INDEX

Section
I.

TOPIC Evolution of Derivatives Parties Involved Commonly Used Derivatives Commodity and Commodity Market Difference Between Commodity and Financial Derivatives Commodities Traded Evolution of the commodity market in orld Evolution of the commodity market in India Tradin! E"chan!es in India MC# $CDE# $MCE Tradin! and &ettlement Procedure Tradin! Procedure Clearin! and &ettlement Procedure Commodity 'nalysis (old (uar &eed Im)ediments in develo)ment of commodity e"chan!es Possi*le +ecommendations Conclusion Bi*lio!ra)hy

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II.

III.

I%.

%.

%I. %II. %III. I#.

Evolution to Derivatives
The ori!in of derivatives can *e traced *ack to the need of farmers to )rotect themselves a!ainst fluctuations in the )rice of their cro). From the time it was sown to the time it was ready for harvest- farmers would face )rice uncertainty. Throu!h the use of sim)le derivative )roducts- it was )ossi*le for the farmer to )artially or fully transfer )rice risks *y lockin! in asset )rices. These were sim)le contracts develo)ed to meet the needs of farmers and were *asically a means of reducin! risk. ' farmer who sowed his wheat in rainy season- faced uncertainty over the )rice he would receive for his )roduce i.e. wheat. If there is scarcity of commodity he has )roduced- he would )ro*a*ly o*tain attractive )rices. 'nd if the su))ly is more- he would have to sale off his harvest at a very low )rice. This means that the farmer was e")osed to a hi!h risk of )rice uncertainty. 't the same time- a merchant tradin! in wheat- with hi!h demand of wheat would face a )rice risk that of havin! to )ay e"or*itant )rices durin! this )eriod- althou!h he will receive hi!h )rices. Under such situation it would *e !ood if farmer and merchant come to!ether and enter under a contract where they would decide the )rice at which they want to settle. This way they can eliminate any )rice risk.

In ,./.- CB0T 1Chica!o Board of Trade2- was esta*lished to *rin! farmers and merchants to!ether. ' !rou) of traders !ot to!ether and created the 3to4arrive5 contract that )ermitted farmers to lock in to )rice u)front and deliver the !rain later. These to4 arrive contracts )roved useful as a device for hed!in! and s)eculation on )rice chan!es. These were eventually standardised- and in ,678 the first futures clearin! house came into e"istence.

Definition of Derivative
Securities Contracts (Regulation) Act, !"# (SCRA) defines derivatives as$ 9A securit% &erive& fro' a &e(t instru'ent, s)are, loan *)et)er secure& or unsecure&, ris+ instru'ent or contract for &ifferences or an% ot)er for' of securit%.: ,A contract *)ic) &erives its value fro' t)e -rices, or in&e. of -rices, of un&erl%ing securities.:

In sim)le words a derivative is a )roduct whose value is derived from the value of one or more underlyin! varia*les or assets in a contractual manner. The underlyin! asset can *e e;uity- fore"- any commodity or any other asset. 's mentioned earlier- that wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a chan!e in )rices *y that date. &uch a transaction is an e"am)le of a derivative. The )rice of this derivative is driven *y the s)ot )rice of wheat- which is the 9underlyin!: in this case.

Derivatives 'ar+ets
Derivative markets can *roadly *e classified as commodity derivative market and financial derivatives markets. 's the name su!!est- commodity derivatives markets trade contracts for which the underlyin! asset is a commodity. It can *e an a!ricultural commodity like wheat- soy*eans- ra)eseed- cotton- etc or )recious metals like !oldsilver- etc. Financial derivatives markets trade contracts that have a financial asset or varia*le as the underlyin!. The more )o)ular financial derivatives are those which have e;uity- interest rates and e"chan!e rates as the underlyin!. The most commonly used derivatives contracts are forwards- futures and o)tions which discussed in detail later.

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Derivatives

Co''o&it% Derivatives E.!.B wheat- soya*ean !uar seed- !old etc

0inancial Derivatives E.!.B e;uity interest rate etc

Derivative )roducts initially emer!ed as hed!in! devices a!ainst fluctuations in commodity )rices- and commodity4linked derivatives remained the sole form of such )roducts for almost three hundred years. Financial derivatives came into s)otli!ht in the )ost4,6=>?s )eriod due to !rowin! insta*ility in the financial markets. @owever- since their emer!ence- these )roducts have *ecome very )o)ular and *y ,66>?s- they accounted for a*out two4thirds of total transactions in derivative )roducts. In recent years- the market for financial derivatives has !rown tremendously in terms of variety of instruments availa*le- their com)le"ity and also turnover. In the class of e;uity derivatives the world over- futures and o)tions on stock indices have !ained more )o)ularity than on individual stocks.

Parties involve& in &erivatives

Derivative contracts are of different ty)es. The most common ones are forwards- futureso)tions. Partici)ants who trade in the derivatives market can *e classiAed under the followin! three *road cate!ories hed!ers- s)eculators- and ar*itra!ers. ,. /e&gersB @ed!ers face risk associated with the )rice of an asset. They use the futures or o)tions markets to reduce or eliminate this risk. The farmer5s e"am)le that we discussed a*out was a case of hed!in!.

7. S-eculatorsB &)eculators are )artici)ants who wish to *et on future movements in the )rice of an asset. Futures and o)tions contracts can !ive them levera!eC that is- *y )uttin! in small amounts of money u)front- they can take lar!e )ositions on the market. 's a result of this levera!ed s)eculative )osition- they increase the )otential for lar!e !ains as well as lar!e losses. <. Ar(itragersB 'r*itra!ers work at makin! )rofits *y takin! advanta!e of discre)ancy *etween )rices of the same )roduct across different markets. If- for e"am)le- they see the futures )rice of an asset !ettin! out of line with the cash )rice- they would take offsettin! )ositions in the two markets to lock in the )rofit.

So'e co''onl% use& &erivatives

@ere we define some of the more )o)ularly used derivative contracts. &ome of these- namely futures and o)tions will *e discussed in more details at a later sta!e. 0or*ar&sB 's we discussed- a forward contract is an a!reement *etween two entities to *uy or sell the underlyin! asset at a future date- at today5s )re4a!reed )rice. 0uturesB ' futures contract is an a!reement *etween two )arties to *uy or sell the underlyin! asset at a future date at today5s future )rice. Futures contracts differ from forward contracts in the sense that they are standardised and e"chan!e traded. O-tionsB There are two ty)es of o)tions 4 calls and )uts. Calls !ive the *uyer the ri!ht *ut not the o*li!ation to *uy a !iven ;uantity of the underlyin! asset- at a !iven )rice on or *efore a !iven future date. Puts !ive the *uyer the ri!ht- *ut not the o*li!ation to sell a !iven ;uantity of the underlyin! asset at a !iven )rice on or *efore a !iven date. 1arrantsB 0)tions !enerally have lives of u)to one year- the maDority of o)tions traded on o)tions e"chan!es havin! a ma"imum maturity of nine months. Eon!er4dated o)tions are called warrants and are !enerally traded over4the4counter. 8

2as+etsB Basket o)tions are o)tions on )ortfolios of underlyin! assets. The underlyin! asset is usually a wei!hted avera!e of a *asket of assets. E;uity inde" o)tions are a form of *asket o)tions. S*a-sB &wa)s are )rivate a!reements *etween two )arties to e"chan!e cashflows in the future accordin! to a )rearran!ed formula. They can *e re!arded as )ortfolios of forward contracts. The two commonly used swa)s areB Interest rate s*a-sB These entail swa))in! only the interest related cashflows *etween the )arties in the same currency. Currenc% s*a-sB These entail swa))in! *oth )rinci)al and interest *etween the )artieswith the cashflows in one direction *ein! in a different currency than those in the o))osite direction.

Co''o&it% an& Co''o&ities 'ar+et

INTROD3CTION

Derivatives as a tool for mana!in! risk first ori!inated in the commodities markets. They were then found useful as a hed!in! tool in financial markets as well. In India- tradin! in commodity futures has *een in e"istence from the nineteenth century with or!aniGed tradin! in cotton throu!h the esta*lishment of Cotton Trade 'ssociation in ,.=8. 0ver a )eriod of time- other commodities were )ermitted to *e traded in futures e"chan!es. +e!ulatory constraints in ,6F>s resulted in virtual dismantlin! of the commodities future markets. It is only in the last decade that commodity future e"chan!es have *een actively encoura!ed. @owever- the markets have *een thin with )oor li;uidity and have not !rown to any si!nificant level.

CO44ODIT5 Commodity is defined as any *ulk !ood traded on an e"chan!e or in the cash market. 0ne of the first forms of trade *etween individuals *e!an *y what is called the *arter system wherein !oods were traded for !oods. Eack of a medium for e"chan!e was the sole initiator of this system. Peo)le sold what they had in e"cess and *ou!ht what they lacked. 'nimals were the first few commodities to *e e"chan!ed. &ome e"am)les of commodities include !rain- oats- !old- oil- *eef- silver- and natural !as. These markets are the meetin! )laces of *uyers and sellers of an ever4e")andin! list of commodities that today includes a!ricultural !oods- metals and )etroleum- *ut also )roducts such as financial instruments- forei!n currencies and stock inde"es that trade on a commodity e"chan!e. Commodity E"chan!e is a )latform where different ty)es of market )artici)ants trade in wide s)ectrum of commodity derivatives. In other words- )rices of contracts can *e determined at )resent for !oods to *e delivered in future. This hel)s )eo)le to avoid wide fluctuations in the )rices of the commodities. The (overnment issued notifications on ,./.7>>< )ermittin! futures tradin! in the commodities- with the issue of these notifications futures tradin! is not )rohi*ited in any commodity. 0)tions tradin! in commodity are- however )resently )rohi*ited. =

In fact- the siGe of the commodities markets in India is also ;uite si!nificant. 0f t)e countr%6s GDP of Rs 7, 89,:79 crore (Rs 7,89:.7 (illion), co''o&ities relate& (an& &e-en&ent) in&ustries constitute a(out "; -er cent. Currently- the various commodities across the country clock an annual turnover of Rs , <9,999 crore (Rs ,<99 (illion). ith the introduction of futures tradin!- the siGe of the commodities market !rows many folds here on.

Difference (et*een co''o&it% an& financial &erivatives

The *asic conce)t of derivative contract remains the same whether the underlyin! ha))ens *e a commodity or a financial asset. @owever there are some features which are very )eculiar to commodity derivative markets. In the case of financial derivatives- most of these contracts are cash settled. Even in the case of )hysical settlement- financial assets are not *ulky and do not need s)ecial facility for stora!e. Due to the *ulky nature of the underlyin! assets- )hysical settlement in commodity derivatives creates the need for warehousin!. &imilarly- the conce)t of varyin! ;uality of asset does not really e"ist as far as financial underlyin! are concerned. @owever in the case of commodities- the ;uality of the asset underlyin! a contract can vary lar!ely. This *ecomes an im)ortant issue to *e mana!ed. these issues. e have a *rief look at

P)%sical settle'ent
Physical settlement involves the )hysical delivery of the underlyin! commodity- ty)ically at an accredited warehouse. The seller intendin! to make delivery would have to take the .

commodities to the desi!nated warehouse and the *uyer intendin! to take delivery would have to !o to the desi!nated warehouse and )ick u) the commodity. This may sound sim)le- *ut the )hysical settlement of commodities is a com)le" )rocess. The issues faced in )hysical settlement are enormous. There are limits on stora!e facilities in different states. There are restrictions on interstate movement of commodities. Besides state level 0ctroi and duties have an im)act on the cost of movement of !oods across locations. The )rocess of takin! )hysical delivery in commodities is ;uite different from the )rocess of takin! )hysical delivery in financial assets. e take a !eneral overview at the )rocess flow of )hysical settlement of commodities. Eater on we will look into details of how )hysical settlement ha))ens on the $CDE#.

