with respect to
anticipating future price movements, in the hope of making
quick, large gains.
• In periods of excessive price swings, individuals, politicians and
market regulators start questioning the role of commodities
speculators. T
• These participants look to profit from either rising or falling
prices through the commodities future markets,(Commodity
speculators take the advantage of market volatility and trying
to make profits from the rising or falling prices through the
commodities futures markets) where it is possible to invest in a
financial asset or index where the price level is determined by
an underlying commodity price level.

• Speculators serve an important role in commodities markets.
There are many legitimate purposes for trading in commodities
futures or by actually holding physical commodities.
• The high-volatility in the commodity prices makes it more difficult
for companies and individual investors to do future planning.
That’s where the speculators play a major role in the commodity
market and utilize the short-term strategy and repeating patterns
based on technical and fundamental analysis and use that
information to profit from the future ups and downs in prices. In
doing so, each speculator develops their own way of trading in
commodity and other financial markets.
• Speculators take the offsetting swing in prices that is, Companies
do it to hedge against rapid rises and falls in price, and farmers
may do it to try and offset swings in the weather or price swings
that result in rapid shifts in demand. These market participants
need someone to take the offsetting positions to their positions,
which is exactly what speculators do.

• Speculation in commodity market sometimes put a big impact
on the market. For instance, if a speculator believes that a
particular commodity is going to increase in value with time,
he/she may choose to buy the commodity as much as possible.
This would lead to a sudden increase in the price of that
particular asset. If this action is taken as a positive sign, then it
may influence other traders to purchase the asset as well,
further increase in value. This speculation may drive the price of
an asset above its true value. The opposite can happens if the
speculator believes that there is going to be a downtrend in a
particular commodity.
• Fluctuations in underlying supply and demand caused by the
speculation in commodities have arguably the most impact on
commodity prices. Speculators should be watched closely for
unethical and even illegal activities. Allegations that certain
insiders at MF Global stole client commodity funds to stave off
bankruptcy.

Trading mechanism (In India)
• In India MCX and NCDEX are the national exchange that provide a platform
to many buyer and seller to exchange there commodities through future
contract trading. MCX is widely known for hard commodities trading on
derivative or future contract, while NCDEX widely known for agri
commodities trading.
• In both this exchange commodity is traded on its future contract.
• In MCX and NCDEX different commodities are traded with a fixed lot size
that is the minimum quantity you can buy or sell. for which you just have to
pay a margin amount this is:
• Gold — 100 lot size
• Silver — 30
• Coper — 1000
• Zinc, Aluminium & Lead — has 5000 lot size
• Nickel — 250
• Crude Oil — 100
• Natural Gas — 1250
• In Agri commodities like Soybean, Chana, TMC, Guarseed has different lot
size that is traded on NCDEX.

COMMODITY MARGIN TRADING
• One of the unique characteristics of commodity futures contracts is
the ability to trade with margin. In the futures
markets, margin refers to the minimum amount of capital that
must be available in your account for you to trade futures contracts.
Think of margin as collateral that allows you to participate in the
futures markets.
• Once the broker is selected and the paperwork is done, the next
step is to deposit the margin required for commodity trading.
• Margin requirements are established for every type of contract by
the exchange on which those contracts are traded.
• Trading on margin provides you with a lot of leverage because you
need to put up only relatively small amounts of capital as collateral
to invest in significant dollar amounts of a commodity.
• There are two types of margins in commodity trading: initial margin
and maintenance margin.

• Initial margin in commodity trading Initial margin is the amount that
you have to deposit with your broker before you can start trading in
commodities. The amount of initial margin depends on the
commodity you want to trade in and the exchange that you will be
trading on. In most cases, however, the initial margin requirement is
5–10% of the contract value.
CHANGE IN INITIAL MARGIN REQUIREMENTS
• Margin requirements may fluctuate based on market conditions.
When markets are changing rapidly and daily price moves become
more volatile clearing house margin methodology may result in higher
margin requirements to account for increased risk.

•The Initial Margin requirement is based on a worst
scenario loss of a portfolio of an individual client
comprising his positions in options and futures contracts
on the same underlying across different maturities and
across various scenarios of price and volatility changes.
•The futures exchange itself is responsible for setting
margin requirements. When prices become more
volatile, an exchange will often raise margin
requirements in order to account for the added risk of
wider daily price ranges.
•Conversely, when volatility in a particular market
decreases exchanges will adjust the amount of margin
required to trade lower to reflect the lower risk. Margin
levels reflect volatility and markets that are more
volatile require more margin as a percentage of total
contract value.

