Commodity Futures

What is Commodity & Commodity Future?

Commodity is a product having commercial value and which can be produced, bought, sold and consumed

Futures are standardized forward contracts traded on regulated exchanges.

Futures contract is a contractual agreement between two parties to buy or sell an asset of a specified quantity and quality at a specific time in future at a specific price through the Exchange

The main functions of an Exchange traded futures contract are Trade Guarantee Risk Management Price Discovery Transactional Efficiency Liquidity

Why Commodities?

Commodities are an unique asset class that can provide valuable diversification benefits to an investment portfolio Used in combination with traditional assets like stocks and bonds, they can potentially reduce overall portfolio long-term risk while increasing upside potential. The historically low correlation between commodities and financial assets means that commodities may perform well in neutral or negative years for stocks or bonds.

Equities vis-a-vis Commodities

EQUITIES
1. Exposure to specific sector as well as management of the company 2. Long term view may be specific to industry

COMMODITIES
1. Exposure to specific sector only 2. Long term view in general is bullish as directly correlated with economy growth 3. Downside Limited 4. Commodity Futures Market Volume = Approx. 25K Crores Every Day

3. Downside unlimited 4. Equity Volume = Approx. 20-30k crores every day in Cash = Approx. 75-90k crores every day in F & O 5. Options, Indices, PMS and participation from Institutional players 6. Futures market took 2 years to reach 1000 Crores 7. Shorter Bull & Bear Cycle

5. Permissions in process 6. Commodity futures took 9 months to reach 1000 Crores 7. Longer Bull & bear Cycle

Regulatory Mechanism
Regulated under FCRA 1952 and FCRR 1954 Regulated by Ministry of Consumer Affairs, Food and Public Distribution, Government of India The Forward Markets Commission

Ministry of Consumer Affairs

FMC (Forward Markets Commission)

Commodity Exchanges

National Exchanges

Regional Exchanges

MCX

NCDEX

NMCE

NBOT

20 Other Regional Exchanges

Multi Commodity Exchange of India (MCX)

MCX : An Overview
MCX is a fully electronic multi commodity futures exchange with permanent recognition from Govt. of India. Live operations since November 10, 2003 Average Daily Turnover (In Month of Oct 2010 ) Rs. 42384 Crores (US$ 9.54 Bn) Highest Daily Turnover Rs. 61368.73 Crores (US$ 13.78 Bn) - 10th Nov10 Highest Daily Turnover GOLD Rs. 23301 Crores ( US$ 5.04 Bn) - 27th Nov 09 Highest Daily Turnover SILVER - Rs. 25435.10 Crores (US$ 5.71 Bn) - 10th Nov 10 Highest Daily Turnover CRUDE OIL- Rs.10971.23 Crores (US$ 2.37 Bn) -18 August 10 Operations from 650+ centers with over 1900+ members & 18000+ Trading Terminals (TWS) Among the leading commodity exchanges globally (in terms of contracts traded)
No. 1 in Silver futures trading No.3 in Gold and Crude Oil futures trading

Key Shareholders of MCX

Cross-border Strategic Alliances

MCX Commodities
Bullion

Energy

Plastics

Gold 1 kg, 100 gm,8 gm Silver 30 Kg, 5 Kg Platinum CottonMedium Staple Cotton Long Staple Kapas Cotton-Short Staple

Fibre

Crude Oil Brent Crude Oil Furnace Oil Natural Gas Carbon Credits

Polypropylene HDPE PVC

Cereals

Maize

Oils and Oilseeds

Pulses

Masur (Masra) Yellow Peas

Metals

Copper Aluminum Zinc Tin Nickel Lead Sponge Iron Steel flat/Long

Soy Seed & Meal Castor Seed & Oil Mustard Oil Sesame Seed Crude Palm Oil Groundnut Oil RBD Palmolein Cotton Seed & Oilcake Refined Sunflower Oil Coconut Oil

Plantation

Coffee

Spices

Black Pepper Cumin Seed (Jeera) Red Chilli Turmeric Cardamom

Jaggery

Others

Gur Sugar S-30 Sugar M-30

Cashew Kernel Guarseed /Gum Mentha Oil Arecanut

Concepts
Every commodity has a contract running with an expiry date

Expiry Date Tender Period DDR

Trading Features

Automated screen-based trading

National reach Order driven trading system Transparent, Objective and Fair system of order matching Identity of the trader undisclosed

Daily Turnover limits for Buy and Sell for each User

Trading Hours Monday to Friday Agricultural commodities - 10.00 a.m. to 5.00 p.m. Bullion, Metals, Energy, Coffee and Petro-chemicals 10.00 a.m. to 11.30 p.m. Saturday (all commodities) - 10.00 a.m. to 2.00 p.m.