Deliver% notice -erio&

Unlike in the case of e;uity futures- ty)ically a seller of commodity futures has the o)tion to !ive notice of delivery. This o)tion is !iven durin! a )eriod identified as Hdelivery notice )eriod5. &uch contracts are then assi!ned to a *uyer- in a manner similar to the assi!nments to a seller in an o)tions market. @owever what is interestin! and different from a ty)ical o)tions e"ercise is that in the commodities market- *oth )ositions can still *e closed out *efore e")iry of the contract. The intention of this notice is to allow verification of delivery and to !ive ade;uate notice to the *uyer of a )ossi*le re;uirement to take delivery. These are re;uired *y virtue of the fact that the actual )hysical settlement of commodities re;uires )re)aration from *oth deliverin! and receivin! mem*ers. Ty)ically- in all commodity e"chan!es- delivery notice is re;uired to *e su))orted *y a warehouse recei)t. The warehouse recei)t is the )roof for the ;uantity and ;uality of commodities *ein! delivered. &ome e"chan!es have certified la*oratories for verifyin! the ;uality of !oods. In these e"chan!es the seller has to )roduce a verification re)ort from these la*oratories alon! with delivery notice. &ome e"chan!es like EIFFE- acce)t warehouse recei)ts as ;uality verification documents while others like BMF4BraGil have inde)endent !radin! and classification a!ency to verify the ;uality. In the case of BMF4BraGil a seller ty)ically has to su*mit the followin! documentsB 6

' declaration verifyin! that the asset is free of any and all char!es- includin! fiscal de*ts related to the stored !oods. ' )rovisional delivery order of the !ood to BMIF 1BraGil2- issued *y the warehouse. ' warehouse certificate showin! that stora!e and re!ular insurance have *een )aid.

Assign'ent
henever delivery notices are !iven *y the seller- the clearin! house of the e"chan!e identifies the *uyer to whom this notice may *e assi!ned. E"chan!es follow different )ractices for the assi!nment )rocess. 0ne a))roach is to dis)lay the delivery notice and allow *uyers wishin! to take delivery to *id for takin! delivery. 'mon! the international e"chan!es- BMF- CB0T and CME dis)lay delivery notices. 'lternatively- the clearin! houses may assi!n deliveries to *uyers on some *asis. The Indian commodities e"chan!es have alsoado)ted this method. 'ny sellerJ *uyer who has !iven intention to deliverJ *een assi!ned a delivery has an o)tion s;uare off )ositions till the market close of the day of delivery notice. 'fter the close of tradin!- e"chan!es assi!n the delivery intentions to o)en lon! )ositions. 'ssi!nment is done ty)ically either on random *asis or first4in4first out *asis. In some e"chan!es- the *uyer has the o)tion to !ive his )reference for delivery location. The clearin! house decides on the daily delivery order rate at which delivery will *e settled. Delivery rate de)ends on the s)ot rate of the underlyin! adDusted for discountJ )remium ;uality and frei!ht costs. The discountJ )remium for ;uality and frei!ht costs are )u*lished the clearin! house *efore introduction of the contract. The most active s)ot market is normally taken as the *enchmark for decidin! s)ot )rices. 'lternatively- the delivery rate is determined *ased on the )revious day closin! rate for the contract or the closin! rate for the day.

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Deliver%
'fter the assi!nment )rocess- clearin! houseJ e"chan!e issues a delivery order to the *uyer. The e"chan!e also informs the res)ective warehouse a*out the identity of the *uyer. The *uyer re;uired to de)osit a certain )ercenta!e of the contract amount with the clearin! house as mar!in a!ainst the warehouse recei)t. The )eriod availa*le for the *uyer to take )hysical delivery is sti)ulated *y the e"chan!e. Buyer or his authorised re)resentative in the )resence of seller or his re)resentative takes the )hysical stocks a!ainst the delivery order. Proof of )hysical delivery havin! *een effected forwarded *y the seller to the clearin! house and the invoice amount is credited to the seller5s account. In India if a seller does not give notice of delivery then at the expiry of the contract the positions are cash settled by price difference exactly as in cash settled equity futures contracts.

1are)ousing
0ne of the main differences *etween financial and commodity derivatives are the need warehousin!. In case of most e"chan!e4traded financial derivatives- all the )ositions are cash settled. Cash settlement involves )ayin! u) the difference in )rices *etween the time the contract was entered into and the time the contract was closed. For instance- if a trader *uys futures on a stock at +s.,>> and on the day of e")iration- the futures on that stock close +s.,7>- does not really have to *uy the underlyin! stock. 'll he does is take the difference of +s.7> cash. &imilarly the )erson who sold this futures contract at +s.,>>- does not have to deliver the underlyin! stock. 'll he has to do is )ay u) the loss of +s.7> in cash. In case of commodity derivatives however- there is a )ossi*ility of )hysical settlement. hich means that if the seller chooses to hand over the commodity instead of the difference in cash- the *uyer must take )hysical delivery of the underlyin! asset. This re;uires the e"chan!e to make an arran!ement with warehouses to handle the settlements. ,,

The efficacy of the commodities settlements de)ends on the warehousin! system availa*le. Most international commodity e"chan!es used certified warehouses 1C @2 for the )ur)ose of handlin! )hysical settlements. &uch C @ are re;uired to )rovide stora!e facilities for )artici)ants in the commodities markets and to certify the ;uantity and ;uality of the underlyin! commodity. The advanta!e of this system is that a warehouse recei)t *ecomes !ood collateral- not Dust for settlement of e"chan!e trades *ut also for other )ur)oses too. In India- the warehousin! system is not as efficient as it is in some of the other develo)ed markets. Central and state !overnment controlled warehouses are the maDor )roviders of a!ri4)roduce stora!e facilities. ')art from these- there are a few )rivate warehousin! *ein! maintained. @owever there is no clear re!ulatory oversi!ht of warehousin! services.

=ualit% of un&erl%ing assets

' derivatives contract is written on a !iven underlyin!. %ariance in ;uality is not an issue in case of financial derivatives as the )hysical attri*ute is missin!. hen the underlyin! hen asset is a commodity- the ;uality of the underlyin! asset is of )rime im)ortance. There may *e ;uite some variation in the ;uality of what is availa*le in the market)lace. the asset is s)ecified- it is therefore im)ortant that the e"chan!e sti)ulate the !rade or !rades of the commodity that are acce)ta*le. Commodity derivatives demand !ood standards and ;uality assuranceJ certification )rocedures. ' !ood !radin! system allows commodities to *e traded *y s)ecification. Currently there are various a!encies that are res)onsi*le for s)ecifyin! !rades for commodities. For e"am)le- the Bureau of Indian &tandards 1BI&2 under Ministry of Consumer 'ffairs s)ecifies standards for )rocessed a!ricultural commodities whereas '(M'+K under the de)artment of rural develo)ment under Ministry of '!riculture is res)onsi*le for )romul!atin! standards for *asic a!ricultural commodities. ')art from these- there are other a!encies like EI'- which s)ecify standards for e")ort oriented commodities. ,7

Different co''o&ities tra&e& in co''o&it% 'ar+et

In all there are around /> forty commodities traded in the different commodity markets. These commodities are *asically divided in four main ty)es- namelyB '!ricultural commodities which consist of all a!ricultural )roducts like cottonwheat- Dowar- coffee- !uar !um- soya*ean- seas am- mustard oil- etc Precious metals which include !old and silver Base metals include other metals like tin co))er- ma!nesium Ener!y includes commodities like crude oil- *rent crude oil- furnace oil.

'll these commodities have different set of features different characteristics- different dealin! methods- and different mar!ins. Due to these differences these commodities re;uire different contracts which some e"tra rules relatin! to delivery- tradin!- ;uality s)ecifications- warehousin! re;uirements- settlement )rocedure- etc.

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Co''o&it% 4ar+ets

Precious 4etals

Ot)ers 4etals

Agriculture

Energ%

Evolution of t)e co''o&it% 'ar+et in 1orl&

Early forward contracts in the U& addressed merchants5 concerns a*out ensurin! that there were *uyers and sellers for commodities. @owever 9credit risk: remained a serious )ro*lem. To deal with this )ro*lem- a !rou) of Chica!o *usinessmen formed the C)icago 2oar& of Tra&e 1CB0T2 in ,./.. The )rimary intention of the CB0T was to )rovide a centralised location known in advance for *uyers and sellers to ne!otiate forward contracts. In ,.F8- the CB0T went one ste) further and listed the first 9E"chan!e traded: derivatives contract in the U&- these contracts were called 9futures contracts:. In ,6,6- Chica!o Butter and E!! Board- a s)in4off of CB0T- was reor!anised to allow futures tradin!. Its name was chan!ed to C)icago 4ercantile E.c)ange 1CME2. The CB0T and the CME remain the two lar!est or!anised futures e"chan!esindeed the two lar!est : financial: e"chan!es of any kind in the world today. The first stock inde" futures contract was traded at >ansas Cit% 2oar& of Tra&e. Currently the most )o)ular stock inde" futures contract in the world is *ased on &IP 8>> inde"- traded on Chica!o Mercantile E"chan!e. Durin! the mid ei!hties- financial futures

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*ecame the most active derivative instruments !eneratin! volumes many times more than the commodity futures. Inde" futures- futures on T4*ills and Euro4Dollar futures are the three most )o)ular futures contracts traded today. 0ther )o)ular international e"chan!es that trade derivatives are EIFFE in En!land- DTB in (ermany- &(# in &in!a)ore- TIFFE in La)an- M'TIF in France- Eure" etc. &ome of the oldest and most famous stock e"chan!es in the world are as followsB4

CO3NTR5

E?C/ANGE

3nite& States of A'erica Chica!o Board of Trade 1CB0T2 Chica!o Mercantile E"chan!e $ew Mork Cotton E"chan!e $ew Mork Mercantile E"chan!e $ew Mork Board of Trade The Cana&a 2ra@il Australia C)ina /ong >ong Aa-an inni)e! Commodity E"chan!e

The inni)e! Commodity E"chan!e BraGilian Futures E"chan!e Commodities and Futures E"chan!e &ydney Futures E"chan!e Etd. BeiDin! Commodity E"chan!e &han!hai Metal E"chan!e @on! Kon! Futures E"chan!e Tokyo International Financial Futures E"chan!e Kansai '!ricultural Commodities E"chan!e Tokyo (rain E"chan!e

4ala%sia Singa-ore 0rance Russia S-ain

Kuala Eum)ur commodity E"chan!e &in!a)ore Commodity E"chan!e Etd. Ee $ouveau Marche M'TIF The +ussian E"chan!e MICE#J +elis 0nline &t. Peters*ur! Futures E"chan!e The &)anish 0)tions E"chan!e

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Citrus Fruit and Commodity Futures Market of %alencia The Eondon International Financial Futures 3nite& >ing&o' 0)tions e"chan!e

