Agri-business & Management

Agri-Business & Management August 2009 Volume 1, Issue 1

Agri-Business & Management

Spot Exchange Inside this issue: Introduction to concept of 2 Spot Exchanges Salient Features of Spot Exchanges

2

Regulations governing Spot Exchanges

3

States in which Spot Ex 3 are operational Business Model of Spot Exchanges

3

Forward Auction

4

Reverse Auction

4

Spot Markets which have been operational in India since time immemorial.. These markets whether regulated or unregulated provides a mechanism for price discovery and physical transaction of goods. The Mandis which are regulated by the APMC acts of the respective states are largely controlled by the middleman. The commission agents act as the bridge between the producer and the consumers and the mechanism of price discovery remains

highly opaque. Moreover the farmers face the problem of insufficient price-information as the prices of the produce is known only after he reaches the APMC market yard. Concepts like ITC e chaupal are praiseworthy but the coverage is not very high. The future markets which are supposed to act as the price information providers have failed to act as a price discovery mechanism

Bullions

due to legal issues like ban on future trading of certain commodities. Hence the concept of Spot Exchanges is seen as a revolution in the field of Agri-Business.

Special points of interest: • Unlike Future Exchanges Spot Exchanges is not regulated by the FMC. • Physical delivery of commodities shall take place • Counterparty risk shall be eliminated • Price discovery and price information shall be free and fare.

The Essence of Spot Exchanges The Spot Exchanges are seen as a revolutionary idea because: 1. They shall act as platforms of price discovery. 2. Middleman shall be

largely eliminated. 3. Prices arrived at shall be realistic as the participation of buyers from across the country shall take place as the platform

is web based. 4. Counterparty risk shall be totally eliminated as the Exchange shall act as the guarantor.

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Introduction What is a Spot Exchange?

Commodities have been traded in the spot market from time immemorial. The presence of too many intermediaries in the system and an opaque price discovery mechanism has been the major disadvantage of the present Spot Market system. More over arriving at the reference spot prices for the Futures Exchanges has also been a problem due to non stan-

dardized nature of the Spot Markets. To do away with the shortcomings of the Spot Markets the concept of Spot Exchanges has been developed. The Spot Exchanges are perceived to be the best thing that can happen to the field of Agri-Business in the coming future. At present National Spot Exchange and NCDEX Spot

Exchange are the two spot exchanges that are operating in India. Reliance Spot Exchange is expected to join the league in a few months time as they have already carried out trading of almonds on an experimental basis.

Salient Features of Spot Exchanges •

Features of Spot exchanges

•

Single day trading contracts Intra day trading with settlement of obligation on net basis

•

All positions outstanding at end of the day resulting into compulsory delivery

•

Demat delivery facil-

ity available •

•

Loan facility against pledge of demate / warehouse receipt

industrial products to be launched •

Cash futures arbitrage

opportunity

All deliverable futures contracts, including agri commodities, gold silver, nonferrous metals and wide number of other

How does it affect the farmers

The farmers perspective

Farmers have not been able to take the advantage of trading in the Futures Exchanges and not much is expected to change with the coming up of Spot Exchanges. These Exchanges shall remain largely dominated by the commodity

traders. But a lot can be expected in terms of authentic price information dissemination and price discovery. This shall help in getting a fare price in the Spot Market. The Spot Exchanges can also facilitate the active

participation of farmers in the spot exchange by making the procedure of membership as seller easier and by reducing the lot sizes to be traded on the Exchange Platform.

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Regulations Unlike the Futures Exchanges which are regulated by the Forward Market Commission the Spot Exchanges comes under the jurisdiction of the respective state governments where the exchanges are set up. The APMC act prevalent in the various states acts as a hurdle to the establishment of Spot Exchanges. The Exchange operations

are regulated in each state by the respective state governments and are be subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, APMC Act and others which impinge on its working.

