COMMODITY MARKETS BACHELOR OF COMMERCE FINANCIAL MARKETS SEMESTER V (2011) SUBMITTED BY: LAVINA PRADEEP CHANDALIA ROLL NO.

02 UNDER THE GUIDANCE OF Mr mandar khandkar

SIES COLLEGE OF COMMERCE AND ECONOMICS, Plot No. 71/72, Sion Matunga Estate T.V. Chidambaram Marg, Sion (East), Mumbai 400022.

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COMMODITY MARKETS BACHELOR OF COMMERCE FINANCIAL MARKETS SEMESTER V (2011) SUBMITTED In Partial Fulfillment of the requirements For the Award of Degree of Bachelor of Commerce Financial Markets BY: LAVINA PRADEEP CHANDALIA ROLL NO. 02 UNDER THE GUIDANCE OF Mr mandar khandkar SIES COLLEGE OF COMMERCE AND ECONOMICS, Sion (East), Mumbai 400022.

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CERTIFICATE This is to certify that Miss._________________________________ of B.Com Financial Markets Semester V (2011) has successfully completed the project on 30-09-2011 under the guidance of Mr. mandar khandkar

________________ Course Coordinator _______________

________ Principal

Project Guide/ Internal Examiner

________________ External Examiner

DATE:

PLACE:

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DECLARATION

I, ________________________________, the student of B.com (Financial Markets) semester V (2011) hereby declare that I have completed the project on 30-09-2011. The information presented through this project is true and original to the best of my knowledge.

Date:

Place:

________________ StudentS Signature LAVINA CHANDALIA ROLL NO: 02

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ACKNOWLEDGEMENT

With great pleasure I would like to thank Mr mandar khandkar and my course Coordinator MR. TAMBE of South Indian Education Society College of Commerce and Economics, for giving me the opportunity to do this project on COMMODITY MARKETS. I would also like to thank him for being an inspiration in the completion of this project. He gave me his invaluable advice and help without which this project would not have materialized.

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Objective

To give a basic introduction of exchange traded commodity future markets in India To understand the difference between commodity & financial derivative To understand merits & demerits of Indian exchange traded commodity markets To understand basics of trading, clearing & settlement on Indian commodity exchange To understand how risk is managed in Indian commodity exchange To understand the regulatory framework of Indian commodity markets To gain theoretical knowledge of gold as a commodity

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Summary

Trading in commodities existed in India since a long decade. But it has been organized only few years ago. India is one of the top producers of large number of commodities and also has a long history of trading in commodities and related derivatives. The Commodities Derivatives market has seen ups and downs, but seems to have finally arrived now. The market has made enormous progress in terms of Technology, transparency and trading activity. Interestingly, this has happened only after the Government protection was removed from a number of Commodities, and market force was allowed to play their role. Transparent trading & clearing settlement mechanism has helped commodity markets to gain popularity. Possibility of default by the participating players is minimized through proper monitoring of the market, strong surveillance systems and implementation of strong risk management procedures. Long term fundamentals of commodity markets appear bright given the supply demand mismatch. Gold as a trading commodity has been of great advantage to individuals & corporate. The recent introduction of gold petal has made gold our traditional investment, within the reach of common man, who otherwise finds it difficult to buy because of its rising price. gold with ease

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Index

Sr no. Topic

Page no

1 2 3 4 5 6 7 8 9 10

Introduction to commodity markets Evolution of commodity markets Indian commodity exchanges Current Scenario in Indian Commodity Market Trading Clearing & settlement Risk management Regulatory framework case study ; gold Bibliography

9-21 22-25 26-36 37-39 40-46 47-56 57-59 60-64 65-68 69-69

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CHAPTER 1 INTRODUCTION TO COMMODITY MARKET COMMODITY

A commodity is a product, which is of uniform quality and traded across various markets. There are generally two types of commodities, hard commodities and soft commodities. Hard commodities include crude oil, iron ore, gold, and silver and have a long shelf life. Agricultural products such as soybean, rice or wheat, are considered soft commodities since they have a limited shelf life. Th ese commodities have to be similar and interchangeable. For example, soybean from one country or market should be of the same quality wise as soybean from another, or gold in one country should be of the same purity as gold from another. Consumer products like televisions or computers vary from manufacturer to manufacturer and hence cannot be traded as commodities. Hence, any product which is traded on an authorized commodity exchange is known as commodity. The article should be movable of value, something which is bought or sold and which is produced or used as the subject or barter or sale. In short commodity includes all kinds of goods. Indian Forward Contracts (Regulation) Act (FCRA), 1952 defines goods as every kind of movable property other than act ionable claims, money and securities. In current situation, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for commodity trading recognized under the FCRA. The national commodity exchanges, recognized by the Central Government, permits commodities which include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur, potatoes and onions, coffee and tea, rubber and spices. Etc.
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2 ways of trading in commodity markets

Spot market

Derivative market

Spot Market
The spot commodity market is governed by State Agricultural Marketing Boards (SAMB), MandiBoard (Farmers, Traders, State). There are more than 7000 Mandis trading in about 140 crops. Participants in this market are Farmers, Licensed Traders, and Brokers & Wholesale Dealers. Mandi Inspectors issue type & quantity certificate. Mandifees: Transaction fee, Taxes; total varies between 4% and 12% Trading, Clearing and Settlement.

Derivatives Market
A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset.

The Forward Contracts (Regulation) Act, 1952, regulates the forward/ futures contracts in commodities all over India. As per this Act, the Forward Markets Commission (FMC) continues to have jurisdiction over commodity forward/ futures contracts. However, when derivatives trading in securities was introduced in 2001, the term 'security' in the Securities Contracts (Regulation) Act, 1956 (SC(R) A), was amended to include derivative contracts in securities. Consequently, regulation of derivatives came under the purview of Securities Exchange Board of India (SEBI). We thus have separate regulatory authorities for securities and commodity derivative markets. Derivatives are securities under the SC(R) A and hence the trading of derivatives is governed by the
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regulatory framework under the SC(R) A. The Securities Contracts (Regulation) Act, 1956 defines 'derivative' to include 1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. 2. A contract which derives its value from the prices, or index of prices, of underlying securities.

COMMODITY EXCHANGE
A commodity exchange is an association or a company or any other body corporate organizing futures trading in commodities for which license has been granted by regulating authority.

Commodity Futures
A Commodity futures is an agreement between two parties to buy or sell a specified and standardized quantity of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract on the commodity futures exchange. The need for a futures market arises mainly due to the hedging function that it can perform. Commodity markets, like any other financial instrument, involve risk associated with frequent price volatility. The loss due to price volatility can be attributed to the following reasons: Consumer Preferences: - In the short-term, their influence on price volatility is small since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their inventory in advance. Changes in supply: - They are abrupt and unpredictable bringing about wild fluctuations in prices. This can especially noticed in agricultural commodities where the weather plays a major role in affecting the fortunes of people involved in this industry. The futures market has evolved to neutralize such risks through a mechanism; namely hedging.
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The objectives of Commodity futures

Hedging with the objective of transferring risk related to the possession of physical assets through any adverse moments in price. Liquidity and Price discovery to ensure base minimum volume in trading of a commodity through market information and demand and supply factors that facilitates a regular price discovery mechanism.

Price stabilization along with balancing demand and supply position. Futures trading leads to predictability in assessing the domestic prices, which maintains stability, thus safeguarding against any short term adverse price movements. Liquidity in Contracts of the commodities traded also ensures in maintaining the equilibrium between demand and supply.

Flexibility, certainty and transparency in purchasing commodities facilitate bank financing. Predictability in prices of commodity would lead to stability, which in turn would eliminate the risks associated with running the business of trading commodities. This would make funding easier and less stringent for banks to commodity market players.

The major participants in commodity markets include

1. Commodity Producers/Consumers These participants are long (producers) and short (consumers) positions in the relevant commodity. The inherent risk-exposure drives the use of commodity derivatives by producers and users. The application of commodity derivatives is frequently driven by the pattern of cash flows. Producers must generally make significant capital investments (sometime significant in scale) to undertake the production of the commodity. This investment must
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generally be made in advance of production and sale of the commodity. This means that the producer is exposed to the price fluctuations in the commodity. If prices decline sharply, then revenues may be insufficient to cover the cost of servicing the capital investment .This means that there is a natural tendency for producers to hedge at levels that ensure adequate returns without seeking to optimize the potential returns from higher returns. This may also be necessitated by the need to secure financing for the project. Consumer hedging behavior is more complex. Consumer desire to undertake hedging is influenced by availability of substitute products and the ability to pass on higher input costs in its own product market. In many commodities, producer and consumer deal directly with each other. The form of arrangement may include negotiated bilateral long term supply or purchase contracts between the producers and consumers. The contracts may include fixed price arrangements to reduce the price risk for both parties. These arrangements create a number of difficulties. These include lack of transparency, low liquidity and exposure to counterparty credit risk. The bilateral structure also creates potential adverse performance incentives. This reflects the fact that the contracts combine supply/purchase obligations and price risk elements in a single contract.

2. Commodity Processors These participants have limited outright price exposure. This reflects the fact the processors have a spread exposure to the price differential between the cost of the input and the cost of the output. For example, oil refiners are exposed to the differential between the price of the crude oil and the price of the refined oil products (diesel, gasoline, heating oil, aviation fuel, etc.). The nature of the exposure drives the types of hedging activity and the instruments used.