Evolution Co''o&it% 4ar+et In In&ia

The or!aniGed tradin! in commodity futures markets has a lon! history in India. In ,.=8the first commodity futures e"chan!e was set u) in Mum*ai under the !uidance of Bom*ay Cotton Traders 'ssociation. Durin! ,6>>4,67> many futures markets were set u) includin! raw Dute futures market in Kolkata 1,6,72 and wheat futures market in @a)ur 1,6,<2. ' num*er of other e"chan!es a))eared *etween ,67> and ,6/> tradin! such commodities as raw Dute- Dute )roducts- )e))er- turmeric- )otatoes- su!ar- castor seed- !roundnuts- !roundnut oil- rice- wheat- etc. ith the out*reak of orld ar II and in its aftermath tradin! in forward and futures contracts as well as o)tions was either outlawed- as )art of the (overnment5s drive to contain inflation- or made im)ossi*le throu!h )rice controls. This situation )ersisted until ,687- when the (overnment introduced the Forward Contracts 1+e!ulation2 'ct- which to this day controls all transfera*le forward contracts and futures. Throu!h this act Forward Market Commission 1FMC2 was esta*lished to oversee the workin! of future e"chan!es in India. The 'ct allowed futures market trade in a num*er of commodities 1*ut e"cluded some which were seen as essential foods- such as su!ar and food !rains2. Durin! ,6F>s- the !overnment either *anned or sus)ended futures tradin! in several commodities- includin! cotton- raw Dute- edi*le oilseeds and their )roducts. Futures5 tradin! in )e))er- turmeric- castor seedlinseed- etc. was- however still )ermitted. In ,6==- futures5 tradin! in non4edi*le oilseeds like castor seed and linseed was for*idden. The reason for this crackdown on futures markets was that- in (overnment5s view- these markets hel)ed drivin! u) )rices for commodities- *y !ivin! free rein to s)eculators. The (overnment5s )olicies underwent a chan!e in the late ,6=>s- when futures trade in !ur and )otato was allowed on the

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recommendations of Khusro Committee. This committee recommended the revival of futures tradin! in a wide ran!e of commodities- *ut little action resulted. 's on 'u!ust 7>><- there are 7, commodity e"chan!es in o)eration in India dealin! in futures tradin! in <8 commodities 1FMC we*site2. 0ut of these- two e"chan!es viG.Indian Pe))er and &)ice Trade 'ssociation 1IP&T'2- Cochin and the Bom*ay Commodity E"chan!e 1BCE2 Etd. have the status of international e"chan!e and deal in international contracts 1transactin! )arty could *e a forei!n national also2 in )e))er and castor oil res)ectively. The commodities in which futures tradin! is done *y other e"chan!es areB )e))er- turmeric- !ur- castor seed- hessian- Dute sackin!- cotton- )otatocastor oil- soya *ean and its oil and cake- coffee- mustard seed and its oil and oilcake!roundnut and its oil- sunflower oil- co)raJcoconut and its oil and oilcake- cottonseed and its oil and oilcake- ka)as- +BD )almolein- rice *ran and its oil and oilcake- sesame seed and its oil and oilcake- safflower seed and its oil and oilcake- and su!ar.

Co''o&it% Tra&ing E.c)anges in In&ia

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Ministry of Consumer affairs

Forward Market Commission

Commodity E"chan!es

$ational Eevel &tock E"chan!e

+e!ional Eevel &tock E"chan!e

$CDE#

MC#

$MCE

7> +e!ional E"chan!es

0or*ar& 4ar+et Co''ission

In India commodity markets are !overned *y Forward Market Commission T)e 0or*ar& Contract (Regulation) Act was enacted in ,687. this act )assed in the )arliament to re!ulate the futures markets and avoid the e")loitation of farmers *y middlemen and cruel landlords. In ,6FF- in the aftermath of a severe drou!ht and escalatin! food )rices- forward tradin! was *anned in most commodities to make it easier for the !overnment to im)ose )rice controls. ' lon! settled over the commodity markets. That was unfortunate. Futures and forward contracts allow market )artici)ants to transfer risks from those wary of it to those who are hun!ry for it. Those most vulnera*le ,.

to risk4the farmin! community4have suffered over the su*se;uent decades. $ot only was the economics of the *an sus)ect- *ut also turned a *lind eye to a natural dis)ensation amon! Indians to trade in commodities. Forward tradin! in commodities is mentioned in >autil%a6s Art)as)astra. The Bom*ay Cotton Trade 'ssociation set u) a futures market for cotton in ,.=8- a mere decade after the Chica!o Board of Trade o)ened for *usiness. &u*se;uently- India develo)ed vi*rant forward markets in a host of commodities. In $ovem*er 7>><- 4u+es) A'(ani- was s)eakin! at the inau!uration of 4C?- a s)ankin! new national- multi4 commodity e"chan!e. The !overnment has decided to clear the way for forward tradin! in commodities once a!ain. Mukesh says that MC# and the other e"chan!es are sittin! on a 'ar+et *ort) B #99 (illion a %ear (or Rs 79 la+) crore). Currently- the annual value of all commodity futures traded in India is B 7" (illion, far less t)an t)e -otential <#99 (illion . hat is si!nificant- however- is the s)eed at which the !a) is *ein! narrowed. 9%olumes in commodity futures have )erked u) from +s 7>->>> crore4 <>->>> crore )er annum *efore the li*eraliGation of futures tradin!- to around +s 8.=, lakhs crore )er annum today. The natural instinctive !enius of the Indian trader has come into )lay:- says &. &undereshan- Chairman- FMC 1forward market commission2- which re!ulates commodity futures market in India Commodities? tradin! is now one of the latest trend in the town. %olumes !rew *y over 6>> N *etween financial years 7>>74>< and 7>>/4>8. 9The !rowth of the commodities *usiness has *een *eyond what was ori!inally )roDected. ith new commodity contracts !ettin! launched se;uentially- the avera!e daily futures volumes could scale u)wards of +s ,/>->>> crore:- says %ineet Bhatna!ar- country mana!er of +efco 1India2- one of the lar!est non4 *ank futures )layers !lo*ally. ith national level e"chan!e of India 1MC#2 and the $ational commodities Derivatives E"chan!e 1$CDE#2 yet to com)lete two years of full4 fled!ed commercial o)erations- the !rowth in commodity futures tradin! is almost as s)ectacular as India?s success in *usiness )rocess outsourcin!.

,6

Co''o&it% E.c)anges
In India there are a*out 78 commodity e"chan!es- these include e"chan!es at national level and re!ional level commodity e"chan!es. 0f all these e"chan!es there are only three national level commodity e"chan!es. 'nd these are $ational Commodity 'nd Derivatives E"chan!e 1$CDE#2- Multi Commodity E"chan!e 1MC#2- $ational Commodity E"chan!e 1$MCE2. But amon! these $CDE# and MC# are ;uite functional in the country. The *asic difference *etween the national level and re!ional level e"chan!es is their area of their o)erations and the technolo!y used *y the e"chan!es.

4ulti Co''o&it% E.c)ange of In&ia Ci'ite& (4C?)$

7>

MC# an inde)endent multi commodity e"chan!e has )ermanent reco!nition from (overnment of India for facilitatin! online tradin!- clearin! and settlement o)erations for commodity futures markets across the country. It was inau!urated in $ovem*er 7>>< *y Mr. Mukesh 'm*ani. It is head;uartered in Mum*ai. The key shareholders of MC# are Financial Technolo!ies 1India2 Etd.- &tate Bank of India- $'B'+D- $&E- @DFC Bank&tate Bank of Indore- &tate Bank of @ydera*ad- &tate Bank of &aurashtra- &BI Eife Insurance Co. Etd.- Union Bank of India- Bank of India- Bank of Baroda- Canara BankCor)oration Bank. MC# offers futures tradin! in the followin! commodity cate!oriesB '!ri Commodities- Bullion- Metals4 Ferrous I $on4ferrous- Pulses- 0ils I 0ilseeds- Ener!yPlantations- &)ices and other soft commodities. Today MC# is offerin! s)ectacular !rowth o))ortunities and advanta!es to a lar!e cross section of the )artici)ants includin! Producers J Processors- TradersCor)orate- +e!ional Tradin! Centers- Im)orters- E")orters- Coo)eratives- and Industry 'ssociations. In a si!nificant develo)ment- $ational &tock E"chan!e of India Etd. 1$&E2country?s lar!est e"chan!e and $ational Bank for '!riculture and +ural Develo)ment 1$'B'+D2- country?s )remier a!riculture develo)ment *ank announced their strate!ic

7,

)artici)ation in the e;uity of MC# on Lune ,8- 7>>8. This new )artnershi) of $&E and $'B'+D with MC# makes MC# consortium the lar!est distri*ution network across the country. MC# is an I&0 6>>,B7>>> online nationwide multi commodity e"chan!e. It has over 6>> mem*ers s)read across 8>> centers across the country- with more than =8> %&'T?s and leased line connections and 8->>> and more tradin! terminals that )rovide a trans)arent ro*ust and trustworthy tradin! )latform in more than 8> commodity futures contract with a wide ran!e of commodity *askets which includes metals- ener!y and a!riculture commodities. E"chan!e has )ioneered maDor innovations in Indian commodities market- which has *ecome the industry *enchmarks su*se;uently. MC# is the only E"chan!e which has !ot three international tie4u)s which is with Tokyo Commodity E"chan!e 1T0C0M2- the 78> year old Baltic Frei!ht E"chan!eEondon- Du*ai Metals I Commodity Centre 1DMCC2 I Du*ai (old I Commodity E"chan!e 1D(C#2- the strate!ic initiative of (overnment of Du*ai. MC# has to its credit- settin! u) of the $ational s)ot e"chan!e 1$&E'P2- which connects all India 'PMC markets there*y contri*utin! in the im)lementation of (overnment of India?s vision to create a common Indian market The tradin! system of MC# is state4of4the4art- new !eneration tradin! )latform that )ermits e"tremely cost effective o)erations at much !reater efficiency. The E"chan!e Central &ystem is located in Mum*ai- which maintains the Central 0rder Book. E"chan!e Mem*ers located across the country are connected to the central system throu!h %&'T or any other mode of communication as may *e decided *y the E"chan!e from time to time. The controls in the system are system driven re;uirin! minimum human intervention. The E"chan!e Mem*ers )laces orders throu!h the Traders ork &tation 1T &2 of the Mem*er linked to the E"chan!e- which matches on the Central &ystem and sends a confirmation *ack to the Mem*er &ettlementB E"chan!e maintains electronic interface with its Clearin! Bank. 'll Mem*ers of the E"chan!e are havin! their E"chan!e o)erations account with the Clearin! Bank.