Due Date Rate

Average of the spot market price polled, after approval disseminated to the members on TWS. Due date rate is calculated by taking simple average of specific number of days (1, 3 or 5) prior to expiry of the contract as specified in the contracts. Announcement of DDR after trading session Ferrous and LME based non-ferrous metal contracts are disabled for trading after due broadcast notice to market and then announced.

Price Circuit Filter Price Circuit Filter

Pre-defined in the Contract Specifications Circuit Filter provides the maximum price range (% of variation) during a trading day

Varies for different commodities Computed on the previous days Close Price

Margins
Type of Margin Description Initial Margin Online Upfront minimum basic margin across all open positions. Special Margin Online incremental margin levied on DPR relaxation OR Margin levied as an Exchange / Regulatory RMS Shall be applicable across all the open market positions Additional Margin Margin levied over and above the initial & special margins, as an Exchange / Regulatory RMS Such margins may be levied on either on both or on long or short open positions Incremental Margin Online margins levied during the tender period of the contract on all the open positions till the time of expiry of the contract

Delivery Margin Margins levied on all the open positions marked for delivery
The margin is calculated on

the contract wise net open positions at end client level

and summed up for all the clients of the member to arrive at the total margin required for the member. Positions across the clients are not netted off to arrive at the margin requirements.

Initial Initial Margin Margin

Margins at Client level Payable upfront Alert signals to Members at 60%, 75% and 90% utilization

Automatic Square off mode if Member crosses the Permitted Margin limits (100%)

Mark-To-Market (MTM) Loss

Monitoring of MTM loss, both notional and booked, incurred by member up to the last executed trade

This is calculated on Real-time basis by way of computing the difference between actual traded price and last traded price

Alert signals to Members at 60%, 75%, 90% of MTM Losses

Automatic Square off mode, if Member crosses the Permitted MTM limit (75% of Deposit)

Delivery Process - Support Agencies

Sellers Option Both Options Compulsory

Delivery Logic
Sellers Option: o The seller has the right to deliver. o On receipt of valid intentions from the members having open sell position, deliveries are marked for the intended quantities. o Once the seller has given the necessary intention, the buyer is obliged to take the delivery. Compulsory Option: o All the open positions (long & short) at the expiry of the contract shall be marked for delivery irrespective of the members intention. o Members with open position are required to honor their delivery obligations i.e seller has to deliver the commodities and the buyer has to remit the funds. Both Option: o Under the both options contract, delivery shall be marked only in cases where the the delivery intentions of both the buyers and sellers match with each other. o If the intentions submitted by the seller and the buyer do not match, then all the open positions at the expiry of the contract are closed out at the DDR.

Characteristics of Gold
1. 2. 3. 4. 5.

International currency Safe commodity Brings liquidity to market Portfolio Diversification Hedge against inflation

GOLD RESPONDS WHEN YOU NEED IT MOST

US Economic indicators affecting Gold

Employment data First Friday of month GDP Last Friday of the month ISM Mfg. Index First working day of month Trade Deficit Third week of month Consumer price index- Third week Production price index Third week Industrial production Third week Retail sale Third week Durable goods order Last week Federal bank meeting (8 times in a year)

Contract Specifications
GOLD

Gold Regular

Gold Mini

Gold Guinea

Quote 10 gms Lot Size 1 Kg +/- Rs. 100/tick

Quote 10 gms Lot Size 100 gms +/- Rs. 10/tick

Quote 8 gms Lot Size 8 gms +/- Rs. 1/tick

Contract Specifications - GOLD

Contract Months Expiry Date Trading Unit Quotation Price quote GOLD Regular Feb, April, June, Aug, October & December 5th of the Contract month 1 Kg 10 grams Ex- Ahmedabad (inclusive of all taxes & levies relating to import duty but excluding sales tax/VAT, any other additional tax or surcharge & octroi) 10 Kg Re. 1 (per 10 grams) 3% 4% 1st to 5th day of contract expiry month 1st to 5th day of contract expiry month 5% incremental margin till the 5th 1Kg Compulsory Ahmedabad Additonal : Mumbai, Hyderabad,Chennai & Delhi GOLD Mini January to December (monthly contract) 5th of the Contract month 100 gms 10 grams Ex- Ahmedabad (inclusive of all taxes & levies relating to import duty but excluding sales tax/VAT, any other additional tax or surcharge & octroi) 10 Kg Re. 1 (per 10 grams) 3% 4% 1st to 5th day of contract expiry month 1st to 5th day of contract expiry month 5 % incremental margin till the 5th 100 grams Compulsory Ahmedabad

Maximum order size Tick size Daily Price Limit Initial Margin Tender period Delivery Period Delivery period margin Delivery Unit Delivery logic Delivery Center

Quality Specification

995 purity (Serially numbered Gold bars supplied by LBMA approved suppliers) Simple Avg. of last 5 days spot price at Ahmedabad

995 purity (Serially numbered Gold bars supplied by LBMA approved suppliers) Simple Avg. of last 5 days spot price at Ahmedabad