3. Commodity Traders Commodity markets have complex trading arrangements. This may include the involvement of trading companies (such as the Japanese trading companies and specialized commodity traders). Where involved, the traders act as an agent or principal
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to secure the sale/purchase of the commodity. Traders increasingly seek to add value to pure trading relationship by providing derivative/risk management expertise. Traders also occasionally provide financing and other services. Commodity traders have complex hedging requirements, depending on the nature of their activities. A trader as a pure agent will generally have no price exposure. Where a trader acts as a principal, it will generally have outright commodity price risk that requires hedging. Where traders provide ancillary services such as commodity derivatives as the principal, the market risk assumed will need to be hedged or managed.

4. Financial Institution/Dealers Dealer participation in commodity markets is primarily as a provider of finance or provider of risk management products. The dealers role is similar to that in the derivative market in other asset classes. The dealers provide credit enhancement, speed, immediacy of execution and structural flexibility. Dealers frequently bundle risk management products with other financial services such as provision of finance.

5. Investors This covers financial investors seeking to invest in commodities as a distinct and a separate asset class of financial investment. The gradual recognition of commodities as a specific class of investment assets is an important factor that has influenced the structure of commodity derivatives markets.

Difference between Commodity and Financial Derivatives

The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. However, there are some features which are very peculiar to commodity derivative markets. In the case of financial derivatives, most of these contracts are cash settled. Since financial assets are not bulky, they do not need special facility for storage even in case of physical settlement. On the other hand, due to the bulky nature of the underlying assets, physical settlement
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in commodity derivatives creates the need for warehousing. Similarly, the concept of varying quality of asset does not really exist as far as financial underlings are concerned. However, in the case of commodities, the quality of the asset underlying a contract can vary largely. This becomes an important issue to be managed. 1 .Physical Settlement Physical settlement involves the physical delivery of the underlying commodity, typically at an accredited warehouse. The seller intending to make delivery would have to take the commodities to the designated warehouse and the buyer intending to take delivery would have to go to the designated warehouse and pick up the commodity. This may sound simple, but the physical settlement of commodities is a complex process. The issues faced in physical settlement are enormous. There are limits on storage facilities in different states. There are restrictions on interest rate movement of commodities. Besides state level octroi and duties have an impact on the cost of movement of goods across locations. The process of taking physical delivery in commodities is quite different from the process of taking physical delivery in financial assets.

1. a. Delivery notice period Unlike in the case of equity futures, typically a seller of commodity futures has the option to give notice of delivery. This option is given during a period identified as `delivery notice period'. 1. b. Assignment Whenever delivery notices are given by the seller, the clearing house of the Exchange identifies the buyer to whom this notice may be assigned. Exchanges follow different practices for the assignment process.

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1. c. Delivery The procedure for buyer and seller regarding the physical settlement for different types of contracts is clearly specified by the Exchange. The period available for the buyer to take physical delivery is stipulated by the Exchange. Buyer or his authorized representative in the presence of seller or his representative takes the physical stocks against the delivery order. Proof of physical delivery having been affected is forwarded by the seller to the clearing house and the invoice amount is credited to the seller's account. The clearing house decides on the delivery order rate at which delivery will be settled. Delivery rate depends on the spot rate of the underlying adjusted for discount/ premium for quality and freight costs. The discount/ premium for quality and freight costs are published by the clearing house before introduction of the contract. The most active spot market is normally taken as the benchmark for deciding spot prices. 2. Warehousing One of the main differences between financial and commodity derivative is the need for warehousing. In case of most exchange-traded financial derivatives, all the positions are cash settled. Cash settlement involves paying up the difference in prices between the time the contract was entered into and the time the contract was closed. For instance, if a trader buys futures on a stock at Rs.100 and on the day of expiration, the futures on that stock close at Rs.120, he does not really have to buy the underlying stock. All he does is take the difference of Rs.20 in cash. Similarly, the person who sold this futures contract at Rs.100 does not have to deliver the underlying stock. All he has to do is pay up the loss of Rs.20 in cash. In case of commodity derivatives however, there is a possibility of physical settlement. It means that if the seller chooses to hand over the commodity instead of the difference in cash, the buyer must take physical delivery of the underlying asset. This requires the Exchange to make an arrangement with warehouses to handle the settlements. The
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efficacy of the commodities settlements depends on the warehousing system available. Such warehouses have to perform the following functions: Earmark separate storage areas as specified by the Exchange for storing commodities; Ensure proper grading of commodities before they are stored; Store commodities according to their grade specifications and validity period; and Ensure that necessary steps and precautions are taken to ensure that the quantity and grade of commodity, as certified in the warehouse receipt, are maintained during the storage period. This receipt can also be used as collateral for financing. In India, NCDEX has accredited over 775 delivery centers which meet the requirements for the physical holding of goods that are to be delivered on the platform. As future trading is delivery based, it is necessary to create the logistics support for the same. 3. Quality of Underlying Assets A derivatives contract is written on a given underlying. Variance in quality is not an issue in case of financial derivatives as the physical attribute is missing. When the underlying asset is a commodity, the quality of the underlying asset is of prime importance. There may be quite some variation in the quality of what is available in the marketplace. When the asset is specified, it is therefore important that the Exchange stipulate the grade or grades of the commodity that are acceptable. Commodity derivatives demand good standards and quality assurance/ certification procedures. A good grading system allows commodities to be traded by specification. Trading in commodity derivatives also requires quality assurance and certifications from specialized agencies. In India, for example, the Bureau of Indian Standards (BIS) under the Department of Consumer Affairs specifies standards for processed agricultural commodities. AGMARK, another certifying body under the Department of Agriculture and Cooperation, specifies standards for basic agricultural commodities.
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Benefits of Commodity Futures Markets

The primary objectives of any futures exchange are authentic price discovery and an efficient price risk management. The beneficiaries include those who trade in the commodities being offered in the exchange as well as those who have nothing to do with futures trading. It is because of price discovery and risk management through the existence of futures exchanges that a lot of businesses and services are able to function smoothly. 1. Price Discovery Based on inputs regarding specific market information, the demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, Government policies, market dynamics, hopes and fears, buyers and sellers conduct trading at futures exchanges. This transforms in to continuous price discovery mechanism. The execution of trade between buyers and sellers leads to assessment of fair value of a particular commodity that is immediately disseminated on the trading terminal.

2. Price Risk Management Hedging is the most common method of price risk management. It is strategy of offering price risk that is inherent in spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price change. This could dent the profitability of their business. Hedging benefits who are involved in trading of commodities like farmers, processors, merchandisers, manufacturers, exporters, importers etc.

3. Import- Export competitiveness The exporters can hedge their price risk and improve their competitiveness by making use of futures market. A majority of traders which are involved in physical trade internationally intend to buy forwards. The purchases made from the physical
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market might expose them to the risk of price risk resulting to losses. The existence of futures market would allow the exporters to hedge their proposed purchase by temporarily substituting for actual purchase till the time is ripe to buy in physical market. In the absence of futures market it will be meticulous, time consuming and costly physical transactions.

4. Predictable Pricing The demand for certain commodities is highly price elastic. The manufacturers have to ensure that the prices should be stable in order to protect their market share with the free entry of imports. Futures contracts will enable predictability in domestic prices. The manufacturers can, as a result, smooth out the influence of changes in their input prices very easily. With no futures market, the manufacturer can be caught between severe short-term price movements of oils and necessity to maintain price stability, which could only be possible through sufficient financial reserves that could otherwise be utilized for making other profitable investments.

5. Benefits for farmers/Agriculturalists Price instability has a direct bearing on farmers in the absence of futures market. There would be no need to have large reserves to cover against unfavorable price fluctuations. This would reduce the risk premiums associated with the marketing or processing margins enabling more returns on produce. Storing more and being more active in the markets. The price information accessible to the farmers determines the extent to which traders/processors increase price to them. Since one of the objectives of futures exchange is to make available these prices as far as possible, it is very likely to benefit the farmers. Also, due to the time lag between planning and production, the market-determined price information disseminated by futures exchanges would be crucial for their production decisions.

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6. Credit accessibility The absence of proper risk management tools would attract the marketing and processing of commodities to high-risk exposure making it risky business activity to fund. Even a small movement in prices can eat up a huge proportion of capital owned by traders, at times making it virtually impossible to payback the loan. There is a high degree of reluctance among banks to fund commodity traders, especially those who do not manage price risks. If in case they do, the interest rate is likely to be high and terms and conditions very stringent. This posses a huge obstacle in the smooth functioning and competition of commodities market. Hedging, which is possible through futures markets, would cut down the discount rate in commodity lending.

7. Improved product quality The existence of warehouses for facilitating delivery with grading facilities along with other related benefits provides a very strong reason to upgrade and enhance the quality of the commodity to grade that is acceptable by the exchange. It ensures uniform standardization of commodity trade, including the terms of quality standard: the quality certificates that are issued by the exchange-certified warehouses have the potential to become the norm for physical trade.

Disadvantages of commodity markets

1. PRINCIPLE IS NOT GUARENTEED Like trading stocks, there is no guarantee of your initial investment. However, in buying stock in a company, your loss is limited to the amount you paid for the stock. In commodity future trading, losses can mount to a greater amount then your initial margin used to open the position and additional capital through margin calls may be necessary if the market goes against your position.