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'll de*its and credits are affected electronically throu!h such accounts only. 'll contracts on maturity are for delivery. MC# s)ecifies tender and delivery )eriods. ' seller or a short o)en )osition holder in that contract may tender documents to the E"chan!e e")ressin! his intention to deliver the underlyin! commodity. E"chan!e would select from the lon! o)en )osition holder for the tendered ;uantity. 0nce the *uyer is identified- seller has to initiate the )rocess of !ivin! delivery and *uyer has to take delivery accordin! to the delivery schedule )rescri*ed *y the E"chan!e Players involved in commodities tradin! like commodity e"chan!es- financial institutions- and *anks have a feelin! that the markets are not *ein! fully e")loited. Education and re!ulation are the main im)ediments to the !rowth of commodity tradin!. Producers- farmers and a!ri4 *ased com)anies should enter into formal contracts to hed!e a!ainst losses. The use of commodity e"chan!es will create more tradin! o))ortunitiesC result in an inte!rated market and *etter )rice discoveries. MC# offers tradin! in various Products which include (old- &ilver- Castor &eeds- &oy &eeds- Castor 0il- Refined Soy Oil, &oymeal- +BD Palmolein- Crude Palm 0il- (roundnut 0il- &esame &eed- Mustard J+a)eseed 0il- Cottonseed- Mustard &eed 1@a)ur2- Mustard &eed 1Lai)ur2- &oy &eeds- Castor 0il- +efined &oy 0il- &oymeal- +BD Palmolein- (roundnut 0il- &esame &eed- Mustard &eed 1Lai)ur2- Pe))er- +ed ChilliLeera- Turmeric- Co))er- $ickel- Tin- 'luminium - Chana- +ice0il1@DPE2. heat- MaiGe- Crude +u**er- Cashew- (uar &eed- Poly)ro)ylene 1PP2- @i!h Density Polyethylene

8. National Co''o&it% an& Derivatives E.c)ange

(NCDE?)
7<

$CDE# is a )u*lic limited com)any incor)orated on ')ril 7<- 7>>< under the Com)anies 'ct- ,68F. It o*tained its Certificate for Commencement of Business on May 6- 7>><. It has commenced its o)erations on Decem*er ,8- 7>><. $ational Commodity I Derivatives E"chan!e Eimited 1$CDE#2 is a )rofessionally mana!ed online multi commodity e"chan!e )romoted *y ICICI Bank Eimited 1ICICI Bank2- Eife Insurance Cor)oration of India 1EIC2- $ational Bank for '!riculture and +ural Develo)ment 1$'B'+D2 and $ational &tock E"chan!e of India Eimited 1$&E2. PunDa* $ational Bank 1P$B2- C+I&IE Eimited 1formerly the Credit +atin! Information &ervices of India Eimited2- Indian Farmers Fertiliser Coo)erative Eimited 1IFFC02 and Canara Bank *y su*scri*in! to the e;uity shares have Doined the initial )romoters as shareholders of the E"chan!e. $CDE# is the only commodity e"chan!e in the country )romoted *y national level institutions. This uni;ue )arenta!e ena*les it to offer a *ou;uet of *enefits- which are currently in short su))ly in the commodity markets. The institutional )romoters of $CDE# are )rominent )layers in their res)ective fields and *rin! with them institutional *uildin! e")erience- trust- nationwide reach- technolo!y and risk mana!ement skills.

7/

$CDE# is re!ulated *y Forward Market Commission in res)ect of futures tradin! in commodities. Besides- $CDE# is su*Dected to various laws of the land like the Com)anies 'ct- &tam) 'ct- Contracts 'ct- Forward Commission 1+e!ulation2 'ct and various other le!islationswhich im)in!e on its workin!.

$CDE# is located in Mum*ai and offers facilities to its mem*ers in more than <6> centres throu!hout India. The reach will !radually *e e")anded to more centres. $CDE# is a nation4level- technolo!y driven de4mutualiGed on4line commodity e"chan!e with an inde)endent Board of Directors and )rofessionals not havin! any vested interest in commodity markets. It is committed to )rovide a world4 class commodity e"chan!e )latform for market )artici)ants to trade in a wide s)ectrum of commodity derivatives driven *y *est !lo*al )ractices- )rofessionalism and trans)arency. $CDE# currently facilitates tradin! of thirty si" commodities 4 Cashew- Castor &eed- Chana- Chilli- Coffee- Cotton- Cotton &eed 0ilcake- Crude Palm 0il- E")eller

78

Mustard 0il- (old- (uar !um- (uar &eeds- (ur- Leera- Lute sackin! *a!s- Mild &teel In!ot- Mul*erry (reen Cocoons- Pe))er- +a)eseed Mustard &eed -+aw Lute- +BD Palmolein- +efined &oy 0il- +ice- +u**er- &esame &eeds- &ilk- &ilver- &oy Bean&u!ar- Tur- Turmeric- Uradfacilitated. heat- Mellow Peas- Mellow +ed MaiGe I Mellow &oy*ean Meal. 't su*se;uent )hases tradin! in more commodities would *e

7. National 4ulti Co''o&it% E.c)ange (N4CE)

7F

$MCE is the first to !et the 3$ational? status and *e fully o)erational Demutualised Cor)orate &tructure leadin! to a relia*le- effective- im)artial and rule4*ased mana!ement *y )rofessionals havin! no trade interest. Conver!ence of all the offers and *ids emanatin! from all over the country in a &in!le Electronic 0rder Book of the E"chan!e ensurin! e;ual access to all intermediaries.

Partici)ation of diverse interests like Im)orters- E")orters- (rowers- BrokersTraders- etc.- usin! an electronic tradin! system )rovidin! a fair- efficient and trans)arent commodities market.

Fair Tradin! Practice ensured throu!h in*uilt checks and *alances in the &ystem. Use of EEMD' *ased mar!inin! at 66.6N %'+ 1%alue at +isk2 system for the initial mar!in.
1are)ouse Recei-t S%ste' (ase& Deliver% of 3n&erl%ing Co''o&ities meetin! the

current international standardsC its endeavor is to fulfill its mission in letter and s)irit. First to esta*lish a Trade (uarantee Fund- there*y offerin! !uaranteed clearin! and *ook entry settlements *y assumin! counter4)arty risks. +eal Time Price I Trade Data Dissemination

$MCE Market &urveillance Pro!ram

$MCE would *rin! a*out the conver!ence of lar!e4scale -rocessors, tra&ers, an& far'ers along *it) (an+s. $MCE would )rovide a common !round for

7=

fi"ation of future )rices of a num*er of commodities ena*lin! efficient )rice discoveryJforecast. In addition- hed!in! usin! different and diverse commodities would also *e )ossi*le with hel) of $MCE. In s)ort, N4CE is lea&ing transition of )ig)l% frag'ente&, controlle& an& restricte& co''o&it% econo'% to glo(all% integrate&, efficient an& co'-etitive environ'ent in t)e 8 st Centur%.

Tra&ing an& Settle'ent Proce&ure At Co''o&it% 4ar+et

7.

TRADING
The various as)ects in tradin! are as followsB a2 c2 e2 f2 Placin! the order Kinds of orders Pricin! of futures Closin! out the )ositions

*2 Methods of tradin! d2 Kinds of mar!ins

a) Placing t)e or&er

In futures market an order should contain s)ecifications such as *uy or sell- the num*er of contracts- the month of contract- ty)e and ;uality of the commodity- the e"chan!e- the )rice s)ecifications and the )eriod of validity. Usually- orders are )laced *y tele)honewith *rokers re)resentin! users and )roducers. If an order is e"ecuted the client receives a confirmation. The Investor who a!rees to *uy assumes a lon! futures )osition and the investor who a!rees to sell assumes a short futures )osition.

() 4et)o&s of Tra&ing
The tradin! in future e"chan!es is carried out throu!h two methods. They are i. ii. 0)en outcry Electronic tradin!

i.

O-en Outcr%

0)en outcry tradin! is a face to face and hi!hly activated form of tradin! used on the floors of the e"chan!es. In o)en outcry system the futures contracts are traded in )its. '

76

)it is a raised )latform in octa!onal sha)e with descendin! ste)s on the inside that )ermit *uyers and sellers to see each other. $ormally only one ty)e of contract is traded in each )it like a Eurodollar )it- Eive Cattle )it- etc. The tradin! )rocess consists of an auction in which all *ids ad offers on each of the contracts are made known to the )u*lic and everyone can see the market5s *est )rice. To )lace an order under this method- the customer calls a *roker- who time4stam)s the order and )re)ares an office order ticket. The *roker then sends the order to a *ooth on the e"chan!e floor called *roker5s floor *ooth. There- a floor order ticket is )re)ared- and a clerk hand delivers the order to the floor trader for e"ecution. In some cases- the floor clerk may use hand si!nals to convey the order to floor traders. Ear!e orders ty)ically !o directly from the customer to the *roker5s floor *ooth. The floor trader- standin! in a central location i.e. tradin! )it- ne!otiates a )rice *y shoutin! out the order to other floor traders- who *id on the order usin! hand si!nals. 0nce filled- the order is recorded manually on the order )arties in the trade. 't the end of each- the clearin! house settles trades *y ensurin! that no discre)ancy e"ists in the matched4trade information.

ii.

Electronic Tra&ing

Electronic tradin! systems have *ecome increasin!ly )o)ular in the )ast decade. The drivin! factor for the rise in the )o)ularity of these systems is their )otential to im)rove efficiency and lower the cost of transactions. In addition- electronic tradin! systems make e"chan!es availa*le to remote investors in real time- which is an im)ortant *enefit in the )resent situation of increased tradin! from remote locations.

Electronic tradin! is an automated trade e"ecution system with three key com)onents.

<>

,. 7. <.

Com)uter terminals- where customer orders are keyed in the and trade confirmations are received. ' host com)uter that )rocesses trade. ' network that links the terminals to the host com)uter.

Customers may enter orders directly into the terminal or )hone in the order to a *roker. ith electronic order matchin! systems- the host com)uter matches *ids with offers accordin! to certain rules that determine an order5s )riority. Priority rules on most systems include )rice and time of entry. In some cases- )riority rules may also include order siGe- ty)e of order and identity of the customer who )laced the order. In the sim)lest case- matchin! occurs when a trader )laces a *uy order at a )rice e;ual to hi!her than the )rice of an e"istin! sell order for the same contract. The host com)uter automatically e"ecutes the order- so that trades are matched immediately. Trades are then cleared immediately- as lon! as the host com)uter is lined to the clearin! house.