• Maintenance margin in commodity trading As the losses
mount, the balance in trading account falls. If this balance falls
to a predefined threshold, the broker may ask to top it up. The
predefined threshold is called the maintenance margin. The
money that has to bring to replenish your account is called
margin money. When there is a profit in trading, account
balance rises above the margin requirement. Customer can
withdraw the excess amount in your account, if they like.
• Special Margin: With a view to controlling price volatility and
the breach of the daily circuit (the maximum permissible daily
movement against the previous closing price on either side),
Exchange has introduced the system of Special Margin. The
purpose of this margin is to control excessive speculation and
to protect the interest of common traders and investors. This
will be applicable for all the traders who have an open position
and they can't trade further unless this special margin amount
is paid.

•Delivery Margin: When the contract
approaches delivery period i.e. last five days
before the expiry date of the contract, the
exchange requires the buyers and sellers to put
additional margins. Usually, it is 25 percent of
the total contract value and is subject to
change by the exchange. The delivery margin
percentage is different for each commodity.

MARK TO MARKET
• Marking to Market simply means valuing the security at the current
trading price and therefore results in the daily settlement of profits
and losses by the traders due to the changes in its market value.
• MTM for the day, which is also referred to as the settlement price, will
rely on a random sample selected any time in the last 5 minutes of
trading at the discretion of the exchange.
• Based on the random snapshot selected, the MTM price is a function of
referencing the last traded price unless there is a better bid or lower
offer.
• If on a particular trading day the value of the security rises, the trader
taking a long position (buyer) will collect the money equal to the
security’s change in value from the trader holding the short position
(seller).
• On the other hand, if the value of the security falls down, the selling
trader will collect money from the buyer. The money is equal to the
change in the value of the security. It should be noted that the value at
maturity does not change much. However, the parties involved in the
contract pay gains and losses to each other at the end of every trading
day.

Steps to Calculate Marking to Market in Futures
• Marking to market in futures involves below 2 steps:
• Step 1 – Determining Settlement Price
• Various assets will have different ways of determining the settlement price
but generally, it will involve averaging a few traded prices for the day. Within
this, the last few transactions of the day are considered since it accounts for
considerable activities of the day.
• The closing price is not considered as it can be manipulated by unscrupulous
traders to drift the prices in a particular direction. The average price helps in
reducing the probability of such manipulations.

• Step 2 – Realization of the Profit/Loss
• The realization of profit and loss depends on the average price taken for as
the settlement price and pre-agreed upon contract price.
• Example of Marking to Market Calculations in Futures
• Let’s assume two parties entering into a futures contract involving 30 bales of
cotton at $150 per bale with a 6-month maturity. This takes the value of
security to $4,500 [30*150]. At the end of the next trading day, the price per
bale increased to $155. The trader in a long position will collect (5*30)$150
from a trader in a short position [$155 – $150] bale for this particular day.
• On the flip side, if the mark to the market price for every bale falls to $145,
this difference of $150 would be collected by the trader in a short position
from the trader in the long position for that particular day.
• Change in Value = Future Price of Current Day – Price as of Prior Day
• Gain/Loss = Change in Value * Total quantity involved [2,000 bushels in this
case]
• Cumulative Gain/Loss = Gain/Loss of the current day – Gain/Loss of Prior
Day
• Account Balance = Existing Balance +/- Cumulative Gain/Loss

Benefits of Marking to Market in Futures Contract
• Daily marketing to the market reduces counterparty risk for
investors in Futures contracts. This settlement takes place until
the contract expires.
• Reduces administrative overhead for the exchange.
• It ensures that at the end of any trading day, when the daily
settlements have been made, there will not be any
outstanding obligations which indirectly reduce credit risk.
Drawbacks of Marking to Market in Futures
• This requires continuous use of monitoring systems which is
very costly and can be afforded only by large institutions.
• It can be a cause of concern during uncertainty as the value of
assets can swing dramatically due to the unpredictable entry
and exit of buyers and sellers.

CONFLICT MANAGEMENT
• Conflict management refers to the long-term management of
intractable conflicts. It is the label for the variety by which
people handle grievances – standing up for what they consider
to be right and against what they consider to be wrong.
• Those ways include such diverse phenomena as gossip,
terrorism, warfare, law, mediation and avoidance. Which forms
of conflict management will be used in any given situation can
be somewhat predicted and explained by the social structure –
or social geometry – of the case.
• Conflict management is often considered to be distinct from
conflict resolution. The latter refers to resolving the dispute to
the approval of one or both parties, whereas the former
concerns an ongoing process that may never have a resolution.
Neither is it considered the same as conflict transformation,
which seeks to reframe the positions of the conflict parties.