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2. High risk due to leverage Using leverage only requires a small amount of initial capital to initiate a new position and price volatility can lead to big profits or big losses. That is why many people suggest using stop orders to limit potential losses. 3. High price volatility could lead to margin call A margin call is when the market is going your position additional capital is required. At this time, additional margin will be deducted from your account balance. If there are insufficient funds in your account, your broker will notify you of the additional amount that is required .if these additional funds are not promptly deposited into traders account, their positions will be automatically liquidated by the broker.

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Chapter 2. Evolution of commodity markets History of commodity markets globally

Commodities future trading was evolved from need of assured continuous supply of seasonal agricultural crops. The concept of organized trading in commodities evolved in Chicago, in 1848. But one can trace its roots in Japan. In Japan merchants used to store Rice in warehouses for future use. To raise cash warehouse holders sold receipts against the stored rice. These were known as rice tickets. Eventually, these rice tickets become accepted as a kind of commercial currency. Latter on rules came in to being, to standardize the trading in rice tickets. In 19th century Chicago in United States had emerged as a major commercial hub. So that wheat producers from Mid-west attracted here to sell their produce to dealers & distributors. Due to lack of organized storage facilities, absence of uniform weighing & grading mechanisms producers often confined to the mercy of dealers discretion. These situations lead to need of establishing a common meeting place for farmers and dealers to transact in spot grain to deliver wheat and receive cash in return. Gradually sellers & buyers started making commitments to exchange the produce for cash in future and thus contract for futures trading evolved. Whereby the producer would agree to sell his produce to the buyer at a future delivery date at an agreed upon price. In this way producer was aware of what price he would fetch for his produce and dealer would know about his cost involved, in advance. This kind of agreement proved beneficial to both of them. As if dealer is not interested in taking delivery of the produce, he could sell his contract to someone who needs the same. Similarly producer who not intended to deliver his produce to dealer could pass on the same responsibility to someone else. The price of such contract would dependent on the price movements in the wheat market. Latter on by making some modifications these contracts transformed in to an instrument to protect involved parties against adverse factors such as unexpected price movements and unfavorable climatic factors.
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This promoted traders entry in futures market, which had no intentions to buy or sell wheat but would purely speculate on price movements in market to earn profit. Trading of wheat in futures became very profitable which encouraged the entry of other commodities in futures market. This created a platform for establishment of a body to regulate and supervise these contracts. Thats why Chicago Board of Trade (CBOT) was established in 1848. In 1870 and 1880s the New York Coffee, Cotton and Produce Exchanges were born. Agricultural commodities were mostly traded but as long as there are buyers and sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants got together to bring chaotic condition in New York market to a system in terms of storage, pricing, and transfer of agricultural products. In 1933, during the Great Depression, the Commodity Exchange, Inc. was established in New York through the merger of four small exchanges the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide Exchange. The largest commodity exchange in USA is Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and New York Coffee, sugar and cocoa Exchange. Worldwide there are major futures trading exchanges in over twenty countries including Canada, England, India, France, Singapore, Japan, Australia and New Zealand.

History of Commodity Market in India

The history of organized commodity derivatives in India goes back to the nineteenth century when Cotton Trade Association started futures trading in 1875, about a decade after they started in Chicago. Over the time derivatives market developed in several commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920).However many feared that derivatives fuelled unnecessary speculation and were detrimental to the healthy functioning of the market for the underlying
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commodities, resulting in to banning of commodity options trading and cash settlement of commodities futures after independence in 1952. The parliament passed the Forward Contracts (Regulation) Act, 1952, which regulated contracts in Commodities all over the India. The act prohibited options trading in Goods along with cash settlement of forward trades, rendering a crushing blow to the commodity derivatives market. Under the act only those associations/exchanges, which are granted reorganization from the Government, are allowed to organize forward trading in regulated commodities. The act envisages three tire regulations: (i) Exchange which organizes forward trading in commodities can regulate trading on day-to-day basis; (ii) Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government. (iii) The Central Government- Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution- is the ultimate regulatory authority. The commodities future market remained dismantled and remained dormant for about four decades until the new millennium when the Government, in a complete change in a policy, started actively encouraging commodity market. After Liberalization and Globalization in 1990, the Government set up a committee (1993) to examine the role of futures trading. The Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17 commodity groups. The Committee which submitted its report in September 1994 recommended that futures trading be introduced in the following commodities: Basmati Rice Cotton, Kapas, Raw Jute and Jute Goods Groundnut, rapeseed/mustard seed, cottonseed, sesame seed, sunflower seed, safflower seed, copra and soybean and oils and oilcakes Rice bran oil Castor oil and its oilcake
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 Linseed Silver Onions

The committee also recommended that some of the existing commodity exchanges particularly the ones in pepper and castor seed, may be upgraded to the level of international futures markets. It also recommended strengthening Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option trading in goods and registration of brokers with Forward Markets Commission. The Government accepted most of these recommendations and futures trading was permitted in all recommended commodities. Since 2002, the commodities future market in India has experienced an unexpected boom in terms of modern exchanges, number of commodities allowed for derivatives trading as well as the value of futures trading in commodities, which crossed $ 1 trillion mark in 2006. Since 1952 till 2002 commodity datives market was virtually non- existent, except some negligible activities on OTC basis.

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Chapter 3. Indian Commodity Exchanges

There are more than 20 recognized commodity futures exchanges in India under the purview of the Forward Markets Commission (FMC). The country's commodity futures exchanges are divided majorly into two categories: National exchanges The four exchanges operating at the national level (as on 1st January 2010) are: i) ii) iii) iv) National Commodity and Derivatives Exchange of India Ltd. (NCDEX) National Multi Commodity Exchange of India Ltd. (NMCE) Multi Commodity Exchange of India Ltd. (MCX) Indian Commodity Exchange Ltd. (ICEX)

Regional exchanges The leading regional exchange is the National Board of Trade (NBOT) located at Indore. There are more than 15 regional commodity exchanges in India.

Indian exchanges
The following are the list of exchange and commodities in which futures contracts are traded in India are as follows sr.no 1 India Exchanges pepper & Spice Commodity Trade Pepper (both domestic and contracts) 2 Vijay Beopar chamber Ltd., Gur Gur, Mustard seed its international

Association , Kochi(IPSTA)

Muzaffarnagar 3 Rajdhani oil & oilseed exchange

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ltd, Delhi 4 Bhatinda Om & oil exchange ltd ,Bhantada 5 The chamber of commerce ,Hapur 6 The Meerut Agro Commodity Exchange ltd., Meerut 7

oil & oilcake

Gur Gur , potatoes and Mustard seed

Oilseed complex Castrol seed, Ground nut, its oil & cake, cottonseed its oil

The Bombay Commodity Exchange Ltd., Bombay 8 Rajkot seeds, oil & Bullion Merchants Association , Rajkot 9 The Ahmedabad Commodity Exchange, Ahmedabad 10 The East India Jute & Hussian Exchange Ltd., Calcutta 11 The East India cotton Association Ltd., Calcutta 12 The Spices & Oilseeds Exchange Ltd, Sangli 13

&cake, cotton & RBD Palmolein Castrol seed, cottonseed , its oil and oilcake

Hessian & sacking

Cotton

Turmeric Rapeseed/Mustard seed, its oil and cake Soya seed, Soya oil and Soya meals. Rapeseed/Mustard

Kanpur Commodity Exchange Ltd., Kanpur 14 National Board of trade, Indore

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seed its oil and oilcake and RBD Palmolien Copra/Coconut, its oil&

oilcake 15 The First Commodities Exchange of India Ltd., Kochi 16 Central India Commerce Exchange Ltd., Gwalior 17 Sugar Oilseed complex and Rubber , sugar, Aluminum, nickel ,Zinc, Copper, Lead. tin ,pepper, Gram and E-Sugar India Ltd., Mumbai 18 National Multi Commodity Exchange of India Ltd., Ahmedabad Coffee 19 Coffee Futures Exchange India Ltd.,Bangalore 20 Surendranagar Cotton oil & Oilseeds, Surendranagar 21 E-Commodities Ltd.,New Delhi 22 Bullion Merchants Association , Bikaner 23 Multi Commodity Exchange (MCX), Mumbai 24 National Commodity and Derivation Exchange ( NCDEX), Mumbai 25 National Multi Commodity Exchange (NMCE) 26 India Commodity Exchange ( ICEX)
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Gur and Mustard Seed

Sacking

Cotton,.Cotton seed, Kapas

Sugar Mustard seed its oil & oilcake Metals & Agri Commodities Metals & Agri Commodities Metals & Agri Commodities Metals & Agri Commodities Metals & Agri Commodities

National Commodity Exchange There is compulsory online trading It should be demutualised exchange. This exchange is recognized on a permanent basis. All commodities permitted by government for futures trading can be traded here.

Regional commodity exchange

There is no compulsion for online trading

It need not be demutualised exchange

This Exchange is recognized for a fixed period, after which it has to apply for re-registration. Exchange has to apply for each commodity for futures trading. Sensitive commodities like gold and silver, rice and wheat are not permitted for trading here.