After )ours Electronic tra&ing S%ste' 'fter4hours electronic tradin! first *e!an in ,667 at CME 1Chica!o Mercantile E"chan!e2. This was introduced to meet the needs of an increasin!ly inte!rated !lo*al economy and to have an access to the currency )rice )rotection around the clock. Electronic tradin! system is used in the o)en outcry e"chan!es after the day tradin! is over.

c) >in&s of or&ers

<,

The orders 1under an o)en outcry J electronic system2 can *e )laced in different waysincludin!B 4ar+et Or&er This is the most common ty)e of order. $o s)ecific )rice is mentioned. 0nly the )osition to *e taken4lon!Jshort is stated. hen this kind of order is )laced- it !ets e"ecuted irres)ective of the current market )rice of that )articular asset. 4ar+et on o-en The order will *e e"ecuted on the market o)en within the o)enin! ran!e. This trade is used to enter a new trade- or e"it an o)en trade. 4ar+et on Close The order will *e e"ecuted on the market close. The fill )rice will *e within the closin! ran!e- which may- in some markets- *e su*stantially different from the settlement )rice. This trade is also used to enter a new trade- or e"it an o)en trade. Ci'it Or&er 'n order to *uy or sell a stated amount of a commodity at a s)ecified )rice- or at a *etter )rice- if o*taina*le at the time of e"ecution. The disadvanta!e is that the order may not !et filled at all if the )rice for that day does not reach the s)ecified )rice. Sto-DCoss Or&er ' sto)4loss order is an order- )laced with the *roker- to *uy or sell a )articular futures contract at the market )rice if and when the )rice reaches a s)ecified level. Futures traders often use sto) orders in an effort to limit the amount they mi!ht lose if the futures )rice moves a!ainst their )osition. &to) orders are not e"ecuted until the )rice reaches the s)ecified )oint. hen the )rice reaches that )oint the sto) order *ecomes a market order. Most of the time- sto) orders are used to e"it a trade. But- sto) orders can *e e"ecuted for *uyin!Jsellin! )ositions too. ' O*uyO sto) order is initiated when one wants

<7

to *uy a contract or !o lon! and a OsellO sto) order when one wants to sell or !o short. The order !ets filled at the su!!ested sto) order )rice or at a *etter )rice. E"am)leB ' trader wants to )urchase a crude oil futures contract at +s.=8> )er *arrel. @e wishes to limit his loss to +s.8> a *arrel. ' sto) order would then *e )laced to sell an offsettin! contract if the )rice falls to +s.=>> )er *arrel. hen the market touches this )rice- sto) order !ets e"ecuted and the trader would e"it the market. Da% or&er Day orders are !ood for only one day- the day the order is )laced. E"am)leB ' trader wants to !o lon! on &e)tem*er ,- 7>>< in +efined Palm 0il in a commodity e"chan!e. ' day order is )laced at +s. </>J,> k!. If the market does not reach this )rice the order does not !et filled even if the market touches +s.</, and closes. In other words- day order is for a s)ecific )rice and if the order does not !et filled that day- one has to )lace the order a!ain the ne"t day. Goo& Till Cancelle& (GTC) Or&er It is an o)en order to *uy or sell that remains active until the order !ets filled in the market- or is cancelled *y the )erson who )laced the order. E"am)leB ' trader wants to !o lon! on +efined Palm oil when the market touches +s./>>J,> k!. The order e"ists until it is filled u)- even if it takes months for it to ha))en. The order is always o)en until the order is cancelled or the contract e")ires. 0ill or >ill or&er This order is a limit order that is sent to the )it to *e e"ecuted immediately and if the order is una*le to *e filed immediately- it !ets cancelled. All or None or&er 'll or $one order 1'0$2 is a limit order- which is to *e e"ecuted in its entirety- or not at all. Unlike a fill4or4kill order- an all4or4none order is not cancelled if it is not e"ecuted as

<<

soon as it is re)resented in the e"chan!e. 'n all4or4none order )osition can *e closed out with another '0$ order. S-rea& Or&er ' sim)le s)read order involves two )ositions- one lon! and one short. They are taken in the same commodity with different months 1calendar s)read2 or in closely related commodities. Prices of the two futures contract therefore tend to !o u) and down to!ether- and !ains on one side of the s)read are offset *y losses on the other. The s)readers !oal is to )rofit from a chan!e in the difference *etween the two futures )rices. The trader is virtually unconcerned whether the entire )rice structure moves u) or downDust so lon! as the futures contract he *ou!ht !oes u) more 1or down less2 than the futures contract he sold. OCO Or&er It is called 0ne cancels the 0ther 10C02 order. The order )laced so as to take advanta!e of )rice movement- which consists of *oth a &to) and a Eimit )rice. 0nce one level is reached- one half of the order will *e e"ecuted 1either &to) or Eimit2 and the remainin! order cancelled 1either Eimit or &to)2. This ty)e of order would close the )osition if the market moved to either the sto) rate or the limit rate- there*y closin! the trade and at the same time- cancellin! the other entry order. E"am)leB ' trader has a *uy )osition at +s.,/- >>>Jtonne on &oy*ean. @e wishes to have *oth sto) and limit orders in order to fill the order in a )articular )rice ran!e. ' sto) order is )laced at +s. ,/-,>>Jtonne and a limit order at +s.,<- 6>>Jtonne. If the market trades as +s. ,<-6>>Jtonne- the limit order !ets filled and the sto) order immediately !ets cancelled. The trader e"ists the market at +s.,<- 6>>Jtonne.

</

&) >in&s of 4argin

Mar!in is the de)osit money that needs to *e )aid to *uy or sell each contract. The mar!in re;uired for a futures contract is *etter descri*ed as )erformance *ond or !ood faith money. The mar!in levels are set *y the e"chan!es *ased on volatility 1market conditions2 and can *e chan!ed at any time. The mar!in re;uirements for most futures contracts ran!e from 7N to ,8N of the value of the contract. The different ty)es of mar!ins in futures that a trader has to maintain are as underB Initial 4argin The amount that must *e de)osited *y a customer at the time of enterin! into a contract is called initial mar!in. This mar!in is meant to cover the lar!est )otential loss in one day. The mar!in is a mandatory re;uirement for )arties who are enterin! into the contract. 4aintenance 4argin ' trader is entitled to withdraw any *alance in the mar!in account in e"cess of the initial mar!in. To ensure that the *alance in the mar!in account never *ecomes ne!ative- a maintenance mar!in- which is somewhat lower than the initial mar!in- is set. If the *alance in the mar!in account falls *elow the maintenance mar!in- the trader receives a mar!in call and is re;uested to de)osit e"tra funds- to *rin! it to the initial mar!in level within a very short )eriod of time. A&&itional 4argin In case of sudden hi!her than e")ected volatility- the e"chan!e calls for an additional mar!in- which is a )reem)tive move to )revent *reakdown. This is im)osed when the e"chan!e fears that the markets have *ecome too volatile and may result in some )ayments crisis- etc. 4ar+DtoD4ar+et 4argin 't the end of each tradin! day- the mar!in account is adDusted to reflect the trader5s !ain or loss. This is known as markin! to market the account of each trader. 'll futures contracts are settled daily reducin! the credit e")osure to one4day5s movement. Based on

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the settlement )rice- the value of all )ositions is marked4to4the4market each day after the official close i.e. the accounts are either de*ited or credited *ased on how well the )ositions faired in that day5s tradin! session. If the account falls *elow the maintenance mar!in level the trader needs to re)lenish the account *y !ivin! additional funds. 0n the other hands- if the )osition !enerates a !ain- the funds can *e withdrawn 1those funds a*ove the re;uired initial mar!in2 or can *e used to fund additional trades.

e) Pricing of 0utures
In futures contract the )rice is )redetermined. The seller knows how much he is !oin! to *e )aid and the *uyer knows how much he is !oin! to )ay at a future date. 's futures contracts are standardiGed accordin! to ;uantity- ;uality and location- it is )rice that is the only factor on which *uyers and sellers can *ar!ain. The )rice in futures market is determined *y a mechanism called Price discovery. Price &iscover% It is the )rocess of arrivin! at a fi!ure in which one )erson *uys and another sells a futures contract for a s)ecific e")iration date. In an active futures market- the )rocess of )rice discovery continues from the market5s o)enin! until its close. The )rices are freely and com)etitively derived. Future )rices are therefore considered to *e su)erior to the administered )rices or the )rices that are determined )rivately. lessenin! the o))ortunity for control *y a few *uyers and sellers. In an active futures markets the free flow of information is vital. Futures e"chan!es act as a focal )oint for the collection and dissemination of statistics on su))liestrans)ortation- stora!e- )urchases- e")orts- im)orts- currency values- interest rates and other )ertinent information. 'ny si!nificant chan!e in this data is immediately reflected in the tradin! )its as traders di!est the new information and adDust their *ids and offers accordin!ly. 's a result of this free flow of information- the market determines the *est estimate of today and tomorrow?s )rices and it is considered to *e the accurate reflection Further the low transaction costs and fre;uent tradin! encoura!es wide )artici)ation in futures markets

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of the su))ly and demand for the underlyin! commodity. Price discovery facilitates this free flow of information- which is vital to the effective functionin! of futures market. Inter-retation of Price c)arts an& ta(les E"am)leB $CDE# Cotton Futures Prices on Thursday- &e)tem*er /- 7>>8. Contract 0)en @i!h Eow &ettle Eifetime Eifetime 0)en Interest <<677 ,/,<>=

Month @i!h Eow &e)t 7F7.=8 7F<.8> 7F,.8> 7F7.>> 7=>.8> 7<..>> Dec 7FF.78 7F=.8> 7F/.=8 7FF.=8 7F..>> 7<8.8> Estimated %olume <.->>>C volume ed <.867C o)en interest </.6F=P6.=

The first line of the ta*leB Cotton 8->>> K!C +s )er ,> K!. This indicates that the ta*le a))lies to the $CDE# Cotton contract- the contract siGe is 8->>> K!- and the )rices shown in the ta*le are in units of +s )er Kilo!rams. 0)enin! Price B The o)en or o)enin! )rice is the )rice or ran!e of )rices for the day5s first trades- re!istered durin! the )eriod desi!nated as the o)enin! of the market or the o)enin! call. Closin! Price B The closin! )rice is the )rice or ran!e of )rices at which the commodity futures contracts are traded durin! the *rief )eriod desi!nated as the market close or on the closin! call 1i.e. last minute of the tradin! day2. @i!hest PriceB The word hi!h refers to the hi!hest )rice at which a commodity futures contract is traded durin! the day. Eowest PriceB Eow refers to the lowest )rice at which a commodity futures contract is traded durin! the day.

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&ettlement PriceB This is a**reviated as settle in most of the )ricin! ta*les. There will *e many trades occurrin! in the last few minutes. &ettlement )rice is com)uted from the ran!e of closin! )rices. &ettlement )rice is im)ortant to calculate the daily !ains- losses and mar!in re;uirements. It is used *y the clearin! house to calculate the market value of outstandin! )ositions held *y its mem*ers. Chan!eB The chan!e refers to the chan!e in settlement )rices from the )revious days close to the current day5s close. Eifetime hi!h and lowB They refer to the hi!hest and lowest )rices recorded for each contract from the first day it traded to the )resent. 0)en InterestB It refers to the num*er of outstandin! contracts for each maturity month. In the line at the *ottom of the ta*le- Est. vol. indicates the estimated volume of tradin! for that day. %ol. ed. indicates the tradin! volume for the )revious day. 0)en interest refers to the total o)en interest for all contract months com*ined at the end of the day5s tradin! session. Then the fi!ure P6.= indicates an increase of 6.= contracts from the o)en interest of the )revious day.

Patterns of 0utures Prices

's the maturity date a))roaches the futures )rices show different )atterns. Based on these )atterns the markets can *e )redicted. $ormal MarketsB Markets where the )rices increase as the time to maturity increases. Inverted MarketsBMarkets where the )rice is a decreasin! function of the time to maturity.

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Convergence of futures -rice to s-ot -rice

's the delivery month of a future contract a))roaches the futures )rices conver!es to the s)ot )rice of the underlyin! asset. hen the delivery )eriod is reached the futures )rice e;uals or is very close to the s)ot )rice. This ha))ens *ecause if the futures )rice is a*ove the s)ot )rice durin! the delivery )eriod it !ives rise to a clear ar*itra!e o))ortunity for traders. In case of such ar*itra!e the trader can short his futures contract*uy the asset from the s)ot market and make the delivery. This will lead to a )rofit e;ual to the difference *etween the futures )rice and s)ot )rice. As traders start exploiting this arbitrage opportunity the demand for the contract will increase and futures prices will fall leading to the convergence of the future price with the spot price. If the futures price is below the spot price during the delivery period all parties interested in buying the asset will take a long position. The trader would buy the contract and sell the asset in the spot market making a profit equal to the difference between the future price and the spot price. As more traders take a long position the demand for the particular asset would increase and the futures price would rise nullifying the arbitrage opportunity.

f) Closing out t)e Positions

The futures contracts are s;uared4off *efore the delivery date. Most of the traders choose to closeout their )ositions )rior to the delivery )eriod s)ecified in the contract. Closin! out means takin! o))osite )ositions of trade from the ori!inal one. Continuin! from E"am)le , B The Mum*ai investor who *ou!ht the Decem*er soy*ean futures on &e)tem*er 7- 7>>8 can close out the )osition *y sellin! 1i.e. !oin! short2 one Decem*er futures contract on any date *efore the a!reed u)on delivery date. The Indore investor who sold the &oy*ean futures can closeout *y *uyin! one Decem*er contract at any time *efore the Delivery date. The investor5s total !ain or loss is determined *y the chan!e in the futures )rices *etween the date of enterin! in to the contract and date of closin! out the contract.