•Conflict is more than an argument, or a mild
disagreement. In the 1950’s, conflict became a focus of
study, and the process oriented communication theory
began to accelerate in the year 1970. Conflict is
generally associated with negative encounters; conflict
itself is neither inherently good nor inherently bad.
Benefits of Conflict Management:
• Conflict fosters an awareness that problem exist.
Discussing conflicting views can lead to better solutions.
•Managing conflict is quicker and more efficient.
• Conflict requires creativity to find the best outcomes.
•Challenging old assumptions can lead to changes in
outdated practices and processes.

•Conflict raises awareness of what is important to
individuals.
•Managing conflicts appropriately helps build self-
esteem and also managing conflicts is a sign of
maturity.
•Conflicts are challenging, exciting, encourage people to
grow, and also creates an opportunity.
•Conflict energizes work to be done on the most
appropriate issues and it helps to raise and address the
problems quickly.
•Conflict motivates people to participate on issues

Committee on Commodity Problems:
• The role of CCP is to review commodity problems of an international
nature, to survey the world commodity situation, and to develop
appropriate policy recommendations for the FAO council.
• The CCP is the only truly global platform for the discussion of
problems facing commodity producers, exporters and importers and
for identifying appropriate solution to them.
Following are the important general conflicts which can be observed:-
• Sharp fall in prices of commodities across the countries.
• Weather conditions especially for agricultural products.
• Import & Export / Internal & External policies.
• Recent market trends and factors lying behind them.
• Increasing market concentration, new technologies, and consumer
concerns over food safety and environmental and social impacts of
agricultural production systems.
• Trade policy developments.

What causes workplace conflict?
Conflict in the workplace could be the result of:
•Poor management
•Unfair treatment
•Unclear job roles
•Iadequate training
•Poor communication
•Poor work environment
•lack of equal opportunities
•Bullying and harassment
•Significant changes to products, organisational charts,
appraisals or pay systems

ARBITRATION
•To settle disputes between trading members, investors,
clearing members, sub-brokers, authorized persons etc.
through a quasi-judicial process is called the Arbitration.
It is aimed at quickly resolving the disputes.
•Arbitration is preceded with complaint resolution
process. When either of the parties is not satisfied with
the complaint resolution process or the complaint is not
resolved amicably between parties, the parties may
choose the route of arbitration.
•Arbitration framework at the Exchange is governed by
Rules, Byelaws, Regulations & Circulars issued by the
Exchange and SEBI, from time to time.

ARBITRAGE IN COMMODITY MARKETS
•Financial markets offer a host of trading options for
investors with different risk profiles.
•While one can opt for various market strategies,
such as trading, arbitrage and long term investing,
an interesting, low risk option is arbitrage.
•Arbitrage helps reduce the price disparity of an
asset in different markets even as it helps boost
the liquidity.
•In case of commodities, too, a market participant
can avail of various types of arbitrage
opportunities.
•The types of arbitrage strategies for trading in
commodities:

Cash and carry
• Cash n carry arbitrage can be used between spot/physical and
future prices of a commodity. This strategy is often used by
commodity traders who have linkages with physical markets.
• In this case, arbitrageurs set up a trade in the physical market
and, simultaneously, take a position in the futures market in
order to gain from the price disparity between the spot and
futures prices.
Spread
• In case of spread, arbitrageurs trade only in the futures
contracts on exchanges to benefit from the price
differentiation between various contracts of the same
commodity.
• They buy a futures contract and sell another futures contract
of the same underlying commodity on the exchange to profit
from the price difference.

Inter exchange
• This is also a technique to set up an arbitrage trade in the
commodity market. The price difference for the same
commodity on various exchanges with the same contract expiry
can be exploited as an interexchange arbitrage opportunity.
• The price difference for the same commodity in the two
exchanges can arise due to volatility, liquidity and contract
specifications, among other reasons.
Inter commodity
• When one considers a different commodity on the same
exchange having the same cash flow or in the same category,
then an inter-commodity arbitrage can be created.
• For instance, an arbitrage between cotton, cottonseed, cotton
oilseed cake and kapas can be created in order to benefit from
the price difference.

MARKET POSITIONS
•There are two basic positions for trading in
commodities known as long and short positions. These
positions can be taken on the basis of our assumptions
whether the price of commodity will go up or will move
down.
•Long position in commodity futures trading conveys the
buying of any commodity first with the expectation of
rise in value of that commodity. This can be done by
entering into any commodity futures contract. To offset
a long position, one needs to sell the same contract
before it expires.
•'buying long' approach should be opted when one feels
that the price of commodity will appreciate in near
future.

