The slides will cover issues related to greater participation with new products, risk management, illegal trading issues, investors protection, how unified exchanges will change commodity space, rules of spot marketing creating challenges in efficient integrated unified commodity market, and other reforms required to take the commodity derivative market Forward.

1. NEW PRODUCTS, RISK MANAGEMENT &
INVESTORS’ PROTECTION - COMMODITY
DERIVATIVES MARKET
17th Commodity Derivatives Market Summit by ASSOCHAM on
November 29, 2019, Hotel Taj Mahal, Delhi
Dr. Saurabh Agarwal,
Member, Managing Committee, ASSOCHAM
Professor of Financial Engineering & Principal (Offg.), IIF College of
Commerce & Management Studies (IIF CCMS), Affiliated to CCS
University for B.Com. and BBA

2. COMMODITY TRANSACTION TAX (CTT) – RISK
MANAGEMENT
 CTT of 0.01 per cent levied on non-agricultural
commodity futures trading since 1/7/2013 by
Government of India
 Parity destroyed by international markets as CTT is
absent on COMEX, LME, MYMEX and so on
 Liquidity declined and average volatility has risen
significantly by about 33 per cent
 Annual net tax revenue loss of INR 30 billion owing
to reduced trading

3. COMMODITY TRANSACTION TAX (CTT)- RISK
MANAGEMENT
 Income tax from brokers, Service tax on transaction
fee charged by brokers, Income tax from
Commodity Exchanges, Service tax on transaction
fee charged by Exchanges, Income Tax from Intra-
day Traders and Income Tax from Hedgers and
Long Term Speculators impacted
 Optimal CTT level should be 0.003 per cent
 Ref: Sehgal, S. and T.J. Agrawal (2019), Impact of Commodity
Transaction Tax on Market Liquidity, Volatility and Government
Revenues: An Empirical Study for India, Vikalpa, IIM Ahmedabad,
44(1), 12-19.

4. OPTIONS – RISK MANAGEMENT & NEW
PRODUCTS
 According to recent notification, a contract for the
purchase or sale of a right to buy or sell or a right to
buy and sell in future such underlying goods has
been notified as a 'derivative' under the Securities
Contracts (Regulation) Act,1956
 This paves the way for introduction of Options
with ‘spot commodities’ as underlying, apart from
‘commodity futures’ (Oct, 2019)

5. NEW PRODUCTS
 China launches world's first stainless steel
futures on 25th September 2019
 China's Dalian Commodity Exchange (DCE) will
shift its iron ore physical settlements to a brand-
based system in 2020
 Euronext (ENX.PA) plans to develop commodity
contracts based on cash settlement to expand a
business in which the financial market operator has
so far offered physical delivery of crops like wheat

6. NEW PRODUCTS
 Chinese authorities have given the go-ahead for the
first exchange-traded funds that track domestic
energy, metal and agricultural futures as the
country seeks to boost the liquidity of its capital
markets (September, 2019)
 CME launches U.S. LNG (liquefied natural gas)
futures contract with physical delivery
 Tata Asset Management Co is likely to approach
the Securities and Exchange Board of India to
launch a fund for investing in commodity
derivatives (65:10:25 for equities, debt and
commodity derivatives)

7. WHY COMMODITY BASED FUND?
 Portfolios can be created with different
combinations of equities, commodities and bonds
 The study highlighted
 combination of equities and commodities
promised high return and high risk
 Combination of equities, commodities and
bonds in the portfolio promised higher returns
with almost similar risk
 Ref: Singh Y. P., Saurabh Agarwal and S. L. Harilal, (2008), “Portfolio
Creation using Markowitz’s Portfolio Selection Model involving
Equities, Commodities and Bonds in Indian Securities Market”, Euro-
Mediterranean Economics and Finance Review (ISSN 1967-502X),
France, Vol. 3, No. 3, pp. 212-236,

8. NEW PRODUCTS
 HKEX rolls out ‘mini’ futures designed to help
investors hedge six base metals during Asian trade -
Dollar-denominated futures contracts will trade in Hong
Kong and track London pricing for aluminum, zinc,
copper, nickel, tin, and lead
 Futures in commodity indices likely by FY20 end, with
MCX as first mover - At present, only single-commodity
futures are permitted on Indian exchanges
 The Securities and Exchange Board of India (SEBI) is
actively examining the feasibility of allowing derivatives
contracts based on intangibles such as weather or
freight in the Indian commodity segment

9. NEW PRODUCTS
 SEBI is also looking at exchange-traded funds
(ETFs) on metals, better designed options
contracts (Ref: The Hindu)
 NCDEX launches agricultures futures index -
AGRIDEX (Nov, 2019). NCDEX will launch
tradeable futures contracts on AGRIDEX on
receipt of SEBI Approval - These contracts will be
cash settled as per SEBI’s guidelines.

10. BULLION – FALL IN RETURNS

11. BASE METALS – ZINC PROMISING

12. BASE METALS – NICKEL PROMISING

13. ENERGY – CRUDE OIL PROMISING

14. AGRI COMMODITIES – CARDAMOM
PROMISING

15. AGRI COMMODITIES - NONE

16. SEBI SEEKS RBI HELP TO ATTRACT
CORPORATE PARTICIPATION ON COMEXES
 Except for a few commodities, corporate hedgers
have stayed away and that has posed a severe
threat to businesses that are exposed to highly
volatile commodity prices
 Lack of hedging has eroded profits in the high-
risk commodity business
 Companies are not hedging on their own
 If, on RBI’s instructions, banks who are lending
money to these borrowers insist that they
hedge on commodity exchanges, that would
protect the lenders also
 Ref: The Economic Times

17. SEBI MAY LIBERALISE NORMS FOR ISSUING
OFFSHORE DERIVATIVE INSTRUMENTS
 P-notes with derivatives as underlying may be
allowed
 The Securities and Exchange Board of India (Sebi)
may liberalise norms for issuing offshore
derivative instruments (ODIs), allowing foreign
portfolio investors (FPIs) to issue these instruments
with derivatives as underlying if they take up a
separate registration specifically for ODI issuances
 Ref: Business Standard

18. INVESTOR PROTECTION

19. ROLE OF FPO – INVESTOR PROTECTION
 The role of Farmer Producer Organizations (FPOs)
is crucial in this context since they can procure
commodities, aggregate them and ensure that size
and quality standards required for agri-futures trade
are met
 In her Budget speech for Union Budget of FY20,
the Union Finance Minister has set a target of
creating 10,000 FPOs in the next five years (by
2024)
 Between April 2016 and May 2018 only a tiny
fraction (0.004 percent) of overall agri-futures trade
at NCDEX was through FPOs
 Ref: http://icrier.org/pdf/Working_Paper_383.pdf

20. THANK YOU AND JAI HIND
 Queries may be sent to info@iifccms.edu.in or
saurabh.agarwal.fms@gmail.com