Trade Performance of leading Indian Commodity Exchanges for January 2010 Traded Value (Rs Crore) January 2010 5,62,703 87,824 16,990 32,901 4,245 MCX NCDEX NMCE ICEX NBOT

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National Commodities & Derivatives Exchange Limited (NCDEX)

National Commodities & Derivatives Exchange Limited (NCDEX) promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank of Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSC). Punjab National Bank (PNB), Credit Rating Information Service of India Limited (CRISIL), Indian Farmers Fertilizer Cooperative Limited (IFFCO), Canada Bank and Goldman Sachs by subscribing to the equity shares have joined the promoters as a share holder of exchange. NCDEX is the only Commodity Exchange in the country promoted by national level institutions. National Commodity & Derivatives Exchange Limited (NCDEX), a national level online multicommodity exchange, commenced operations on December 15, 2003.It is a national level technology driven on line Commodity Exchange with an independent Board of Directors and professionals not having any vested interest in Commodity Markets. It is committed to provide a world class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. The Exchange has received a permanent recognition from the Ministry of Consumer Affairs, Food and Public Distribution, Government of India as a national level exchange NCDEX is regulated by Forward Markets Commission (FMC). NCDEX is also subjected to the various laws of land like the Companies Act, Stamp Act, Contracts Act, Forward Contracts Regulation Act and various other legislations. The Exchange, in 2005 posted an average daily turnover (one-way volume) of around Rs 4500- 5000 crore a day (over USD 1 billion). The major share of the volumes comes from agricultural commodities and the balance from bullion, metals, energy and other products. Trading is facilitated through over 850 Members located across around 700 centers (having ~20000 trading terminals) across the country. Most of these terminals
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are located in the semi-urban and rural regions of the country. Trading is facilitated through VSATs, leased lines and the Internet. Commodities Traded at NCDEX Bullion:- Gold KG, Silver, Brent Minerals:- Electrolytic Copper Cathode, Aluminum Ingot, Nickel Cathode, Zinc Metal Ingot, Mild steel Ingots Oil and Oil seeds:-Cotton seed, Oil cake, Crude Palm Oil, Groundnut (in shell), Groundnut expeller Oil, Cotton, Mentha oil, RBD Pamolein, RM Seed oil cake, refined soya oil, Rape seeds, Mustard seeds, Caster seed, Yellow soybean, Meal Pluses:- Urad, Yellow peas, Chana, Tur, Masoor, Grain:- Wheat, Indian Pusa Basmati Rice, Indian parboiled Rice (IR- 36/IR64), Indian raw Rice (ParmalPR-106), Barley, Yellow Red maize Spices:-Jeera, Turmeric, Pepper Plantation:-Cashew, Coffee Arabica, Coffee Robusta Fibers and other:- Guar Gum, Guar seeds, Guar, Jute sacking bags, Indian 28 mm cotton, Indian 31mm cotton, Lemon, Grain Bold, Medium Staple,

Mulberry, Green Cottons, , , Potato, Raw JuteMulberry raw Silk, V-797 Kapas, Sugar, Chilli LCA334 Energy:Crude Oil, Furnace oil

Multi Commodity Exchange of India Limited (MCX)

Multi Commodity Exchange of India Limited (MCX) is an independent and de-mutulized exchange with permanent reorganization from Government of India, having Head Quarter in Mumbai. Key share holders of MCX are Financial Technologies (India) Limited, State Bank of India, Union Bank of India, Corporation Bank of India, Bank of
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India and Canada Bank. MCX facilitates online trading, clearing and settlement operations for commodity futures market across the country. MCX started of trade in Nov 2003 and has built strategic alliance with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors Association of India, pulses Importers Association and Shetkari Sanghatana. MCX deals with about 100 commodities.

Commodities Traded at MCX: Bullion:-Gold, Silver, Silver Coins, Minerals:-Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead Oil and Oil seeds:-Castor oil/castor seeds, Crude Palm oil/ RBD Pamolein, Groundnut oil, Mustard/ Rapeseed oil, Soy seeds/Soy meal/Refined Soy Oil, Coconut Oil Cake, Copra, Sunflower oil, Sunflower Oil cake, Tamarind seed oil, Pluses:- Chana, Masur, Tur, Urad, Yellow peas Grains:- Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley, Spices:-Pepper, Red Chili, Jeera, Cardamom, Cinnamon, Clove, Ginger, Plantation:- Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut, Coffee, Fiber and others:- Kapas, Kapas Khalli, Cotton (long staple, medium staple, Short staple), Cotton Cloth, Cotton Yarn, Gaur seed and Guargum, Gur and Sugar, Khandsari, Mentha Oil, Potato, Art Silk Yarn, Chara or Berseem, Raw Jute, Jute Goods, Jute Sacking, Petrochemicals:-High Density Polyethylene (HDPE), Polypropylene (PP), Poly Vinyl Chloride (PVC)

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Energy:-Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour Crude Oil, Natural Gas

National Multi Commodity Exchange of India Limited (NMCEIL)

National Multi Commodity Exchange of India Limited (NMCEIL) is the first demutualised Electronic Multi Commodity Exchange in India. On 25th July 2001 it was granted approval by Government to organize trading in edible oil complex. It is being supported by Central warehousing Corporation Limited, Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. It got reorganization in Oct 2002. NMCEIL Head Quarter is at Ahmadabad.

INTERNATIONAL COMMODITY EXCHANGE

Worlds Major Commodity Exchanges

Futures trading is a result of solution to a problem related to the maintenance of a year round supply of commodities/ products that are seasonal as is the case of agricultural produce. The United States, Japan, United Kingdom, Brazil, Australia, Singapore are homes to leading commodity futures exchanges in the world.

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The New York Mercantile Exchange (NYMEX) The New York Mercantile Exchange is the worlds biggest exchange for trading in physical commodity futures. It is a primary trading forum for energy products and precious metals. The exchange is in existence since last 132 years and performs trades trough two divisions, the NYMEX division, which deals in energy and platinum and the COMEX division, which trades in all the other metals. Commodities traded: - Light sweet crude oil, Natural Gas, Heating Oil, Gasoline, RBOB Gasoline, Electricity Propane, Gold, Silver, Copper, Aluminum, Platinum, Palladium, etc. London Metal Exchange The London Metal Exchange (LME) is the worlds premier non -ferrous market, with highly liquid contracts. The exchange was formed in 1877 as a direct consequence of the industrial revolution witnessed in the 19th century. The primary focus of LME is in providing a market for participants from non-ferrous based metals related industry to safeguard against risk due to movement in base metal prices and also arrive at a price that sets the benchmark globally. The exchange trades 24 hours a day through an inter office telephone market and also through a electronic trading platform. It is famous for its open-outcry trading between ring dealing members that takes place on the market floor. Commodities traded:- Aluminum, Copper, Nickel, Lead, Tin, Zinc, Aluminum Alloy, North American Special Aluminum Alloy (NASAAC), Polypropylene, Linear Low Density Polyethylene, etc. The Chicago Board of Trade The first commodity exchange established in the world was the Chicago Board of Trade (CBOT) during 1848 by group of Chicago merchants who were keen to establish a central market place for trade. Presently, the Chicago Board of Trade is one of the
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leading exchanges in the world for trading futures and options. More than 50 contracts on futures and options are being offered by CBOT currently through open outcry and/or electronically. CBOT initially dealt only in Agricultural commodities like corn, wheat, non storable agricultural commodities and non-agricultural products like gold and silver. Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat, Oats, Ethanol, Rough Rice, Gold, and Silver etc. Tokyo Commodity Exchange (TOCOM) The Tokyo Commodity Exchange (TOCOM) is the second largest commodity futures exchange in the world. It trades in to metals and energy contracts. It has made rapid advancement in commodity trading globally since its inception 20 years back. One of the biggest reasons for that is the initiative TOCOM took towards establishing Asia as the benchmark for price discovery and risk management in commodities like the Middle East Crude Oil. TOCOMs recent tie up with the MCX to explore cooperation and business opportunities is seen as one of the steps towards providing platform for futures price discovery in Asia for Asian players in Crude Oil since the demand-supply situation in U.S. that drives NYMEX is different from demand-supply situation in Asia. In Jan 2003, in a major overhaul of its computerized trading system, TOCOM fortified its clearing system in June by being first commodity exchange in Japan to introduce an inhouse clearing system. TOCOM launched options on gold futures, the first option contract in Japanese market, in May 2004. Commodities traded: Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum, Aluminum, Rubber, etc Chicago Mercantile Exchange The Chicago Mercantile Exchange (CME) is the largest futures exchange in the US and the largest futures clearing house in the world for futures and options trading. Formed in 1898 primarily to trade in Agricultural commodities, the CME introduced the world s first financial futures more than 30 years ago. Today it trades heavily in interest rates
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futures, stock indices and foreign exchange futures. Its products often serves as a financial benchmark and witnesses the largest open interest in futures profile of CME consists of livestock, dairy and forest products and enables small family farms to large Agri-business to manage their price risks. Trading in CME can be done either through pit trading or electronically. Commodities Traded: - Butter milk, Diammonium phosphate, Feeder cattle, frozen pork bellies, Lean Hogs, Live cattle, Non-fat Dry Milk, Urea, Urea Ammonium Nitrate, etc

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Chapter 4 Current Scenario in Indian Commodity Market

As on (September 21st, 2010)

Current Scenario in Indian Commodity Market

Need of Commodity Derivatives for India India is among top 5 producers of most of the Commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% GDP of Indian economy. It employees around 57% of the labor force on total of 163 million hectors of land Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major centre for trading of commodity derivatives.