•A short position in commodity futures trading
implies the selling short a commodity futures first
and then offsetting by buying the same on a later
date.
•Sell short strategy can be adopted when the
expectation is that the price of commodity will
decline in near future.
•A short position is of course opposite of a long
position.
•The selling short position turns out to be profitable
if the underlying commodity depreciates in its
value during the holding period of that contract.

ORDER TYPES
The most important pieces of information one needs to
indicate in a commodity transaction is the order type. This
indicates how you want your order to be placed and
executed.
•Fill or kill (FOK): Use this order if you want your order to
be filled right away at a specific price.If a matching offer
isn’t found within three attempts, your order is
cancelled, or “killed.”
•Limit (LMT) A limit order is placed when you want your
order to be filled only at a specified price or better. If
you’re on the buy side of a transaction, you want your
limit buy order placed at or below the market price.
Conversely, if you’re on the sell side, you want your limit
sell order at or above market price.

•Market (MKT): A market order is perhaps the simplest
type of order. When you choose a market order, you’re
saying you want your order filled at the current market
price.
•Market if touched (MIT): When you place an MIT, you
specify the price at which you want to buy or sell a
commodity. When that price is reached (or “touched”),
your order is automatically filled at the current market
price. A buy MIT order is placed below the market; a sell
MIT order is placed above the market. In other words,
you buy low and sell high.
•Market on close (MOC):When you place a market on
close order, you’re selecting not a specific price, but a
specific time to execute your order. Your order is
executed at whatever price that particular commodity
happens to close at the end of the trading session.

•Stop (STP): A stop order is a lot like a market if touched
order because your order is placed when trading occurs
at or through a specified price. However, unlike an MIT
order, a buy stop order is placed above the market, and a
sell stop order is placed below market levels.
•Stop close only (SCO): If you choose a stop close only
order, your stop order is executed only at the closing of
trading and only if the closing trading range is at or
through your designated stop price.
•Stop limit (STL): A stop limit order combines both a stop
order and a limit order. When the stop price is reached,
the order becomes a limit order and the transaction is
executed only if the specified price at which you want
the order to go through has been reached.

•GTC (Good ‘Till Canceled) These orders, often called
open orders, are always considered active until filled,
canceled, or replaced by another order. Beginning
traders have been known to place GTC orders and
forget about them only to find that disaster has struck
while they weren’t watching.
•MOO (Market On Open) This is an order for a name
contract to be executed during the opening range of the
market, usually the first 3 minutes.
•Cancel/Replace This cancels and replaces a previous
order by changing the price, type, or quantity, but you
cannot replace the commodity or contract month

Access to Commodity Exchanges
• The commodities market works just like any other market. It is a
physical or a virtual space, where one can buy, sell or trade various
commodities at current or future date.
• One can also do commodity trading using futures contracts. A
futures contract is an agreement between the buyer and the seller,
wherein the buyer promises to pay the agreed-upon sum at the
moment of the transaction when the seller delivers the commodity
at a pre-decided date in the future.
• A farmer can thus buy wheat futures to fix a price at which he
would want to sell a certain amount in future. Similarly, a trader
might buy or sell wheat futures for delivery on a future date at a
price decided now.

•To trade in commodities, one needs to open a
commodity trading account with a broker. This type of
trading is essentially in futures and options of products
like agriculture (wheat, cotton, etc.), minerals
(petroleum), and precious metals (gold, silver, etc.
•Futures and options are traded on commodity
exchanges like Multi-Commodity Exchange (MCX) and
National Commodity and
Derivatives Exchange (NCDEX). Only members
(brokers) are allowed to trade on these exchange, so
you need to open commodity trading account with a
broker

Volume and Open Interest
• Volume represents the total amount of trading activity or
contracts that have changed hands in a given commodity market
for a single trading day.
• The greater the amount of trading during a market session the
higher will be the trading volume.
• A higher volume bar on the chart means that the trading activity
was heavier for that day.
• Volume represents a measure of intensity or pressure behind a
price trend. The greater the volume the more we can expect the
existing trend to continue rather than reverse.
• Open Interest is the total number of outstanding contracts that
are held by market participants at the end of each day.
• Where volume measures the pressure or intensity behind a price
trend, open interest measures the flow of money into the futures
market