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CEE'+I$( '$D &ETTEEME$T

INTROD3CTION
Most of the futures contracts do not lead to the actual )hysical delivery of the underlyin! asset. The settlement is *y closin! out- )hysical delivery or cash settlement. 'll these settlement functions are taken care of *y an e"chan!e4clearin! house- called clearin! house J cor)oration- in futures transactions.

Clearing /ouse
' clearin! house is a system *y which e"chan!es !uarantee the faithful com)liance of all trade commitments undertaken on the tradin! floor or electronically over the electronic tradin! systems. The main task of the clearin! house is to kee) track of all the transactions that take )lace durin! a day so that the net )osition of each of its mem*ers can *e calculated. It !uarantees the )erformance of the )arties to each transaction. It is res)onsi*le forB Effectin! timely settlement Trade re!istration and follow u) Control of the evolution of o)en interest Financial clearin! of the )ayment flow Physical settlement 1*y delivery2 or financial settlement 1*y )rice difference2 of contracts. 'dministration of financial !uarantees demanded *y the )artici)ants.

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0unctions of t)e clearing )ouse

Clearin! house has a num*er of mem*ers- who are mostly financial institutions res)onsi*le for the clearin! and settlement of commodities traded on the e"chan!es. The mar!in accounts for the clearin! house mem*ers are adDusted for !ains and losses at the end of each day 1in the same way as the individual traders kee) mar!in accounts with the *roker2. In the case of clearin! house mem*ers only the ori!inal mar!in is re;uired 1and not maintenance mar!in2. Everyday the account *alance for each contract must *e maintained at an amount e;ual to the ori!inal mar!in times the num*er of contracts outstandin!. Thus de)endin! on a day5s transactions and )rice movement the mem*ers either need to add funds or can withdraw funds from their mar!in accounts at the end of the day. The *rokers who are not the clearin! mem*ers need to maintain a mar!in account with the clearin! house mem*er throu!h whom they trade in the clearin! house.

Provisions +e!ardin! Mem*ers 0f The Clearin! @ouse

REG3CATION O0 CCEARING /O3SE
E"chan!es shall )rescri*e the )rocess from time to time for the functionin! and o)erations of the Clearin! @ouse and to re!ulate the functionin! and o)erations of the Clearin! @ouse for the settlement of non4de)ository deals.

CCEARING DISCRETION

/O3SE

TO

DECIEER

CO44ODITIES

AT

The Clearin! @ouse is entitled at its discretion to deliver commodities- which it has received from a mem*er under these +e!ulations to another mem*er who is entitled under these +e!ulations to receive delivery of commodities of a like kind or to instruct a mem*er to !ive direct delivery of commodities which he has to deliver.

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Processes of a clearing )ouse

Tradin! +oo Price information Commitments information Clearin! &ection4 +e)ort on Mar!ins In4out

Mem*er Tradin! +e)ort &tatement of commitments

Checkin !

In)ut

Com)uter Processin! &tatement of Mar!ines Mar!in +e;uired 4 Mar!in Mar!in re;uired or refunda*le 0ut)ut &tatement of account for daily &ettlement Daily clearin! account 1Mark to Market2 E"chan!e Tradin! fee E"chan!e Ta" Eia*ility +eserve 'mount to *e )aid or received Mar!in re;uired is to *e )aid *y cash or su*stituta*le securities. Mar!in refunda*le is to To *e made throu!h account transfer at the contracted *ank *y noon of 7 *usiness days after

Payment

NO CIEN ON CONSTIT3T3ENTFS CO44ODITIES

hen a mem*er is declared a defaulter neither the E"chan!e nor the creditor of the defaulter shall *e entitled to any lien on the commodities delivered *y him to the Clearin! @ouse on account of his Constituents.

CCEARING CODE AND 0OR4S

' mem*er shall *e allotted a Clearin! Code- which must a))ear on all forms used *y the mem*er connected with the o)eration of the Clearin! @ouse. The Clearin! Forms and Formats to *e used *y the mem*ers shall *e )rescri*ed *y the Clearin! @ouse. /7

SIGNING O0 CCEARING 0OR4S

The mem*er or his Clearin! 'ssistant shall si!n all Clearin! Forms

SPECI4EN SIGNAT3RES
' mem*er shall file with the Clearin! @ouse s)ecimens of his own si!nature and of the si!natures of his Clearin! 'ssistants. The mem*er and his 'uthorised +e)resentative in the )resence of an officer of the E"chan!e or of the Clearin! @ouse shall si!n the s)ecimen si!natures card.

CCEARANCE 25 4E42ERS ONC5

Clearin! mem*ers includin! )rofessional Clearin! Mem*ers only shall *e entitled to clear and settle contracts throu!h the Clearin! @ouse.

C/ARGES 0OR CCEARING

The E"chan!e shall from time to time )rescri*e the scale of clearin! char!es for the clearance and settlement of transactions throu!h the Clearin! @ouse.

CCEARING /O3SE 2ICCS

The Clearin! @ouse shall )eriodically render *ills for the char!es- fees- fines and other dues )aya*le *y mem*ers to the E"chan!e which would also include the char!es for the use of the )ro)erty as well as the char!es- fines and other dues )aya*le on account of the *usiness cleared and settled throu!h the Clearin! @ouse and de*it the amount )aya*le *y mem*ers to their accounts. 'll such *ills shall *e )aid within a week of the date on which they are rendered.

CIA2ICIT5 O0 T/E CCEARING /O3SE

The only o*li!ation of the Clearin! @ouse shall *e to facilitate the delivery and )ayment in res)ect of commodities- transfer deed and any other documents *etween mem*ers.

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SETTCE4ENT 4ET/ODS
' contract can *e settled in three waysB By )hysical delivery of the underlyin! asset. Closin! out *y offsettin! )ositions. Cash settlement. Closing Out Most of the contracts are settled *y closin! out. In closin! out- the o))osite transaction is effected to close out the ori!inal futures )osition. ' *uy contract is closed out *y a sale and sale contract is closed out *y a *uy. Cas) Settle'ent hen a contract is settled in cash it is marked to the market at the end of the last tradin! day and all )ositions are declared closed. The settlement )rice on the last tradin! day is set e;ual to the closin! s)ot )rice of the underlyin! asset ensurin! the conver!ence of future )rices and the s)ot )rices.

Co''o&it%

P)%sical settle'ent sc)e&ule for -a% inG-a%out6s

&oya*ean +efined soya*ean oil +a)eseed mustard seed +a)eseed mustard seed oil +BD Palmolein Crude )alm oil Medium sta)le cotton Eon! sta)le cotton (old &ilver T6 is t)e &ate of e.-ir% of t)e contract.

TP= TP= TP= TP= TP= TP= TP,> TP,> TP7 TP/

Cas) settle'ent on TH for all contracts.

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Process of De'aterli@ation$D
DematerliGation refers to issues of an electronic credit- instead of vaultJ warehouse recei)t- to the de)ositor a!ainst the de)osit of commodity. 'ny )erson 1a consultant2 seekin! to dematerialiGe a commodity has to o)en an account with an a))roved de)ository )artici)ant. In case of a!ri commodities the constituent delivers the commodity to the e"chan!e4a))roved warehouses. The commodity *rou!ht *y the constituent is checked to the ;uality *y the e"chan!e4a))roved assayers *efore the de)osit of the same is acce)ted *y the warehouse. If the ;uality of the commodity is a )er the norms defined and notified *y the e"chan!e from time to time- the warehouse acce)ts the commodity and sends conformation in the re;uisite form to the +IT a!ent who u)on verification- confirms the de)osit of such commodity to the de)ository for !ivin! credit to the demat account of the said constituent. In case of )recious metals- the commodity must *e accom)anied with the assayers? certificate. The vault acce)ts the )recious metal- after verifyin! the contents of assayers? certificate with the )recious metal *ein! de)osited. 0n acce)tance- the vault issues an acknowled!ement to the constituent and sends confirmation in the re;uisite format to the +IT a!ent who u)on verification- confirms the de)osit of such )recious metal to the de)ository for !ivin! credit to the demat account of the said constituent.

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&eller client of mem*er

&u*mits commodities I Demat +e;uest Form

arehouse &ends data to $&DE via + I T '!ent 'cce)ts (oods + I T '!ent

$&DE

Process of reD'ateriali@ation$D
+e4materialiGation refers to issue of )hysical delivery a!ainst the credit in the demat account of the constituent. The constituent seekin! to rematerialiGe his commodity holdin! has to make a re;uest to his DP then routes his re;uest throu!h the de)ository system to the +I T a!ent issues the authoriGation addressed to the vaultJwarehouse to release )hysical delivery to the constituent.

Co''o&it% Anal%sis
&tudy on some commodities that are traded in the commodity markets. Commodities selected are which are traded widely in the market. &o commodities like !old and !uar are selected. This analysis contains *rief descri)tion if )roduct- factors affectin! its su))ly and demand-

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Gol&

For centuries- !old has meant wealth- )resti!e- and )ower- and its rarity and natural *eauty have made it )recious to men and women alike. 0wnin! !old has lon! *een a safe!uard a!ainst disaster. Many times when )a)er money has failed- men have turned to !old as the one true source of monetary wealth. Today is no different. hile there have *een fluctuations in every market and decided downturns in some- the e")ectation is that !old will hold its own. There is a limited amount of !old in the world- so investin! in !old is still a !ood way to )lan for the future. (old is homo!eneous- indestructi*le and fun!i*le. These attri*utes set !old a)art from other commodities and financial assets and tend to make its returns insensitive to *usiness cycle fiuctuations. (old is still *ou!ht 1and sold2 *y different )eo)le for a wide variety of reasons Q as a use in Dewellery- for industrial a))lications- as an investment and so on. Traditionally &outh 'frica has *een the lar!est )roducers of !old in the world accountin! for almost .>N of all non communist out)ut in ,6=>. 'lthou!h it retained its )osition as the sin!le lar!est !old )roducin! country- its share had fallen to around ,=N *y ,666 *ecause of hi!h costs of minin! and reduced resources. In contrast other countries like U&- 'ustralia- Canada and China have increased their out)ut e")onentially with out)ut from develo)in! countries like Peru and other Eatin 'merican countries also increasin! im)ressively.