States in which Spot Exchanges ore operational: Gujarat, Maharashtra, Karnataka, Rajasthan and Madhya Pradesh. In addition to these states since Bihar and Kerala does not have APMC act, setting up Spot Exchanges in these states shall be relatively easier. Control !!!!

Business Model of Spot Exchanges The Spot Exchanges are distinctively different from the Future Exchanges as physical delivery of the commodity is compulsory in Spot Exchanges. Unlike the Futures Exchanges the positions outstanding at the end of the day, will result

into compulsory delivery. But during the day, the transactions of offsetting nature will be netted off and delivery will be executed only with respect to the net quantity outstanding at the end of the day. All the terms relating to quality specifications,

place of delivery, date of delivery and other conditions will be specified by the Exchange in advance and all contracts executed on the system would be on the basis of such terms only.

Business Model is the Key

Spot Exchanges for Spot Trading (NEST) system has two types of markets Normal Market: All orders which are of regular lot size or multiples thereof are traded in the Normal Market. For commodities that are traded on the NEST system are deliverable in

physical or in dematerialized mode. Auction Market: In the Auction Market, auctions are initiated by the Exchange on behalf of trading members for settlement related reasons.

Auctions are again of two types: • •

Forward Auction Reverse Auction

The Market

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Forward Auction 1.

The seller brings the goods at the Spot Exchange designated Warehouse location before listing for auction.

2.

The selers details are captured.

3.

A provisional deposit code is generated.

4.

Post weighing the empanelled assayer grades and certifies the quality of the goods and accepts the goods for warehousing. The warehouse issues a warehouse receipt (WR) towards the goods stored.

5.

A unique deposit code (UDC) is generated by the collateral Manager which captures of WR No, Quantity, Quality, Grade, Validity, Warehouse Location, Depositors (owners) details etc.

6.

The Trading member lists the UDC for auction post approval of Collateral Manager on the Online Auction Platform.

7.

As the auction opens, the buyers bids for the listings. The bids are allowed only if the buyers maintain a prescribed margin amount with the Exchange.

8.

Upon settlement the buyer pays the balance fund including charges and taxes.

Guess who Wins!!!!!!

Reverse Auction How Auction really work

1.

Buyer specifies the quantity, quality, location and ceiling price of the commodity he wishes to buy in the Spot Exchange.

2.

The Category Manager defines the quality, grade, quantity and the terms and agreement for each RFQs. Buyers vet the deal thus structured and Collateral Manager approves the listings.

3.

Buyers provide the stipulated amount of money towards margin obligation.

4.

The sellers bid to match the buyers specification. The lowest price bidder wind and is obligated to deliver the goods in the specified time frame.

5.

Post closure the winner brings the goods to the Exchange designated warehouse where the goods are inspected, weighed, assayed etc.

6.

The warehouse issues a warehouse receipt towards the goods stored.

7.

The Buyers pay the balance fund towards settlement and takes the delivery of the goods against Delivery order issued by the Exchange

Advantage of Spot Exchange over Spot market •

The seller has prior knowledge of the spot and futures prices at his own or at a nearby centre. This provides him with the option of selling his produce at the centre of his choice.

•

Since the goods are assayed prior to sale, he knows the grade of his produce and can guage the true price of his product based on the benchmark grade price and the applicable premium or discount accorded based on the grade.

•

The Spot platform would offer excellent opportunities for arbitrage against future prices if the goods in the spot market conform to futures quality.

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Agri-Business & Management

Rajdeep Saikia PGPABM 2008-10 Hoatel 2 National Institute of Agricultural Extension Management (MANAGE), Rajendranagar, Hyderabad-500030 Phone: 09951351151 E-mail: [email protected]

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Agri-Business & Management is a Newsletter published on a monthly basis by Rajdeep Saikai and Ankan Langthasa, two Agri-Business Management students from National Institute of Agricultural Extension Management (MANAGE).

Watch out for the Next Issue on Microfinance and a few tips on Preparation for GDs and Interviews.