• For each seller of a futures contract there must be a buyer of that
contract.
• Thus a seller and a buyer combine to create only one contract.
• To determine the total open interest for any given market we need
only to know the totals from one side or the other, buyers or
sellers, not the sum of both.
The relationship between the prevailing price trend, volume, and open
interest can be summarized by the following table
Price Volume Open Interest Interpretation
Rising Rising Rising Market is Strong
Rising Falling Falling Market is Weakening
Falling Rising Rising Market is Weak
Falling Falling Falling Market is Strengthening

CLEARING AND SETTLEMENT IN COMMODITY MARKET
• Most futures contracts do not lead to the actual physical delivery of
the underlying asset. The settlement is done by closing out open
positions, physical delivery or cash settlement.
• All these settlement functions are taken care of by an entity called
clearing house or clearing corporation.
CLEARING
• Clearing of trades that take place on an Exchange happens through
the Exchange Clearing House.
• A clearing house is a system by which Exchanges guarantee the
faithful compliance of all trade commitments undertaken on the
trading floor or electronically over the electronic trading systems.
• The main task of the clearing house is to keep track of all the
transactions that take place during a day so that the net position of
each of its members can be calculated. It guarantees the
performance of the parties to each transaction.

SETTLEMENT
• Settlement involves payments and receipts for all the transaction
done by the members.
• Trades are settled through the Exchange’s settlement system.
• Future contracts have two types of settlements.
• Mark-to-Market settlement which happens on a continuous basis
at the end of each day, and the final settlement which happens on
the last trading day of the futures contract.
• Daily settlement price: Daily settlement price is the consensus
closing price as arrived after closing session of the relevant futures
contract for the trading day. In the absence of trading for a contract
during closing session, daily settlement price is computed as per the
methods prescribed by the Exchange from time to time.
• Final settlement price: Final settlement price is the polled spot
price of the underlying commodity in the spot market on the last
trading day of the futures contract. All open positions in a futures
contract cease to exist after its expiration day.

COMMODITY CLEARING HOUSE
• Clearing house can be defined as entity which is different
form the exchange, The clearing house is responsible for
keeping records. Clearing house acts as a seller to all buyers
and a buyer to all sellers.
• Each day of trading all exchange members must report their
buys and sell to the clearing house.
• The clearing house then ensures that financial settlement
form all buyers and sellers is made to the clearing house.
• The clearing house guarantees all contracts by requiring that
the participants maintain cash deposits called margin or
margin money.
• As soon as a contract is processed by the clearing house the
buyer and seller of the contract will have a contract with the
clearing house instead of counter party with their original
trade.

•The Exchange has an in house clearing department
which monitors and performs all activities relating to
delivery, fund settlement, margining and managing the
settlement guarantee funds. It operates a well-defined
settlement cycle to ensure no deviations or deferments
from this cycle.
•The clearing house collects margin from the members,
effect of pay-in and pay-out and monitor delivery and
settlement process.
•Clearing & Settlement is a system whereby Exchange
guarantees the settlement of the trade on its platform.
•Since exchange facilitates anonymous trade transactions
between Buyer and seller the counter party risk in the
event of failure of a trading member to meet the
settlement obligation rest with the exchange.

Clearing House Operations and Risk Management
•As market participants and regulators alike focus on
solutions to prevent a future financial crisis, clearing has
a center spot on the global stage.
•Central clearing is a proven, highly transparent,
regulated means of managing counterparty risk and
reducing systemic risk.
•Clearing houses maintain market integrity and capital
protections by standing in the middle of each trade;
once a trade is matched, the clearing house becomes
the central counterparty (CCP) - the buyer to every
seller’s clearing member and the seller to every buyer’s
clearing member.
•The CCP also risk-manages trades to minimize any
impact on clearing members and the larger market in
the event of a default.

Each clearing house has unique risk management practices based
on the products it clears and the risk associated with those
products. The methods the ICE clearing houses use to manage risk
include:
• Strict Membership Criteria – Initial and ongoing conservative
membership standards.
• Initial Margin Collateral Requirement – Collateralizing (margining)
each and every cleared position.
• Continuous Position Monitoring – Monitoring positions and
margin throughout the day to make sure clearing risk is effectively
managed as the value and size of our members’ positions change.
• Intraday Mark-to-Market Margining – The revaluation of cleared
portfolios, on at least a daily basis, through settlement of variation
margin or mark-to-market margin; this practice of requiring
clearing members to pay their losses on at least a daily basis
serves to avoid the accumulation of large losses over time.
Clearing members with losing positions are held accountable as
the market moves.