Trends in volume contribution on the three National Exchanges:-

Pattern on Multi Commodity Exchange (MCX) MCX is currently largest commodity exchange in the country in terms of trade volumes, further it has even become the third largest in bullion and second largest in silver future trading in the world. Coming to trade pattern, though there are about 100 commodities traded on MCX, only 3 or 4 commodities contribute for more than 80 percent of total trade volume. As per recent data the largely traded commodities are Gold, Silver, Energy and base Metals. Incidentally the futures trends of these commodities are mainly driven by international futures prices rather than the changes in domestic demand-supply and hence, the price signals largely reflect international scenario. Among Agricultural commodities major volume contributors include Gur, Urad, Mentha Oil etc.

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Pattern on National Commodity & Derivatives Exchange (NCDEX) NCDEX is the second largest commodity exchange in the country after MCX. However the major volume contributors on NCDEX are agricultural commodities. But, most of them have common inherent problem of small market size, which is making them vulnerable to market manipulations and over speculation. About 60 percent trade on NCDEX comes from guar seed, chana and Urad (narrow commodities as specified by FMC).

Pattern on National Multi Commodity Exchange (NMCE) NMCE is third national level futures exchange that has been largely trading in Agricultural Commodities. Trade on NMCE had considerable proportion of commodities with big market size as jute rubber etc. But, in subsequent period, the pattern has changed and slowly moved towards commodities with small market size or narrow commodities. Analysis of volume contributions on three major national commodity exchanges reveled the following pattern, Major volume contributors: Majority of trade has been concentrated in few commodities that are Non Agricultural Commodities (bullion, metals and energy) Agricultural commodities with small market size (or narrow commodities) like guar, Urad, Mentha etc.

Latest Developments
Agriculture commodity futures staged a remarkable recovery after steady decline over the last two years, recording a trading value of Rs 10.88 lakh crore in 2009, signifying growth of 48 per cent over the previous year. During the year 2009, a new National Commodity Exchange called Indian Commodity Exchange (ICEX) became operational. Besides, a scheme of upgradation of Ahmadabad Commodity Exchange to National Commodity Exchange status has been approved. Development of Electronic Spot
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Exchanges v/s Electronic spot exchanges is an emerging phenomenon in the country these spot exchanges provide real time, online, transparent and vibrant spot platform for commodities. The contracts allow participants from all over the country to buy and sell, thereby enabling producers and users to discover best price. The Government has allowed the National Commodity Exchanges to set up three spot exchanges in the country, namely the National Spot Exchange Ltd. (NSEL), NCDEX Spot Exchange Ltd. (NSPOT) and National Agriculture Produce Marketing Company of India Ltd. (NAPMC). During 2009, there was significant expansion of spot exchanges' trading facilities in India. These spot exchanges have created an avenue for direct market linkage among farmers, processors, exporters and end users with a view to reducing the cost of intermediation and enhancing 29 price realizations by farmers. They will also provide the most efficient spot price inputs to the futures exchanges. The spot exchanges will encompass the entire spectrum of commodities across the country and will bring home the advantages of an electronic spot trading platform to all market participants in the agricultural and nonagricultural segments. On the agricultural side, the exchanges would enable farmers to trade seamlessly on the platform by providing simultaneous access to the exchanges and be able to procure at the best possible price. Therefore, the efficiency levels attained as a result of such seamless spot transactions would result in major benefits for both producers and consumers. In order to overcome current inefficiencies in the commodities spot market and to bring transparency in trading in commodity spot markets, National Commodity and Derivatives Exchange Limited (NCDEX) has set up an electronic spot exchange realtime access to price information and a simplified delivery process, thereby ensuring the best possible price. On the buy side, all users of the commodities in the commodity value chain would have called NCDEX Spot Exchange Limited.

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CHAPTER 5.Trading Commodities Futures Trading System

The trading system on the NCDEX provides a fully automated screen-based trading for futures on commodities on a nationwide basis as well as an online monitoring and surveillance mechanism. It supports an order driven market and provides complete transparency of trading operations. The NCDEX system supports an order driven market, where orders match automatically. Order matching is essentially on the basis of commodity, its price, time and quantity. All quantity fields are in units and price in rupees. The Exchange specifies the unit of trading and the delivery unit for futures contracts on various commodities. The Exchange notifies the regular lot size and tick size for each of the contracts traded from time to time. When any order enters the trading system, it is an active order. It tries to find a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and gets queued in the respective outstanding order book in the system. Time stamping is done for each trade and provides the possibility for a complete audit trail if required.

Entities in the Trading System

There are following entities in the trading system of NCDEX 1. Trading cum Clearing Member (TCM) : Trading cum Clearing Members can carry out the transactions (trading, clearing and settling) on their own account and also on their clients' accounts. The Exchange assigns an ID to each TCM. Each TCM can have more than one user. The number of users allowed for each trading member is notified by the Exchange from time to time. Each user of a TCM must be registered with the Exchange and is assigned an unique user ID. The unique TCM ID functions as a reference for all orders/trades of different users.
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It is the responsibility of the TCM to maintain adequate control over persons having access to the firm's User IDs. 2. Professional Clearing Member (PCM): These members can carry out the settlement and clearing for their clients who have traded through TCMs or traded as TMs. 3. Trading Member (TM): Member who can only trade through their account or on account of their clients and will however clear their trade through PCMs/STCMs. 4. Strategic Trading cum Clearing Member (STCM): This is up gradation from the TCM to STCM. Such member can trade on their own account, also on account of their clients. They can clear and settle these trades and also clear and settle trades of other trading members who are only allowed to trade and are not allowed to settle and clear.

Commodity Futures Trading Cycle

NCDEX trades commodity futures contracts having one-month, two-month, three-month and more (not more than 12 months) expiry cycles. Most of the futures contracts (mainly agro commodities contract) expire on the 20th of the expiry month. Some contracts traded on the Exchange expire on the day other than 20th of the month. New contracts for most of the commodities on NCDEX are introduced on 10th of every month.

Base Price
On introduction of new contracts, the base price is the previous days' closing price of the underlying commodity in the prevailing spot markets. These spot prices are polled across multiple centers and a single spot price is determined by the bootstrapping

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method. The base price of the contracts on all subsequent trading days is the daily settlement price of the futures contracts on the previous trading day.

Price Ranges of Contracts

To control wide swings in prices, an intra-day price limit is fixed for commodity futures contract. The maximum price movement during the day can be +/- x% of the previous day's settlement price for each commodity. If the price hits the first intra-day price limit (at upper side or lower side), there will be a cooling period of 15 minutes. Then price band is revised further and in case the prices reach that revised level, no trade is permitted during the day beyond the revised limit. Take an example of Guar Seed- Daily price fluctuation limit is (+/-) 4% (3% +1%). If the trade hits the prescribed first daily price limit of 3 %, there will be a cooling off period for 15 minutes. Trade will be allowed during this cooling off period within the price band. Thereafter, the price band would be raised by (+/-) 1% and trade will be resumed. If the price hits the revised price band (4%) during the day, trade will only be allowed within the revised price band. No trade / order shall be permitted during the day beyond the limit of (+/-) 4%. In order to prevent erroneous order entry by trading members, operating price ranges on the NCDEX are pre-decided for individual contracts from the base price. Presently, the price ranges for agricultural commodities is (+/-) 4 % from the base price for the day, and upto (+/-) 9 % for non-agricultural commodities. Orders, exceeding the range specified for a day's trade for the respective commodities are not executed

Margins for Trading In Futures Margin is the deposit money that needs to be paid to buy or sell each contract. The margin required for a futures contract is better described as performance bond or good faith money.
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The margin levels are set by the exchanges based on volatility (market conditions) and can be changed at any time. The margin requirements for most futures contracts range from 5% to15% of the value of the contract, with a minimum of 5%, except for Gold where the minimum margin is 4%. In the futures market, there are different types of margins that a trader has to maintain. Initial margin The amount that must be deposited by a customer at the time of entering into a contract is called initial margin. This margin is meant to cover the potential loss in one day. The margin is a mandatory requirement for parties who are entering into the contract. The exchange levies initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other concept as the Exchange may decide periodically. The margin is charged so as to cover one-day loss that can be encountered on the position on 99.95% confidence-interval VaR methodology. Exposure & Mark-to-Market Margin Exposure margin is charged taking into consideration the back testing results of the VaR model. For all outstanding exposure in the market, the Exchange also collects mark-to-market margin which are positions restated at the daily settlement prices (DSP). At the end of each trading day, the margin account is adjusted to reflect the trader's gain or loss. This is known as marking to market the account of each trader. All futures contracts are settled daily reducing the credit exposure to one day's movement. Based on the settlement price, the value of all positions is marked-to-market each day after the official close. i.e. the accounts are either debited or credited based on how well the positions fared in that day's trading session. If the account falls below the required margin level the clearing member needs to replenish the account by giving additional funds or closing positions either partially/ fully. On the other hand, if the position generates a gain, the funds can be withdrawn (those funds above the required initial margin) or can be used to fund additional trades.
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 Additional margin In case of sudden higher than expected volatility, the Exchange calls for an additional margin, this is a preemptive move to prevent potential default. This is imposed when the Exchange/ regulator has view that that the markets have become too volatile and may result in some adverse situation to the integrity of the market/ Exchange. Pre-expiry margin This margin is charged as additional margin for most commodities expiring during the current/near month contract. It is charged on a cumulative basis from typically 3 to 5 days prior to the expiry date (including the expiry date). This is done to ensure that only interested parties remain in the market and speculators roll over their positions to subsequent months and ensure better convergence of the futures and spot market prices. Delivery Margin This margin is charged only in the case of positions materializing into delivery. Members are informed about the delivery margin payable. Margins for delivery are to be paid the day following expiry of contract. Special Margin This margin is levied when there is more than 20% uni-directional movement in the price from a pre-determined base and is typically related to the underlying spot price. The base could be the closing price on the day of launch of the contract or the 90 days prior settlement price. This is mentioned in the respective contract specification. Some contracts also have an as-deemed-fit clause for levying of Special margins. It can also be levied by market regulator if market exhibits excess volatility. If required by the regulator, it has to be settled by cash. This is collected as extra margin over and above normal margin requirement.