Glo(al an& &o'estic De'an&DSu--l%

The demand for !old may *e cate!oriGed under two heads consum)tion demand and investment demand. Consum)tion of !old differs accordin! to ty)e- namely industrial a))lications and Dewellery. The s)ecial feature of !old used in industrial and dental

/=

a))lications is that some of it cannot *e salva!ed and thus is truly consumed. This is unlike consum)tion in the form of Dewellery- which remains as stock and can rea))ear at future time in market in another form. Consumer demand accounts for almost 6>N of total !old demand and the demand for Dewelry forms .6N of consumer demand. !!# In&ia 3SA C)ina SE Asia Sau&i Tur+e% 8>F.6. <<,.8F <=/./. <76.F6 ,./.=8 ,8<.>< !!: =<F../ <F7.>/ />F..< 7>/.>/ ,66.>F 7>,..F !!; .,/.6, /7..76 <,/./8 8,.F< 7>..<6 ,=7.>> !!! .<...F /86.=, </<.<. 7F8.F7 ,66.<= ,<6.>< 8999 .88.</ <.=.88 <76.<. 7F=.,. 77,.,/ 7>=.,8

DDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDDD

1orl& 4ar+ets
Today5s !old market is a round4the4world- round4the4clock *usiness- )layed out lar!ely on dealers5 tradin! screens. The core of the *usiness- however- remains in the key markets of Eondon- as the !reat clearin! house- $ew Mork as the home of futures tradin!- Rurich as a )hysical turnta*le- Istan*ul- Du*ai- &in!a)ore and @on! Kon! as doorways to im)ortant consumin! re!ions and Tokyo where the Commodity E"chan!e 1T0C0M2 sets the mood of La)an. Even Paris still has a small market- a reminder of the days when the French were !reat hoarders- while Mum*ai has increasin! im)ortance under India5s li*eralised !old re!ime that )ermits official im)orts throu!h local markets.

Do'estic Scenario
India is the world5s lar!est consumer of !old. 'ccordin! to (old Field Minerals &ervicein 7>>, it a*sor*ed around =>> tons from the world market- com)ared to Dust <7> tons in ,66/C that is without takin! into account the recyclin! of scra) from the immense stock

/.

of close to ,>->>> tons *uilt u) on the su*4continent in the last few hundred years- or !old im)orted for Dewellery manufacture and re4e")ort. Durin! ,66>468- India?s share in !lo*al !old demand is )laced at a*out />7 tons 1,F./ )er cent2 a year- includin! im)orts into India. This should *e viewed a!ainst its share of >.F )er cent in world trade. 0n the other hand- India e")orted a*out 7< tons in ,668 accountin! for a ne!li!i*le )art of world trade. (old is valued in India as a savin!s and investment vehicle and is the second )referred investment *ehind *ank de)osits. India is the world?s lar!est consumer of !old in Dewellery 1much of which is )urchased as investment2. @owever- !old has to com)ete with the stock market- investment in internet industries- and a wide ran!e of consumer !oods. In the rural areas 77 carat Dewellery remains the *asic investment.

Ae*eller%
India is the world5s foremost !old Dewellery fa*ricator and consumer with fa*ricator and consum)tion annually of over F>> tons accordin! to (FM&. Measures of consum)tion and fa*rication are made more difficult *ecause Indian Dewellery often involves the re4 makin! *y !oldsmiths of old family ornaments into li!hter or fashiona*le desi!ns and the amount of !old thus recycled is im)ossi*le to !au!e. Estimates for this recycled Dewellery vary *etween .> tons and <>> tons a year. (FM& estimates are that official !old *ullion im)orts in 7>>, were F8/ tons.

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0actors affecting t)e -rice of Gol&

3ncontrolle& an& uncertain su--l%
Besides new minin! su))ly- the availa*le su))ly of !old in the market is made u) of three maDor 3a*ove4!round sources?. In recent years- the !rowth in !old su))ly has come from these 3a*ove!round? sources. +eclaimed scra)- or !old reclaimed from Dewelry and other industries such as electronics and dentistryC 0fficial- or central4*ank- sales (old loans made to the market from official !old reserves for *orrowin! and lendin! )ur)oses. The su))ly from these sources is not determined easily- so it is not )ossi*le to estimaye the total su))ly.

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0luctuating an& uncertain &e'an&

The dere!ulation of the Indian !old market durin! the ,66>s *rou!ht a*out a dramatic chan!e. Lewellery demand increased from 7>. tons in ,66, to )eak at F8. tons in ,66.while demand for investment *ars !rew from ,> tons in ,66, to ,,F tons in ,66.- and re!istered .8 tons in 7>>7. India in 7>>, it a*sor*ed around =>> tons from the world market com)ared to Dust <7> tons in ,66/C that is without takin! into account the recyclin! of scra). In India the rural )o)ulation accounts for a))ro"imately =>N of national !old demand. Thus India?s annual !old consum)tion is dictated *oth *y the monsoon- with its effect on the harvest- and the marria!e season. Between ,66.47>>, annual Indian demand for !old in Dewellery e"ceeded F>> tons- however in 7>>7- due to risin! and volatile )rices and a )oor monsoon season- this dro))ed *ack to /6> tons. The maDor factors influencin! demand for !old in India are (eneration of lar!e market sur)lus in rural areas as a result of all round increase in a!ricultural )roduction Unaccounted incomeJwealth !enerated mainly in the service sector Domestic !old )rices relative to those of ordinary shares and international !old )rices

1i&e an& unforeseen -rice variation

Economic forces that determine the )rice of !old are different from- and in many cases o))osed to- the forces that influence most financial assets. Econometric studies indicate that the )rice of !old is determined *y two sets of factorsB 3su))ly? and 3macro4economic factors?.

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&u))ly and the !old )rice are inversely related. In the case of 3macro4economic factors?the U.&. dollar tends to *e inversely related to !old- while inflation and !old tend to move in tandem with each other. 'lso- hi!h low4interest rates are !enerally a )ositive factor for !old. 0verall- the im)act of all of these determinants on the !old )rice is Dud!ed to *e neutral4to4)ositive at this time. 'lso there is low to ne!ative correlation *etween returns on !old and those on stock markets

'n 'rticle from 3The @indu?

De'an& for gol& set to re'ain strong

World price likely to reach $ !! an ounce by the end of "!! . #il$dollar$gold price link broken Alternative for speculative investors %ine$ month sale in India exceeds that of whole of "!!&.

'(')AI *th %ovember+ "!! ,World -old .ouncil /W-.0 data reveal that in the first nine months of "!! + Indian demand was up at 1& tonnes /&*! tonnes0 and Indians bought 1&" tonnes of the metal more than the whole of last year. )esides+ it is expected

87

that with the festive and wedding seasons in full swing+ the full year figure could well break the previous record of *2 tonnes in 3224. According to the W-.+ following the astonishing growth witnessed in the first half of "!! + when total consumer demand rose per cent. With the (.5. dollar at a two$year high and oil prices having peaked+ the alternative to investors seems to have been gold. 'adhusudan 6aga+ )ullion Analyst and .onsultant+ -oldfield 'ineral 5ervices+ attributed the spectacular rise to open speculative positions in the (.5. 7This time the link between gold+ oil and the (.5. dollar seems to have been broken. While gold has traditionally had a direct link with oil prices and an inverse one with the (.5. dollar+ this time+ gold has moved up in consonance with falling oil and rising dollar.7 In India+ investment demand in the first nine months of "!! was up ! per cent at 3! tonnes /*3 tonnes0 and in the 8uly$5eptember period+ it was up 1 per cent. -lobally+ the price moved up to $&44 per ounce from $& 4 per ounce in 8uly. 'r. 6aga was confident that prices would cross the $500 per ounce mark by the year-end. 5an9eev Agarwal+ 'anaging 6irector+ Indian 5ubcontinent+ World -old .ouncil+ 7-old has been on the up because over the last few years+ with the (.5. dollar weakness and the huge deficit in the (.5.+ the investors have been looking at other options like housing+ hedge funds and gold. Also+ oil prices have moved up in last six months. 5o gold has been seen as a means of diversification of portfolio.7 7The underlying prospects for gold in India remain very good. The economy continues to perform.7 according to the W-..

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Tradin! system

$CDE#5s Tradin! &ystem Monday to Friday Tradin! @ours 4 ,>.>> a.m. to /.>> ).m. I 8.>> ).m. to ,,.>>

Tradin! @ours

).m. Closin! session S ,,.,8 ).m. to ,,.<> ).m. or as may *e decided and notified *y the E"chan!e from time to time

Unit of tradin! Delivery unit TuotationJBase %alue Tick siGe Price *and

, k! , k! +s )er ,> (rams of (old with 666.6 fineness +e , or as may *e notified *y the E"chan!e from time to time Eimit ,>N. Eimits will not a))ly if the limit is reached durin! final <> minutes of tradin! $ot less than 668 fineness *earin! a serial num*er and identifyin! stam) of a refiner a))roved *y $CDE#. Eist of a))roved refiners will *e availa*le with the E"chan!e and also on its we* siteB www.ncde".com $one < concurrent month contracts or as may *e notified *y the E"chan!e from time to time Mum*ai as also other centers as may *e notified *y the E"chan!e from time to time The first < contracts will *e launched on March <,- 7>>/. &u*se;uently- tradin! in any contract month will o)en on the 7,st day of the month or as may *e decided *y the E"chan!e from time to time. 7>th day of the delivery month- if 7>th ha))ens to *e a holiday then )revious workin! day Mem*er4wiseB Ma" 1+s 7>> Crores- ,8N of o)en interest2 Client4wiseB Ma" 1+s ,>> Crores- ,>N of o)en interest2 The )rice adDustment will *e !iven for the fineness *elow 666.6. The settlement )rice for less than 666.6 fineness will *e calculated asB 1actual fineness J 666.62 &ettlement Price 88

Tuality s)ecification

Tuantity %ariation $o. of active contracts Delivery center

0)enin! Date

Due date Position limits

PremiumJDiscountin!

8. Guar See&

Intro&uction$D
(uar- or cluster *ean- 1Cyamo)sis tetra!onolo*a 1E.2 Tau*2 is a drou!ht4tolerant annual le!ume cro). (uar is *ein! !rown in India since ancient time and the Tender (reen (uar is an im)ortant source of nutrition to animals and humans and is consumed

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as a ve!eta*le and cattle feed The (uar le!ume )lant is an a!ricultural )roduct !rown in arid Gones of west and $orth est India and )arts of Pakistan.

India accounts for .>N of the total !uar )roduced in the world and =>N is cultivated in +aDasthan. ')art from +aDasthan- it is *ein! !rown mainly in (uDarat@aryana and PunDa*. It is also !rown in some )arts of Uttar Pradesh and Madhya Pradesh.

Glo(al Scenario$D Pakistan- &udan and )arts of U&' are the other maDor (uar !rowin! countries. =8N of the (uar (ums or their derivatives )roduced in India are e")orted mainly to U&' and Euro)ean countries. The value added derivatives of (uar Powder are used *y the various industries in India as well as a*road.

Geogra-)icGAgrono'ic suita(ilit%$

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(uar !rows *est in sandy soils and it needs moderate- intermittent rainfall with lots of sunshine. Too much )reci)itation can cause the )lants to *ecome leafier- there*y reducin! the num*er of )ods andJor the num*er of seeds )er )od which affects the siGe and yield of the seeds. (uar is a rain fed monsoon cro)- which re;uires .4,8 inch of rain in <4/ s)ell and is !enerally sown after the monsoon rainfall in the second half of Luly to early 'u!ust and is harvested in 0cto*er 4 $ovem*er. (uar re;uires 7 rainfalls *efore sowin!- one when the cro) *uds- and one rainfall when the cro) comes u) well and the *lossomin! starts. The (uar has the )ro)erties to re!enerate soil nitro!en and the endos)erm of !uar seed is an im)ortant hydrocolloid widely used across a *road s)ectrum of industries. +aDasthan accounts for =>N of the (uar &eed cultivation. Pricing Pattern$D (uar seed has shelf life of more than < years without losin! out on any of its )ro)erties or ;ualities. It re;uires the *arest minimum maintenance and handlin! environment. The )rice ran!e of (uar seed ran!es from +s .8>J4 )er ;tl to +s F8>>J4 ;tl.