• Special Margin Calls – When intraday position losses breach certain
margin thresholds, clearing houses have the discretion to make
special intraday margin calls.
• Substantial Default Resources – Collecting and maintaining
significant default resources that can be used in the event of a
hypothetical member default.
• Rigorous Stress Testing – Running extreme but plausible market
scenarios and what-if testing to determine the sufficiency of the
clearing houses’ default resources.
• Transparency Standards – In addition to settlement prices that
provide an independent pricing method for evaluating positions, a
clearing house should have transparency standards that extend to
providing straightforward and comprehensive documentation of
fees and risk obligations. Clearing houses operate based on clear
and comprehensive sets of rules
• Independent Risk Committees – The primary function of an
independent risk committee is to provide oversight of clearing
house activities and ensure appropriate risk mitigation steps are
being taken.

Operational Procedure of Commodity Exchanges:
Operational procedures might vary across the exchanges.
The entire operations constitutes of three stages:
Trading:
• Online commodity exchanges usually trade within 10.00 am to
5.00 pm.
• On the first day of the contract the exchange decides the base
price of the commodity, which is the sum of notional price
based on the spot market price of that commodity on the
previous day and a notional carrying cost.
• The trading systems provide automated screen based trading
for futures on commodities on a nationwide basis with online
monitoring and surveillance.
• The market is order driven, where the orders match
automatically on the base of price, time and quantity.

• If an entered order finds a match then trace is generated, if not,
the active order becomes passive and queues up in the respective
outstanding order book.
• The units of trading, delivery unit, lot size, tick size, expiry date
are all specified by the exchange.
• At the end of the day, the trading system calculates the closing
price as the weighted average price of all the trades executed in
the last thirty minutes.
• Orders in violation of the circuit filter are rejected by the system.
• At the end of the life of the contract, i.e. the expiry date, the
contract is settled at the due date rate, usually calculated as the
weighted average of the last 1 or 3 or 5 days prices in the spot
market (of the market place/where the contracts based) or as
prescribed by the exchange in contract specification.

The entities trading system are:
a. TCM: Trading cum clearing member who can trade on their own
account as well as on account of their clients through a unique ID
assigned by the exchange.
b. PCM: Professional clearing members are entitled to clear trades
executed by the other members of the exchange.
Clearing:
• Futures contracts are settled either by physical settlement or cash
settlement.
• A clearing house or clearing corporation remains in charge of the
clearing and settlement functions.
• A settlement guarantee fund, guaranteeing the settlement of the
net settlement liability of clearing members, is maintained with the
exchange.
• Physical settlement (by delivery) or financial settlement (by price
difference) of contract is monitored by the clearing house.

Settlement:
• Futures contracts are settled by mean of mark to market
settlement and final settlement.
• Under this, the system keeps track of national and booked losses,
or gains, incurred by every member up to the last executed trade.
• On the day of entering the contract, the profit or loss is
determined as the difference of entry value and daily settlement
price for that day.
• On the other day it is the difference between daily settlement
price.
• On the day of expiry of contract, trades are settled against the
final settlement price.
• Final settlement price is the spot price on the expiry day, but is
done by the method of boot strapping.
• On the date of expiry of future contract, the final settlement price
is the spot price on the expiry day.

•The spot prices are collected from members across the
country through pooling. The bid/ask prices are
bootstrapped and the mid of the two bootstrapped
prices is taken as the final settlement price.
•The responsibility of [final settlement’ in a clearing
house is on a trading-cum-clearing member for all trades
done on his own account and his client’s trades.
•A professional clearing member is responsible for settling
all the participants’ trade which he has confirmed to the
exchange.

Delivery Related Issues in Commodity Exchanges
The Delivery Process
• Futures exchanges work with industry to develop standardized
quantities, qualities, sizes, grades, and locations for delivery of a
physical commodity.
• The delivery process often includes premiums and discounts for
varying grades and distribution points for specific raw materials.
• The exchange designates warehouse and delivery locations for
many commodities.
• The exchange also sets the rules and regulations for the delivery
period which can vary depending upon the particular product.
• When delivery takes place, a warrant or bearer receipt that
represents a certain quantity and quality of a commodity in a
specific location changes hands from the seller to the buyer upon
which time full value payment occurs.