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 Margin for Calendar Spread positions Calendar spread is defined as the purchase of one delivery month of a given futures contract and simultaneous sale of another delivery month of the same commodity by a client/ member. At NCDEX, for calendar spread positions, margins are imposed as one half of the initial margin (inclusive of the exposure margin). Such benefit will be given only of there is positive correlation in the prices of the months under consideration and the far month contracts are sufficiently liquid. No benefit of calendar spread is given in the case of additional and special margins. However, calendar spread positions in the far month contract are considered as naked position three days before expiry of near month contract. Gradual reduction of the spread position is done at the rate of 33.3% per day from 3 days prior to expiry. Just as a trader is required to maintain a margin account with a broker, a clearing house member is required to maintain collaterals/deposits with the clearing house against which the positions are allowed to be taken.

Charges
Members are liable to pay transaction charges for the trade done through the Exchange during the previous month. The important provisions are listed below. The billing for the all trades done during the previous month will be raised in the succeeding month. 1. Transaction charges The transaction charges are payable at the rate of Rs. 4 per Rs.100,000 worth of trade done. This rate is charged for average daily turnover of Rs. 20 crores. Reduced rate is charged for increase in daily turnover. This rate is subject to change from time to time. The average daily turnover is calculated by taking the total value traded by the member in a month and dividing it by number of trading days in the month including Saturdays 2. Due date
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The transaction charges are payable on the 10th day of every month in respect of the trade done in the previous month. 3. Collection Members keep the Exchange Dues Account opened with the respective Clearing Banks for meeting the commitment on account of transaction charges. 4. Adjustment against advances transaction charges In terms of the regulations, members are required to remit Rs.50,000 as advance transaction charges on registration. The transaction charges due first will be adjusted against the advance transaction charges already paid as advance and members need to pay transaction charges only after exhausting the balance lying in advance transaction. 5. Penalty for delayed payments If the transaction charges are not paid on or before the due date, a penal interest is levied as specified by the Exchange. Finally, the futures market is a zero sum game i.e. the total number of long in any contract always equals the total number of short in any contract. The total number of outstanding contracts (long/ short) at any point in time is called the 'Open interest'. This Open interest figure is a good indicator of the liquidity in every contract. Based on studies carried out in international Exchanges, it is found that open interest is maximum in near month expiry contracts.

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Chapter 6 Clearing and Settlement Introduction

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. National Commodity Clearing Limited (NCCL) undertakes clearing of trades executed on the NCDEX.

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. Typically it is responsible for the following: 1. Effecting timely settlement. 2. Trade registration and follow up. 3. Control of the open interest. 4. Financial clearing of the payment flow. 5. Physical settlement (by delivery) or financial settlement (by price difference) of contracts. 6. Administration of financial guarantees demanded by the participants.

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The clearing house has a number of members, who are responsible for the clearing and settlement of commodities traded on the Exchange. The margin accounts for the clearing house members are adjusted for gains and losses at the end of each day (in the same way as the individual traders keep margin accounts with the broker). Everyday the account balance for each contract must be maintained at an amount equal to the original margin times the number of contracts outstanding. Thus depending on a day's transactions and price movement, the members either need to add funds or can withdraw funds from their margin accounts at the end of the day. The brokers who are not the clearing members need to maintain a margin account with the clearing house member through whom they trade. Clearing Mechanism Only clearing members including professional clearing members (PCMs) are entitled to clear and settle contracts through the clearing house. The clearing mechanism essentially involves working out open positions and obligations of clearing members. This position is considered for exposure and daily margin purposes. The open positions of PCMs are arrived at by aggregating the open positions of all the Trading Members clearing through him, in contracts in which they have traded. A Trading-cum-Clearing Member's (TCM) open position is arrived at by the summation of his clients' open positions, in the contracts in which they have traded. Client positions are netted at the level of individual client and grossed across all clients, at the member level without any set-offs between clients. Proprietary positions are netted at member level without any set-offs between client and proprietary positions. After the trading hours on the expiry date, based on the available information, the matching for deliveries takes place firstly, on the basis of locations and then randomly, keeping in view the factors such as available capacity of the vault/ warehouse, commodities already deposited and dematerialized and offered for delivery etc. Matching done by this process is binding on the clearing members. After completion of
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the matching process, clearing members are informed of the deliverable/ receivable positions and the unmatched positions. Unmatched positions have to be settled in cash. The cash settlement is only for the incremental gain/ loss as determined on the basis of final settlement price. Clearing Banks Each exchange has designated clearing banks through whom funds to be paid and/ or to be received must be settled. Every clearing member is required to maintain and operate a clearing account with any one of the designated clearing bank branches. The clearing account is to be used exclusively for clearing operations i.e., for settling funds and other obligations to each exchange including payments of margins and penal charges. A clearing member having funds obligation to pay is required to have clear balance in his clearing account on or before the stipulated pay-in day and the stipulated time. Clearing members must authorize their clearing bank to access their clearing account for debiting and crediting their accounts as per the instructions of each exchange, reporting of balances and other operations as may be required by each exchange from time to time. The clearing bank will debit/ credit the clearing account of clearing members as per instructions received from the exchange.

Depository participants
Every clearing member is required to maintain and operate two CM pool account each at NSDL and CDSL through any one of the empanelled depository participants. The CM pool account is to be used exclusively for clearing operations i.e., for effecting and receiving deliveries from NCDEX.

Settlement
Futures contracts have two types of settlements, the Mark-to-Market (MTM) 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. On, commodity exchange
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MTM settlement and final MTM settlement in respect of admitted deals in futures contracts are cash settled by debiting/ crediting the clearing accounts of CMs with the respective clearing bank. 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: Daily settlement price is the consensus closing price as arrived after closing session of the relevant futures contract for the trading day. However, 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. 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. Settlement Mechanism Settlement of commodity futures contracts is a little different from settlement of financial futures which are mostly cash settled. The possibility of physical settlement makes the process a little more complicated. Daily mark to market settlement Daily mark to market settlement is done till the date of the contract expiry. This is done to take care of daily price fluctuations for all trades. All the open positions of the members are marked to market at the end of the day and the profit/ loss is determined as below: On the day of entering into the contract, it is the difference between the entry value and daily settlement price for that day.
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 On any intervening days, when the member holds an open position, it is the difference between the daily settlement price for that day and the previous day's settlement price. On the expiry date if the member has an open position, it is the difference between the final settlement price and the previous day's settlement price. Final settlement On the date of expiry, the final settlement price is the closing price of the underlying commodity in the spot market on the date of expiry (last trading day) of the futures contract. The spot prices are collected from polling participants from base centre as well as other locations. The poll prices are bootstrapped and the mid-point of the two boot strapped prices is the final settlement price. The responsibility of settlement 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' trades which he has confirmed to the Exchange. Members are required to submit delivery information through delivery request window on the trader workstations provided by commodity exchange or all open positions for a commodity for all constituents individually. This information can be provided within the time notified by Exchange separately for each contracts. Commodity exchange on receipt of such information matches the information and arrives at a delivery position for a member for a commodity. A detailed report containing all matched and unmatched requests is provided to members through the extranet. Pursuant to regulations relating to submission of delivery information, failure to submit delivery information for open positions attracts penal charges as stipulated by commodity exchange from time to time. Commodity exchange also adds all such open positions for a member, for which no delivery information is submitted with final settlement obligations of the member concerned and settled in cash as the case may be.
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Non-fulfillment of either the whole or part of the settlement obligations is treated as a violation of the rules, bye-laws and regulations of commodity exchange and attracts penal charges as stipulated by commodity exchange from time to time. In addition, commodity exchange can withdraw any or all of the membership rights of clearing member including the withdrawal of trading facilities of all trading members clearing through such clearing members, without any notice. Further, the outstanding positions of such clearing member and/ or trading members and/ or constituents, clearing and settling through such clearing member, may be closed out forthwith or any time thereafter by the Exchange to the extent possible, by placing at the Exchange, counter orders in respect of the outstanding position of clearing member without any notice to the clearing member and/ or trading member and/ or constituent. Commodity exchange can also initiate such other risk containment measures as it deems appropriate with respect to the open positions of the clearing members. It can also take additional measures like, imposing penalties, collecting appropriate deposits, invoking bank guarantees or fixed deposit receipts, realizing money by disposing off the securities and exercising such other risk containment measures as it deems fit or take further disciplinary action. Settlement Methods Settlement of futures contracts on the NCDEX can be done in two ways - by physical delivery of the underlying asset and by closing out open positions. All contracts materializing into deliveries are settled in a period as notified by the Exchange separately for each contract. The exact settlement day for each commodity is specified by the Exchange through circulars known as 'Settlement Calendar'. a) Physical delivery of the underlying asset If the buyer/seller is interested in physical delivery of the underlying asset, he must complete the delivery marking for all the contracts within the time notified by the Exchange.
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b) Closing out by offsetting positions Most of the contracts are settled by closing out open positions. In closing out, the opposite transaction is effected to close out the original futures position. A buy contract is closed out by a sale and a sale contract is closed out by a buy. For example, an investor who took a long position in two gold futures contracts on the January 30 at Rs.16090 per 10 grams, can close his position by selling two gold futures contracts on February 13, at Rs.15928. In this case, over the period of holding the position, he has suffered a loss of Rs.162 per 10 grams. This loss would have been debited from his account over the holding period by way of MTM at the end of each day, and finally at the price that he closes his position, that is Rs.15928, in this case. c) Cash settlement In the case of intention matching contracts, if the trader does not want to take/ give physical delivery, all open positions held till the last day of trading are settled in cash at the final settlement price. Similarly any unmatched, rejected or excess intention is also settled in cash. When a contract is settled in cash, it is marked to the market at the end of the last trading day and all positions are declared closed. For example, Paul took a short position in five Silver 5kg futures contracts of July expiry on June 15 at Rs.21500 per kg. At the end of 20th July, the last trading day of the contract, he continued to hold the open position, without announcing delivery intention. The closing spot price of silver on that day was Rs.20500 per kg. This was the settlement price for his contract. Though Paul was holding a short position on silver, he did not have to actually deliver the underlying silver. The transaction was settled in cash and he earned profit of Rs. 5000 per trading lot of silver. Unmatched positions of contracts, for which the intentions for delivery were submitted, are also settled in cash. In case of commodity exchange, all contracts being settled in cash are settled on the day after the contract expiry date. If the cash settlement day
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happens to be a Saturday, a Sunday or a holiday at the exchange, clearing banks or any of the service providers, Pay-in and Pay-out would be effected on the next working day.

