Commodities Assignment.docx

Periodical II assignment Jyoti Chauhan AE-1710

SUMMARY In India, commodity derivatives are traded on exchanges that are separate and distinct from the exchanges on which financial derivatives are traded. The commodity futures market in India went through a transformation between 2000 and 2003 with significant regulatory liberalization and creation of three new national, electronic exchanges, each listing scores of products. The first of these new National, electronic exchanges was the National multi-commodity exchange of Ahmadabad (NMCE), which started November 2002 and then a year later, Multi-Commodity exchange (MCX) and the national commodity derivatives exchange( NCDEX) started, which is partially owned by the NSE. The Forward markets commission notes 153 different products as being listed and available for trading on India’s 23 commodity exchanges. The agricultural and non-agricultural commodities with listed products in Indian exchange are shown in Table1. Table1: Commodities and listed products on Indian exchange

In India, about a quarter of the volumes in commodity derivatives market is agricultural. The remaining volume comes from non-agricultural products mainly gold, silver and energy and this can be seen in Table2

Table2: Average daily volume on Indian Financial Markets, March 2007

Out of the National electronic exchanges, MCX and NCDEX account for 14 of the 15 most active contracts, as shown in table3. The National board of trade of Indore (NBOT) has a soy contract that trades roughly the same volume as NCDEX. This is NBOT’s only active contract and NBOT is not a national electronic exchange. MCX’s gold, silver, copper, zinc, nickel and crude oil contracts accounted for 71% of all commodity futures trading. Table3: Top 15 Futures on Physical Commodities: Average Daily Value of Trading for June 1–15, 2007

There are various agricultural contracts that are uniquely Indian. The agricultural contracts in the top 15 accounted for 29% of the total volume. In agriculture, uniquely Indian traded contracts are for commodities like Jeera, Guar, Chana, Rapeseed- mustard seed. Contract specifications vary with the underlying commodity. But, some of the common features are: a. Exchanges trade only commodity futures, there are no commodity options traded in India. b. The shortest maturity contracts are one month contracts. The longest possible contracts listed are 12- month contracts. c. NCDEX has almost all its expiration date on the 20th of the months and MCX on the 5th, 15th or 20th.

d. All commodity contracts today have mandatory delivery for parties who hold their position beyond expiration. Other important aspects of contract design are the size and grade of commodity. Traditionally, instead of one exchange trading multiple commodities, each commodity would have multiple exchanges. Today, these markets are very different due to liberalization in the underlying product markets and the reform in the financial sector. Also, there were local open outcry exchanges generally focusing on a single commodity whereas now there are three electronic exchanges which offer a single trading and clearing platform across the nation. These exchanges are unlike the traditional exchange in almost every aspect. They are owned by financial entities rather than by brokers. Also, a single entity can own more than 10% equity in an exchange. So, there is foreign ownership as well. At NCDEX, there are processes to gather Spot market price in a timely manner and at frequent intervals within the day. The price polling mechanism is not new one- price polling is used to calculate the London inter-bank offer rate (LIBOR). Unlike LIBOR, which is polled by British bankers association, the spot price polling process in India is outsourced to third-party information vendors like CRISIL, CMIE and NCMSL. In India, the equity derivatives were trading at low volumes for two years after their start in 2000. But now liquidity for a specific product tends to accrue to one specific exchange. For e.g.: Bullion and metal contracts are the top trades at MCX while NCDEX, Bombay is the agricultural futures exchange. Table4 shows total trading volumes in the top commodity exchanges, as well as the top traded products on the exchange. Table4: Monthly Volumes on the Top Commodity Exchanges, March 2007

Trading volume falls off sharply beyond the two top national, multi commodity exchanges. MCX is the top exchange with volumes of around USD 60 billion in March 2007, with NCDEX clearly below with about a third of the volumes at around USD 20 billion If we look at volume and open interest in the front month as a percent of volume and open interest in all months combined, this gives us some feeling for how speculative the market is. Table5 shows these ratios for the five most important non-agricultural commodities as well as the five biggest agricultural commodities.

Table5: Patterns in Near Month Contract Open Interest (OI) and Traded Volumes (TV) as a Fraction of the Open Interest and Traded Volumes Summing across Contracts of all Maturities, March 2007

Improvements This book has been published in 2007 and since then many changes have occurred in the commodities exchange market. For instance, 99.88% of the total trading in commodities occurs in the following national-level commodity exchanges (as opposed to 23 in the book): 1. Multi Commodity Exchange of India (MCX), Mumbai 2. National Commodity and Derivatives Exchange of India (NCDEX), Mumbai 3. National Multi Commodity Exchange (NMCE), Ahmadabad 4. Indian Commodity Exchange (ICEX), New Delhi 5. ACE Derivatives & Commodity Exchange Limited, Mumbai 6. Universal Commodity Exchange Limited, Navi Mumbai

Products traded on MCX include Agricultural Products

Bullion

Base Metals

Energy

Black pepper Crude Palm oil Cotton Cardamom Menthe Oil Rubber

Gold Silver

Aluminium Brass Copper Lead Nickel Zinc

Crude Oil Crude Oil Mini Natural Gas

Products traded on NCDEX Cereal and Pulses

Fibres

Barley Chana Maize Kharif/ South Maize Rabi Wheat Guar

Kapas 29 mm Cotton

Oil and Oilseeds Castor Seed Cotton seed oilcake Soy Bean Degummed Soy oil Refined soy oil Mustard Seed Rapeseed Mustard Seed OilCake Crude Palm Oil