T)e Ealue C)ain$D Farmer

'!ent 1mandi2 stockist Broker

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&)lit Processin! Units Broker Powder Processin! Units

Industrial use 1localJe")ort2

Consumer Earious In&ustrial a--lications of Guar Po*&er$D

Food- )et4food- nutritional )roducts and )harmaceuticals. Personal care )roducts. @ousehold )roducts. Paints. Te"tiles and car)ets. Minin! and flocculation. 0ils- !as and other dee) well o)erations. Pa)er.

I'-e&i'ents in &evelo-'ent of co''o&it% e.c)anges

'!ricultural commodity Futures e"chan!es in India are still not develo)ed as com)ared to other countries. The dominant )olitical ideolo!y durin! early years after inde)endence dealt a severe *low to develo)ment of futures e"chan!es in India. It is only after the onset of li*eraliGation durin! ,66>s that attitude towards futures tradin! has chan!ed and its )otential *enefits are now *ein! acknowled!ed in the )olicy circles. @owever- there are still a num*er of im)ediments in their !rowth many of which are on account of re!ulatory

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)rovisions while others relate to the )ractices of trade )revalent in these e"chan!es. 's a result of these im)ediments mem*ershi) of commodity e"chan!es and volume of futures transactions have remained low. The mem*ershi) of a maDority of a!ricultural commodity e"chan!es have either remained sta!nant or declined durin! last few years. &mall and sta!nant num*er of mem*ers )roves that the *usiness of tradin! in futures is not considered attractive. E"am)les of a few e"chan!es will illustrate this )oint. The num*er of active mem*ers in Kochin )e))er e"chan!e declined from 88 in ,666 to << in 7>>,. In castor oil e"chan!e at Mum*ai it declined from . to 8- in Potato e"chan!e at @a)ur- it declined from <F to 7, and in Cotton e"chan!e it declined from ,8 to = durin! the same )eriod. In most of the a!ricultural commodity e"chan!es- less than ,> )er cent of the re!istered mem*ers are actually actively tradin!. These are definite )ointers to dee) malaise afflictin! the futures tradin! *usiness in India. &imilarly- the volume of transactions in a!ricultural commodity e"chan!es have *een very low e"ce)t in )e))er e"chan!e at Cochin- (ur e"chan!e at @a)ur- Castor seed e"chan!e at 'hmeda*ad- (ur e"chan!es at Bhatinda and MuGaffarna!ar- &oya e"chan!e at Indore and Lute e"chan!e at Kolkata where the annual transaction e"ceeded +s. 7>>> Crores durin! 7>>>4>,. The avera!e volume of transaction of other e"chan!es was less than +s. ,>> Crores durin! 7>>>4>,. &ome of the reasons for low mem*ershi) and low volume of transactions in a!ricultural commodity e"chan!es are discussed *elowB

o Most of the e"chan!es still follow o)en outcry system. This stystem is not considered to *e efficient and trans)arent. The chances of mani)ulations are ;uite hi!h in o)en outcry system. This is the reason why the Forward Market Commission has *een em)hasiGin! on the need for automation and has made it mandatory to have on4line tradin! system for all the commodity e"chan!es that are set u) newly. There is a !lo*al trend towards electronic tradin!C even the e"chan!es that have a le!acy of o)en outcry 1and the concomitant )ro*lem of floor *rokers keen on defendin! their turf2 are now movin! towards electronic tradin!.

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o Most of the a!ricultural commodity e"chan!es in India are *eset with the )ro*lem of )oor infrastructure. They even lack *asic infrastructure like modern tradin! rin!- warehousin! facilities. inde)endent clearin! house o Under the e"istin! system- users of e"chan!e- i.e. traders- hed!ers- s)eculatorsetc need to re!ister their full details with Forward Market Commission. This is not in tune with forei!n e"chan!es norms. This adds unre;uired re!ulatory costs. This *ecomes a si!nificant issue in India where there is lar!e e")anda*le economy. o Due to history of *an on futures tradin! a 9@avala: or unor!aniGed marketwas *uilt and they continue to e"ist now. ' lar!e )ortion of future is diverted to this market. Due to there lon! e"istence they have *uilt u) !ood re)utation in terms of li;uidity and inte!rity some of these markets trade as much as 7>4<>Nhi!her than re!istered markets. o There is wides)read lack of awareness the role and techni;ue of tradin! amon! the )otential *eneficiaries. 0nly traditional )layers who have *een )artici)atin! in such tradin! either in formal markets or !ray markets. This acts as a *arrier to the !rowth of futures tradin! in India. o Currently- Indian ta" law does not )ermit losses on a futures transaction to *e treated as a *usiness e")ense to *e offset a!ainst- say- a )rofit on the underlyin! )hysical trade 1unless there is a definite underlyin! contract2. o ' maDor flaw in Indian commodities futures market is the )ractice of havin! an e"clusive futures e"chan!e for each commodity. This has ha))ened due to historical reasons. Futures e"chan!es !ot set u) in s)ecific re!ions in which there was an active s)ot market for a )articular a!ricultural commodity. 's a result the volumes availa*le at each e"chan!e are so miniscule that it does not )ermit lar!e investments re;uired to create a modem derivative e"chan!e.

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o $o futures market can e"ist in the a*sence of varia*ility in the )rices. Throu!h a host of diverse measures such as )rice controls- )rice su))ort o)erations)rocurement and distri*ution schemes- *uffer stock o)erations- restriction on stora!e and movement- etc. the !overnment has tried to virtually eliminate )rice risks. There are also commodity *ased s)ecialiGed !overnment a!encies like $'FED- Cotton Cor)oration of India- Lute Cor)oration of India- etc. which control su))lies of some farm )roducts. In the )resence of these restrictions the futures markets can5t *e e")ected to develo) and )lay any meanin!ful role in )rice discovery of a!ricultural commodities.

Reco''en&ations
ElectronicG4o&ern Tec)niIue
Markets in are traditional ty)e- so there are hu!e amount of mani)ulations in it. &o it?s necessary for the !overnin! *ody to use modern techni;ue for tradin! in futures to avoid such mani)ulations and )rovide its mem*ers with fair tradin!.

Create A*areness a'ong 0ar'ers

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In India many farmers- traders are not aware a*out the e"istence of commodity markets. Ins)ite of efforts taken *y the !overnment to create awareness it is still not enou!h to attract farmers and traders towards the commodity and re!ulated markets. This is due to lack of educational facilities to farmers.

Per'itting 0II an& 'utualDfun& -artici-ation$D

Currently- re!ulations do not )ermit FIIs and mutual funds to )artici)ate in

commodity tradin! in India. +emoval of these restrictions is likely to )rovide further de)th to the commodity markets as FIIs are likely to trade actively across various commodity markets and asset classes !lo*ally to take advanta!e of ar*itra!e o))ortunities.

Increasing cor-orate an& retail -artici-ation$D

Commodity tradin! in India is still at a nascent sta!e- with the maDority of volume attri*uta*le to traders- industry associations and s)eculators. Cor)orate and retail )artici)ation is ne!li!i*le. @owever- I *elieve this will chan!e once the contracts mature and there is sufficient li;uidity. U) to now only a few com)anies have used commodity e"chan!es to hed!e on a trial *asis. Their full entry will *oost li;uidity and tradin! volume.

Create Infrastructure
Commodity markets lack )ro)er infrastructural facilities which are necessary for conductin! tradin! smoothly. &o it is necessary to have !ood infrastructural facilities to im)rove commodity markets. It should have )ro)er orderin!- fillin! - )rocessin!- stora!edis)atchin! facilities.

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 Contract of S'aller Ealue

E"chan!es should come with conce)t like contract of smaller value. ' contract of smaller would *e a*le to attract the small investors to )lay in the markets. This could ena*le to a*olish the mono)oly of few e"istin! mem*ers. This can also hel) these e"chan!es to increase the num*er of their mem*ers.

Intro&uction of o-tions
Transaction volume will rise further if the re!ulator o)ens u) the commodity e"chan!es for commodity o)tion tradin!. Currently- only tradin! in commodity futures is )ermissi*le. (lo*ally- tradin! volume from o)tions is 7>4<> N of the futures volumeim)lyin! that India e"chan!es could !et a further 7>4<> N *oost in commodity tradin! volume.

1are)ousing 0acilit%
'll the e"chan!es have their warehouses at a )articular )lace i.e. the )lace where it is traded in hu!e num*ers or )lace where it is )roduced. &o it is necessary for the e"chan!es to locate heir warehouses at various )laces as it is )ossi*le to deliver and collect the !oods. This could hel) in increasin! )ercenta!e of delivery.

Co'-ulsor% Deliver%
E"chan!es can also try with com)ulsory delivery contracts. This contract can *e hel)ful *asically for farmers throu!h which they can sell off their )roduce at reasona*le )rices.

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Conclusion
In s)ite of the *est efforts of the !overnment and the *anks- the credit off take for a!ricultural sector is not increasin! to the desired e"tent. For this to ha))en- dee)enin! of a!ricultural credit market is necessary. If farmers have access to market4*ased )rice insurance throu!h futures markets- they will *e a*le to *enefit from hi!her income *y commercial farmin! and the )otential )rofita*ility of s)ecialiGation. The hi!her investment re;uired for commercial and hi4tech farmin! will *oost the demand for farm credit. The )olicy environment !overnin! the Indian a!ricultural sector is ra)idly evolvin!. &everal measures have *een ado)ted which su!!est that international )rice and com)etition is likely to intensify in a!riculture sector in near future. In order to ena*le the Indian farmers to meet these challen!es com)rehensively- the )olicy environment will

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have to *e suita*ly chan!ed. The market forces will have to *e !iven a much !reater freedom to discover )rices. It is in this conte"t that futures markets assume a very im)ortant role in facilitatin! discovery of )rices and devisin! new and effective risk mana!ement tools for the *enefit of farmin! economy. The o)enin! of futures tradin! in several commodities- after an almost />4year !a)- is a welcome ste). Futures tradin! is em)loyed in all maDor !lo*al commodities markets as an effective hed!e a!ainst fluctuatin! )rices. @owever- in India a !reat deal of !roundwork- such as stren!thenin! Forward Market Commission- amendin! Forward Contract 'ct- ,687 and modifyin! Essential Commodities 'ct- Minimum &u))ort Price Mechanism- etc.- needs to *e done if the futures markets are to efficiently carry out their function as a mechanism of )rice discovery and risk mana!ement. There is a need to )ut in )lace a stron!- *ut not e"cessive- re!ulatory re!ime that will ensure trans)arency and efficient tradin! and encoura!e develo)ment of futures trade. Efficient futures markets will sta*iliGe the incomes of the farmers and )rovide an incentive to !o for ca)ital4intensive cash cro)s. This- in turn- will increase the demand for a!ricultural credit. @i!her and sta*le income of the farmers will hel) in emer!ence of a sustaina*le credit market in rural areas with hi!h demand for credit cou)led with hi!h )ercenta!e of re)ayment of loans.

2i(liogra-)%

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