Entities involved in Physical Settlement Physical settlement of commodities involves the following three entities - an accredited warehouse, registrar & transfer agent and an assayer. We will briefly look at the functions of each. Accredited warehouse Commodity exchange specifies accredited warehouses through which delivery of a specific commodity can be affected and which will facilitate for storage of commodities. For the services provided by them, warehouses charge a fee that constitutes storage and other charges such as insurance, assaying and handling charges or any other incidental charges. Following are the functions of an accredited warehouse: 1. Earmark separate storage area as specified by the Exchange for the purpose of storing commodities to be delivered against deals made on the Exchange. The warehouses are required to meet the specifications prescribed by the Exchange for storage of commodities. 2. Ensure and co-ordinate the grading of the commodities received at the warehouse before they are stored. 3. Store commodities in line with their grade specifications and validity period and facilitate maintenance of identity. On expiry of such validity period of the grade for such commodities, the warehouse has to segregate such commodities and store them in a

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separate area so that the same are not mixed with commodities which are within the validity period as per the grade certificate issued by the approved assayers. Approved Registrar and Transfer agents (R&T agents) The Exchange specifies approved R&T agents through whom commodities can be dematerialized and who facilitate for dematerialization/re-materialization of commodities in the manner prescribed by the Exchange from time to time. The R&T agent performs the following functions: 1. Establishes connectivity with approved warehouses and supports them with physical infrastructure. 2. Verifies the information regarding the commodities accepted by the accredited warehouse and assigns the identification number (ISIN) allotted by the depository in line with the grade, validity period, warehouse location and expiry. 3. Further processes the information, and ensures the credit of commodity holding to the demat account of the constituent. 4. Ensures that the credit of commodities goes only to the demat account of the constituents held with the Exchange empanelled DPs. 5. On receiving a request for re-materialization (physical delivery) through the depository, arranges for issuance of authorization to the relevant warehouse for the delivery of commodities. R&T agents also maintain proper records of beneficiary position of constituents holding dematerialized commodities in warehouses and in the depository for a period and also as on a particular date. They are required to furnish the same to the Exchange as and when demanded by the Exchange. R&T agents also do the job of co-ordinating with DPs and warehouses for billing of charges for services rendered on periodic intervals. They also reconcile dematerialized commodities in the depository and physical
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commodities at the warehouses on periodic basis and co-ordinate with all parties concerned for the same. Approved assayer The Exchange specifies approved assayers through whom grading of commodities (received at approved warehouses for delivery against deals made on the Exchange) can be availed by the constituents of clearing members.

Assayers perform the following functions: 1. Make available grading facilities to the constituents in respect of the specific commodities traded on the Exchange at specified warehouse. The assayer ensures that the grading to be done (in a certificate format prescribed by the Exchange) in respect of specific commodity is as per the norms specified by the Exchange in the respective contract specifications. 2. Grading certificate so issued by the assayer specifies the grade as well as the validity period up to which the commodities would retain the original grade, and the time up to which the commodities are fit for trading subject to environment changes at the warehouses.

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Chapter 7 Risk Management Introduction

Commodity exchange has developed a comprehensive risk containment mechanism for its commodity futures market. The salient features of risk containment mechanism are 1. The financial soundness of the members is the key to risk management. Therefore, the requirements for membership in terms of capital adequacy (net worth, security deposits) are quite stringent. 2. Commodity exchange charges an upfront initial margin for all the open positions of a member. It specifies the initial margin requirements for each futures contract on a daily basis. It also follows value-at-risk (VaR) based margining through SPAN. The PCMs and TCMs in turn collect the initial margin from the TCMs and their clients respectively. 3. The open positions of the members are marked to market based on contract settlement price for each contract. The difference is settled in cash on a T+1 basis. 4. A member is alerted of his position to enable him to adjust his exposure or bring in additional capital. Position violations result in withdrawal of trading facility and reinstated only after violation(s) rectified. 5. To safeguard the interest of those trading on the Exchange platform, an Investor Protection Fund is also maintained. The most critical component of risk containment mechanism for futures market on the commodity exchange is the margining system and on-line position monitoring. The actual position monitoring and margining is carried out on-line through the SPAN (Standard Portfolio Analysis of Risk) system.

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Margining At commodity exchange In pursuance of the bye-laws, rules and regulations, the Exchange has defined norms and procedures for margins and limits applicable to members and their clients. The margining system for the commodity futures trading on the NCDEX is explained below. SPAN SPAN (Standard Portfolio Analysis of Risk) is a registered trademark of the Chicago Mercantile Exchange, used by NCDEX under license obtained from CME. The objective of SPAN is to identify overall risk in a portfolio of all futures contracts for each member. Its over-riding objective is to determine the largest loss that a portfolio might reasonably be expected to suffer from one day to the next day based on 99.95% confidence interval VaR methodology Initial Margin This is the amount of money deposited by both buyers and sellers of futures contracts to ensure performance of trades executed. Initial margin is payable on all open positions of trading cum clearing members, up to client level, at any point of time, and is payable upfront by the members in accordance with the margin computation mechanism and/ or system as may be adopted by the Exchange from time to time. Initial margin includes SPAN margins and such other additional margins that may be specified by the Exchange from time to time.

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Effect of violation
Whenever any of the margin or position limits are violated by members, the Exchange can withdraw any or all of the membership rights of members including the withdrawal of trading facilities of all members and/ or clearing facility of custodial participants clearing through such trading cum members, without any notice. In addition, the outstanding positions of such member and/ or constituents clearing and settling through such member can be closed out at any time at the discretion of the Exchange. This can be done without any notice to the member and/ or constituent. The Exchange can initiate further risk containment measures with respect to the open positions of the member and/ or constituent. These could include imposing penalties, collecting appropriate deposits, invoking bank guarantees/ fixed deposit receipts, realizing money by disposing off the securities, and exercising such other risk containment measures it considers necessary.

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CHAPTER 10: Regulatory Framework

Three tiers of regulations of forward/futures trading system in India Governme nt of India Commodity Exchanges

Forward Markets Commission (FMC)

The need for regulation

The need for regulation arises on account of the fact that the benefits of futures markets accrue in competitive conditions. Proper regulation is needed to create competitive conditions. In the absence of regulation, unscrupulous participants could use these leveraged contracts for manipulating prices. This could also have undesirable influence on the spot prices, thereby affecting interests of society at large. Regulation is also needed to ensure that the market has appropriate risk management system. In the absence of such a system, a major default could create a chain reaction. The resultant financial crisis in a futures market could create systematic risk. Regulation is also needed to ensure fairness and transparency in trading, clearing, settlement and management of the Exchange so as to protect and promote the interest of various stakeholders, particularly non-member users of the market.