Due Date Rate Calculation

S I L V E R

S Contract I L V E R R E G U L A R

Specifications

Contract Specification - Silver

Contract Months Expiry Date Trading Unit Quotation Price quote SILVER Regular May, July, September & December 5th of the Contract month 30 Kgs 1Kg Ex- Ahmedabad (inclusive of all taxes & levies relating to import duty but excluding sales tax/VAT, any other additional tax or surcharge & octroi) 600 Kgs Re. 1 per Kg 4% 5% 1st to 6th day of contract expiry month 1st to 6th day of contract expiry month 5% incremental margin 30 Kgs Compulsory Ahmedabad Addtl : Chennai, Delhi & Mumbai 999 fineness (Serially numbered Silver bars supplied by LBMA approved suppliers) Simple Avg. of last 5 days spot price at Ahmedabad SILVER Mini May, July, September & December Last working day of the month prior to the contract expiry month 5 Kgs 1 Kgs Ex- Ahmedabad (inclusive of all taxes & levies relating to import duty but excluding sales tax/VAT, any other additional tax or surcharge & octroi 600 Kgs Re. 1 per Kg 4% 5% 1st working day after expiry of the contract 1st to 3rd working days after expiry of the contract. 5% incremental margin 30 Kgs Both option Ahmedabad 999 fineness (Serially numbered Silver bars supplied by LBMA approved suppliers) Settlement rate will be the official closing price fixed by the system on the basis of Silver 30 Kg contract of the same day.

Maximum order size Tick size Daily Price Limit Initial Margin Tender period Delivery Period Delivery period margin Delivery Unit Delivery logic Delivery Center Quality Specification Due Date Rate Calculation

Delivery Procedure
DELIVER LOGIC: -COMPULSORY DELIVERY Any seller having open position on the expiry date fails to deliver then a penalty of 6.5% shall be imposed.

Tender Period: - 1st to 6th day of the contract expiry month. Delivery Period: -1st to 6th day of the contract expiry month. Normal trading ends on the last day of the previous month prior to the expiry month.

Delivery Procedure
Pay-in of Commodities (Delivery by seller member): On the Tender days by 6.00 P.M. except Saturday, Sunday and public holiday. Pay- in of Funds: By 11:00 A.M. on Tender day + 1 basis. Pay-out of Funds and Commodities (Delivery to Buyer Member): By 05:00 P.M. on Tender day +1 basis.

Delivery Procedure
1st Day: 5% Delivery period margin on an incremental basis over 5 days is levied on all the open positions. Intention is received from buyers upto 6:00 pm and sellers upto 6:00 pm. Intention received from the buyers and sellers are matched and marked for delivery after market close. Delivery Order Rate: Settlement/closing price of the 1st day. Before sellers gives intention for the Delivery he has to deposit goods at the designated clearinghouse of Group 4 Securitas along with all the documents that is mentioned in the Contract specification, on the same day. The very next day marked buyer has to deposit the funds in the exchange before payout, that fund will be transferred to seller in the evening.

Delivery Procedure

Close out of outstanding positions: All outstanding positions on the expiry of contract not settled by way of delivery in the aforesaid manner will be settled as per the Due Date Rate. DDR (Due Date Rate): DDR is calculated on 5th day or Expiry day of the contract month. This is calculated by way of taking simple average of last 5 days of the spot market of Ahmedabad. Taxes, duties, cess and levies: Ex-Ahmedabad, Inclusive of all charges/levies relating to import duty, customs to be borne by seller. But excluding Sales Tax/ VAT, any other additional tax or surcharge on sales tax, local taxes and octroi to be borne by the Buyer.

IN CASE OF FAILURE TO TAKE OR MAKE DELIVERY BY ANY OF THE PARTY A PENALTY OF 2.5% IS LEVIED ON THE DEFAULTING PARTY.2% will be credited to IPF & 0.5% is credited to counter party. 4% is levied as replacement cost to defaulting seller/buyer :Out of which 90% is given to counter party & 10% retained by Exchange as administrative charges Option of Delivery: It can be in physical or Demat form. If sellers produce in Demat form the buyer get in Demat. If sellers produce in physical form the buyer get in physical form. VAT IN AHMEDABAD IS 1%

Group 4 Vaulting Charges

No Vaulting Charges on Gold Guinea

Base metals:Zinc/Zinc Copper

MINI
Trading unit Quotation base Max order size (MT) Tick size (per kg) Profit/loss on 1 Rs movement (Rs) Initial margin 1
1 As on Mar 2010

Al

Nickel Lead/Lea d MINI

Tin

1t 70 5 ps 1000

5t&1t 100 5 ps

5t 150 5 ps

250 kg 5 t & 1 t 500 kg 24 10 ps 250 100 5 ps 5000 & 1000 (M) VaR Based 20 25 ps 500

Rs/ kg

5000 & 5000 1000 (M) VaR Based

VaR Based

VaR VaR Based Based

VaR Based

Thank You