Spices Pepper Turmeric Jeera Coriander Sugar

We see that there is a fall in the number of exchange markets in commodity trading (from 23 to 6). This shows that SEBI has been having a good control over the market since 2007, thus regulating the market by having proper governmental control. Reduction in exchange markets leads to more transparency as well. The products in which trading occurs has changed over the course of time. In non-agricultural products, trading of ferrous metals and polymers has been discontinued along with tin. Even the trading in agricultural products has changed if we compare the table 7.1 and the two tables above. Currently, MCX has had the highest daily turnover of Rs. 1,19,940 crore and a market share of 91.4%. The daily turnover amounts to Rs. 21,123 crores. The volume of trading in 2017 of agricultural commodities accounts to 1.3 billion contracts. Daily Volume Agriculture Non – agriculture

2017-18 5% 95%

This amount has significantly declined from 27% in 2007 (refer table 7.2) to 5% for agricultural products and increased from 73% in 2007 to 95% for non – agricultural products. For the year 2017-18, following is the summary statistics calculated from the detailed report of MCX annual reports. Segment Agro commodities Base Metals Bullion Energy

Average Daily Turnover 1.66% 41.40 23.72% 33.22%

Following table shows the top gainers contracts on NCDEX

Following table shows the most active contracts on MCX

Comparing the above two snapshots with table 7.3 we can see changes in the most active commodities traded.

Chapter 7 talks about the daily trade hours between 10:30 am to 3:30 pm whereas the current updated timings are as follows:

Table 7.4 suggests the position limit of Gold Futures contracts on MCX are 2 metric tons. A snapshot of the updated position limit from MCX has been updated to 5 metric tons.

Compared to table 7.5, following are the revisions in the membership fees on MCX. We can see that the fees have significantly increased over the span of 10 years.

Total value of agro commodities traded in the year 2018 are as follows:

F12 shows the total sum in lacs for the year 2018, i.e 8629546.68 lacs is the total amount spend in trading agro commodities in 2018. Lastly, checking the open interest and traded volumes in October 2018,

This is the latest data of Open Interest of October 2018. If we compare this with table 7.7, we see that increase in open interest along with an increasein price is said to confirm an upward trend. Commodities Gold Crude Oil Copper Silver

Open Interest as on 19th October 13057 6573 11272 24605

The Way Forward Currently Indian Commodity market face a tough condition because of Commodity transaction tax (CTT) imposed by govt of India on Commodity futures contract and the National spot exchange limited (NSEL) Scam and because of that reason in last 1.5 years Indian commodity exchange lost the turnover by 70%. But it all just happened because of back to back worst news for the market. Indian Commodity exchange face some tough situation now but the market would overcome all such issues as Indian commodity exchanges work and launch contracts like Gold Hedge contract, spread contract in Gold and Crude which attract traders, arbitragers or investors to invest in commodities market again with confidence in future. What is needed from the commodity futures market in the future are some of the given following points a) Exchanges ensuring that there is enough liquidity and transparency in the market b) Government regulatory bodies ensuring that there are no payment crisis and the commodities futures markets will continue to grow c) The three month contracts to continue and other longer term contracts being introduced d) Reduction in the commodity transaction tax (CTT) which the government introduced in this budget.

Currently, NSE and BSE do not trade in commodity future derivatives.NSE will launch its commodity derivatives segment. NSE has plans to launch derivatives trading in non-agriculture commodities in the initial phase, followed by agriculture commodities, subject to SEBI approval. This would achieve integration of trading in commodity derivatives market with other segments of the securities market at exchange level. NSE said it has conducted multiple road shows and engaged leading industry associations to create awareness among the participants and held mock trading sessions with active participation from prospective participants. The market regulator had said the country would have a unified exchange regime wherein stock exchanges would be allowed to offer trading in commodities derivatives. The move will not have an immediate impact on the commodity market segment. It is not necessary that it would create additional liquidity or result in more volume in the commodity markets. It has been to see how the two exchanges roll out the products and implement them to have an impact on the commodity markets. Currently, commodity derivatives are largely traded on MCX and NCDEX. The regulator, government and stock exchanges are taking various steps to promote the agricultural commodity derivative segment so that the benefits of agricultural commodity derivative are passed on to the farmers and Farmers Producer Organizations (FPOs). The SEBI board decided that instead of levying regulatory fee at the prescribed turnover-based slab rates, a nominal regulatory fee at a flat rate of Rs 1 lakh per exchange would be levied on turnover arising from agricultural commodity derivatives. The entry of BSE and NSE into commodity derivatives trading is expected to give a fillip to the market as the broker and client base will expand. Brokers, however, say equity exchanges will have to innovate to make inroads into the commodity space. The foray of equity exchanges will intensify the competition in the commodity derivatives space. Both the NSE and BSE would be vying to grab market share from the existing commodity exchanges such as Multi Commodity Exchange (MCX) and National Commodity & Derivatives Exchange (NCDEX), while the incumbent players will try to protect their turf. Industry experts say production innovation would be the key. While adding some new delivery centres, MCX and NCDEX will try to protect against migration of trade volumes. The system of a single screen with all the three trading classes -- equity, commodity and currency -already exists. Liquidity would be a prime driver for trading volume. For clients, nothing will change

with the entry of new players into commodity futures as they chose trading platforms. For brokers, however, exchange-wise collateral will not be required if clients want to trade in all asset classes on one platform. Product innovation would be the key for the success of BSE and NSE.