• The buyer has the right to remove the commodity from the
warehouse at their option.
• Often, a purchaser will leave the raw material product at the
storage location and pay a periodic storage fee.
• Exchanges also set fees for many aspects of the delivery process.
• The delivery mechanism differs for each commodity and all
exchanges.
• A buyer that takes delivery of either of the precious metals would
receive a warehouse receipt or warrant representing a particular
platinum or gold bar or bars in an exchange-approved warehouse.
• The receipt includes the weight, size, and bar number of the metal
in questions.
• The buyer would pay the full value for the metal plus or minus any
premium or discount.
• The purchaser receives a receipt endorsed by the last owner and
the buyer then has the right to withdraw the metal from the
warehouse

DELIVERY RELATED ISSUES- Delivery Centre
• Activities related to Delivery & Settlement of commodities traded on the
Exchange platform are monitored and performed by Delivery Department.
The department also acts as a facilitator for delivery related documentation.
• The functions are performed on a predefined settlement schedule to effect
Delivery & Settlement of commodities.
• Each commodity exchange has designated Delivery centers in different
states.
Delivery
Center/State
Warehouse Address Contact Details
Billing Cycle/
Storage Charges
Delhi (Delhi)
M/s Sequel Logistics
Pvt Ltd
E1/18 Jhandewalan
Extension, New Delhi
- 110 055
Mr. Satish Kumar; Mr.
Rahul Purwar
011– 43012390,
08527611332
1 Day
Rs. 35.00 per Kg
Ahmedabad
(Gujarat)
Pvt. Ltd
29/B, Shrimali
Society, Opp.
Passport Seva
Kendra, Navrangpura,
Ahmedabad-380 009.
Mr.Ramprasad Sahu
079 – 2640 9689,
09016346699
1 Day
Rs. 35.00 per Kg
Mumbai
(Maharashtra)
Pvt Ltd
Ashish Product,
Ground Floor, Plot No
23, MIDC Main Road,
MIDC Andheri,
Mumbai - 400 093
Mr. Nelson Murzello,
Mr. Ravi Som
022– 6190 2710 / 11 /
12, 9930001900,
7738895883
1 Day
Rs. 35.00

• Producers/ Traders are not satisfied with the warehousing facilities
provided by commodity exchanges.
• Better services and infrastructure are not offered by Government
warehouses.
• There is no uniformity in settlement procedures.
• Cash settlement is the most preferred mode of settlement on the
Indian commodity exchanges.
• Delivery is not mandatory in commodity futures contract trading.
• Physical delivery of goods is insignificant on Indian exchanges and
make the futures market unstable.
• Compulsory delivery was the most preferred mechanism for final
settlement on any commodity exchange.
• Traders face issues during physical settlement of commodities.
• Smoothening of the physical delivery system is a problem faced by
the commodities market

Deliverable Varieties
• Multi Commodity Exchange of India Ltd (MCX), offers a
comprehensive suite of base metal derivatives in its portfolio to
mitigate the risk involved in metal trading.
• Though these contracts offer extensive trading opportunity, global
price discovery and price transparency for market participants,
these contracts were never physically settled.
• The delivery logic of these contracts was settlement in cash on
expiry.
• Hence, these contracts were not appropriate for hedging or
stocking and key market players preferred to hedge in international
exchanges due to its liquidity and contract design.
• Traders face quality concerns for various deliverable varieties.
• Taking delivery of cotton from warehouses is time consuming.
• Lengthy procedure. The regulations are such that trader may have
to take delivery of the stock first before seeking to return it, and the
stock return procedure is lengthy.

Issues Related to Monitoring and Surveillance by
Exchanges and Regulator
• Trading Venues have become more automated, trading systems
have become ever more sophisticated, and trading volumes have
increased significantly.
• Trading has also become more dispersed across an increasing
number of Trading Venues and therefore more difficult to monitor
and trace.
• Advances in technology allow investors to trade cross-market,
cross-asset and cross-border in milliseconds.
• These advances also have substantially increased the vulnerability
of markets to inappropriate activity, which in turn has made the
Market Authorities regulations more challenging.
• Current surveillance techniques, including the collection, storage
and accessibility of data is insufficient to capture in a timely
manner all of the information necessary to monitor efficiently and
effectively trading activity.

• There are major challenges for regulatory authorities in
achieving effective cross-border surveillance.
• The ongoing technological developments has made it more
difficult for effective monitoring of markets.
• Issues relating to data collection, including the potential
inadequacy of current content and the related collection and
storage costs for a vast amount of trade information.
• Challenges to develop a process to use effectively such
information for surveillance purposes, particularly for the
purpose of identifying customers.
• The increasing amount of trading noise produced by the
proliferation of fully automated program trading and order
execution systems, has created a challenge to distinguish
bona fide orders and trades from manipulative activities.