Rules Governing Commodity Derivatives Exchanges /Participants

The trading of commodity derivatives on the NCDEX is regulated by Forward Markets Commission (FMC). In terms of Section 15 of the Forward Contracts (Regulation) Act,
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1952 (the Act), forward contracts in commodities notified under section 15 of the Act can be entered into only by or through a member of a recognized association, i.e, commodity exchange as popularly known. The recognized associations/commodity exchanges are granted recognition under the Act by the central government (Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution). All the Exchanges, which permit forward contracts for trading, are required to obtain certificate of registration from the Central Government. The other legislations which have relevance to commodity trading are the Companies Act, Stamp Act, Contracts Act, Essential Commodities Act 1955, Prevention of Food Adulteration Act, 1954 and various other legislations, which impinge on their working. Forward Markets Commission provides regulatory oversight in order to ensure financial integrity (i.e. to prevent systematic risk of default by one major operator or group of operators), market integrity (i.e. to ensure that futures prices are truly aligned with the prospective demand and supply conditions) and to protect and promote interest of customers/ non-members. Some of the regulatory measures by Forward Markets Commission include: 1. Limit on net open position as on the close of the trading hours. Sometimes limit is also imposed on intra-day net open position. The limits are imposed member- wise and client wise. 2. Circuit-filters or limit on price fluctuations to allow cooling of market in the event of abrupt upswing or downswing in prices. 3. Special margin deposit to be collected on outstanding purchases or sales when price moves up or down sharply above or below the previous day closing price. By making further purchases/sales relatively costly, the price rise or fall is sobered down. This measure is imposed by the Exchange (FMC may also issue directive).

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4. Circuit breakers or minimum/maximum prices: These are prescribed to prevent futures prices from falling below as rising above not warranted by prospective supply and demand factors. This measure is also imposed on the request of the exchanges (FMC may also issue directive). 5. Stopping trading in certain derivatives of the contract, closing the market for a specified period and even closing out the contract. These extreme measures are taken only in emergency situations. Besides these regulatory measures, a client's position cannot be appropriated by the member of the Exchange. No member of an Exchange can enter into a forward contract on his own account with a non-member unless such member has secured the consent of the non-member in writing to the effect that the sale or purchase is on his own account. The FMC is persuading increasing number of exchanges to switch over to electronic trading, clearing and settlement, which is more safe and customer-friendly. The FMC has also prescribed simultaneous reporting system for the exchanges following open out-cry system. These steps facilitate audit trail and make it difficult for the members to indulge in malpractices like trading ahead of clients, etc. The FMC has also mandated all the exchanges following open outcry system to display at a prominent place in exchange premises, the name, address, telephone number of the officer of the commission who can be contacted for any grievance. The website of the commission also has a provision for the customers to make complaint and send comments and suggestions to the FMC. Officers of the FMC meet the members and clients on a random basis, visit exchanges, to ascertain the situation on the ground to bring in development in any area of operation of the market.

Rules Governing Trading On Exchange

The Forward Markets Commission (FMC) is the Regulatory Authority for futures market under the Forward Contracts (Regulation) Act 1952. In addition to the provisions of the
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Forward Contracts (Regulation) Act 1952 and rules framed there under, the exchanges and participants of futures market are governed by the Rules and Bye laws of the respective exchanges, which are published in the Official Gazette and Regulations if any (all approved by the FMC).

Penalties for defaults

In the event of a default by the seller in delivery of commodities, the Exchange closes out the derivatives contracts and imposes penalties on the defaulting seller. In case of default by a buying member penalty as prescribed by the Exchange is levied on the member till such time that the buyer does not bring in the funds. However it may be noted that buyers default is not permitted by Exchange and amount will be recovered as pay-in shortages together with penalty. It can also use the margins deposited by such clearing member to recover the loss.

Rules Governing Investor Grievances

The Exchange has put in place a dispute resolution mechanism by way of arbitration for resolution of disputes between members or between a member and client arising out of transactions on the Exchange. The Exchange may provide for different seats of arbitration for different regions of the country termed as Regional Arbitration Centers (RACs). The seat of arbitration shall be Mumbai where no RAC has been notified.

JURISDICTION
In matters where the Exchange is a party to the dispute, the civil courts at Mumbai shall have exclusive jurisdiction and in all other matters, proper courts within the area covered under the respective RAC shall have jurisdiction in respect of the arbitration proceedings falling/ conducted in that RAC.

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PERIOD FOR REFERENCE OF CLAIMS/DISPUTES

All claims shall have to be referred within six months from the date on which such claim, dispute or difference arose. The time taken by the Exchange for administratively resolving the dispute shall be excluded for the purpose of determining the period of six months.

REFERENCE OF CLAIM
If the value of claim, difference or dispute is more than Rs.50 Lakh on the date of application, then such claim, difference or dispute are to be referred to a panel of three Arbitrators. If the value of the claim, difference or dispute is up to Rs.50 Lakh, then they are to be referred to a sole Arbitrator. Where any claim, difference or dispute arises between agent of the member and client of the agent of the member, in such claim, difference or dispute, the member, to whom such agent is affiliated, is impeded as a party. In case the warehouse refuses or fails to communicate to the constituent the transfer of commodities, the date of dispute is deemed to have arisen on 1. The date of receipt of communication of warehouse refusing to transfer the commodities in favour of the constituent; or 2. The date of expiry of 5 days from the date of lodgment of dematerialized request by the constituent for transfer with the seller; whichever is later.

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Case study

Commodity: Gold

Introduction
Gold is a unique asset based on few basic characteristics. First, it is primarily a monetary asset, and partly a commodity. As much as two thirds of golds total accumulated holdings relate to store of value considerations. Holdings in this category include the central bank reserves, private investments, and high-cartages jewellery bought primarily in developing countries as a vehicle for savings. Thus, gold is primarily a monetary asset. Less than one third of golds total accumulated holdings can be considered a commodity, the jewellery bought in Western markets for adornment, and gold used in industry. The distinction between gold and commodities is important. Gold has maintained its value in after-inflation terms over the long run, while commodities have declined. Some analysts like to think of gold as a currency without a country. It is an internationally recognized asset that is not dependent upon any governments promise to pay. This is an important feature when comparing gold to conventional diversifiers like T-bills or bonds, which unlike gold, do have counter-party risk.

What makes gold special?

1. Timeless and Very Timely Investment 2. Gold is an effective diversifier 3. Gold is the ideal gift 4. Gold is highly liquid

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5. Gold responds when you need it most

Market Characteristics
1. The gold market is highly liquid. Gold held by central banks, other major institutions, and retail jewellery is reinvested in market. 2. Due to large stock of gold, against its demand, it is argued that the core driver of the real price of gold is stock equilibrium rather than flow equilibrium. 3. Effective portfolio diversifier: This phrase summarizes the usefulness of gold in terms of Modern Portfolio Theory, a strategy used by many investment managers today. Using this approach, gold can be used as a portfolio diversifier to improve investment performance. 4. Effective diversification during stress periods: Traditional method of portfo lio diversification often fails when they are most needed, that is during financial stress (instability). On these occasions, the correlations and volatilities of return for most asset class (including traditional diversifiers, such as bond and alternative assets) increase, thus reducing the intended cushioning effect of the diversified portfolio.

Demand and supply

1. China produced 276 metric tons of gold last year, equal to about 9.7 million ounces, said London precious metals consultancy GFMS Ltd. That's up 12% from the year-ago and represented just over one-tenth of the world's supply. 2. The ranking pushes South Africa into second place, the first time the gold giant has lost its top ranking since 1905. South Africa, whose late 19th century gold rush led to the founding of mining heavyweight Anglo American Plc and is home to global producers Gold Fields Ltd and AngloGold Ashanti Ltd, saw its production decline 8% to 272 metric tons.

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3. India is world largest gold consumer with an annual demand of 800 tones.
MCX Contract Specifications of Gold: GOLD Name of Commodity Ticker Symbol Trading System Trading Period Trading Session TRADING Trading Unit Price Quote Gold GLDPURMUMK MCX Trading System Monday to Saturday Monday to Friday: 10:00a.m. to 11:30 p.m. Saturday: 10:00a.m. to 2:00 p.m. 1 kg Rs. Per 10 g, ex-Ahmedabad (inclusive of all taxes and levies relating to import and custom duty, but excluding sales tax/VAT, any other additional tax or surcharge on sales tax, local taxes and octroi) 10 kg Re. 1 per 10 g (minimum price movement) 3% 4% In case of initial volatility, a special margin at such percentage (as deemed fit), will be imposed immediately on both buy and sell side in respect of all outstanding positions, which will remain in force for next 2 days, after which the special margin will be relaxed. For individual client: 2 MT For members collectively for all clients: 6 MT or 15%of the market position, whichever is high 1 kg 25% of the value of the open position during the delivery period At designated clearing house facilities of Group 4 Securitas at these centers and at additional delivery centers at Chennai, New Delhi and Hyderabad. [67]

Maximum order size Tick Size Daily price limit Initial Margin Special Margin

Maximum Allowable

DELIVERY Delivery unit Delivery period margin Delivery center(s)

Delivery Logic SETTLEMENT PERIOD Tender Period Delivery Period Pay-in of commodities (delivery by seller member)

Compulsory 1st to 6th day of the contract expiry month. 1st to 6th day of the contract expiry month. On any tender days by 6.00 p.m. except Saturdays, Sundays and Trading Holidays. Marking of delivery will be done on the tender days based on the intentions received from the sellers after the trading hours. On expiry all the open positions shall be marked for delivery. Delivery pay-in will be on E + 1 basis. By 11.00 a.m. on Tender day +1 basis By 05.00 p.m. on Tender day +1 basis.

Pay-in of funds Pay-out of funds and commodities (delivery to

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Bibliography

Internet
www.mcxindia.com www.ncdex.com www.commodity.co.jp www.finance.india.com

Books
NSE ncfm commodity market module

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