•Market Authorities may have inadequate resources to
hire the staff necessary to conduct complex
technological market surveillance
•Market Authorities responsible for conducting market
surveillance need enhanced financial resources to
meet the challenges of technological developments.
•Manual surveillance is not adequate for current
market conditions.
•Market Authority responsible for surveillance needs
systems that can perform the authority’s monitoring
responsibilities and have the capacity to handle the
data they receive/maintain.

MARGINING METHODS
• In order to buy or sell commodities on the exchange, the user must
deposit specific amount of money with the broker. This money is
called the margin.
• Like many other regulations, the level of margin to be placed by
traders is set by the exchange based on the amount of volatility
and volume.
• Without margins place, the parties cannot enter into any contract.
• For most future contracts, the margin requirement in the range of
4%-15%.
• There are 6 types of margins applicable to futures trading in
commodities
Initial margin
• The ‘initial margin’ is the amount that is required to be placed by
the trader when they intend to enter a contract. This amount is
meant to compensate for a potential loss that may occur in that
day.

Exposure & Mark-to-Market Margin
• After back testing the results of the VaR model in
commodities, the ‘exposure margin’ is levied.
• When a position is carried on more a number of days, the
exchange also requires the traders to pay mark-to-market
margin which are positions restated at the ‘daily settlement
prices’ (DSP).
• After every trading session, the margin account of each user
is adjusted to reflect the trader’s gain or loss.
• This is done to reduce the credit exposure on that day’s
market activities.
• In the case of a profit, funds are added to a trader’s account,
but if a loss has occurred and the account has fallen below
the initial margin, the account must be replenished by the
clearing member.

Additional margin
• ‘Additional margin’ is called forth on occasional situations where
there has been unexpected volatility in the market.
• To prevent potential default, the exchanged necessitates this so
that the system/exchange does not lose its stability in
unfavourable situations.
Pre-expiry margin
• This ‘pre-expiry’ margin is charged by the exchange on a
cumulative basis over 3-5 days near the contract expiry to ensure
better convergence of the futures and spot market prices by
having only interested parties remain in the market while the
speculators roll over their positions to subsequent months.
Delivery Margin:
• When a trader wants to settle the contract by taking delivery of
the commodity, this margin is charged.

Special Margin
• Special margin is usually imposed by an exchange on certain
commodities as a surveillance measure during times when there is
more than 20% price movement in the same direction from a pre-
determined base (underlying spot price).
• This base can be either, the closing price on the launch day of the
contract or the 90 days prior settlement price.
• It is be levied by market regulators when there is excess volatility in
the market.
Margin for Calendar Spread positions
• A spread is going long on one commodity futures month while
simultaneously shorting the same commodity of another contract
month.
• At exchanges such as the NCDEX, a ‘margin for calendar spread’ is
charged for such positions.
• Such benefits are given subject to the positive correlation in the
prices of the contract months and the far month contracts’ liquidity.

SETTLEMENT PROCESS
• At the expiry of a commodity futures contract, the settlement is done
financially (more common) or delivery of the goods is done.
• The settlement functions and formalities is headed by the ‘clearing house’.
For example, National Commodity Clearing Limited (NCCL) is the clearing
corporation for the NCDEX.
• The work at clearing houses is delegated to a number of members who
perform a function in the process of clearing and settling of the
commodities trade
• Similar to broker margin accounts, the clearing house members are also
supposed to maintain proper levels of margins according to the profits and
losses of each day.
• Depending on the margin balance in their account, funds are either added
to the existing amount or it needs to me replenished.
• Futures contracts have two types of settlements: (i) the Mark-to-Market
(MTM) settlement which happens on a continuous basis at the end of each
day, and (ii) the final settlement which happens on the last trading day of
the futures contract.

Settlement Price
• All positions of a CM, either brought forward, created during
the day or closed out during the day, are marked to market at
the daily settlement price or the final settlement price at the
close of trading hours on a day.
• Daily settlement price: This is the agreed closing price of
futures contract that is arrived at after the closing of the
market session. In some cases when trading has not been
done for a contract during closing session, daily settlement
price is ascertained as per the methods prescribed by the
exchange from time to time.
• Final settlement price: This is the polled spot price of a
commodity on the last trading day of the futures contract. In
futures, the open positions cease after its expiration day and
a Professional Clearing Member settles all the participants’
trades which have been confirmed to the Exchange.

• Settlement involves payments (Pay-Ins) and receipts (Pay-Outs) for all
the transactions done by the members.
• Trades are settled through the Exchange’s settlement system.

Commodity makets warehousing trading & settlement

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Commodity makets warehousing trading & settlement

Similar to Commodity makets warehousing trading & settlement (20)

Recently uploaded

Recently uploaded (20)