COMMODITY MARKETS

By Group 2
Pranjal Moitra 309/2019
Resham Grover 315/2019
Ishan Singh 322/2019
Gurpreet Singh 328/2019
Saksham Agrawal 332/2019
Sourabh Singh 343/2019
 ■ Osaka Rice Exchange set up in 1730 in Japan.
■ The Chicago Board of Trade (CBOT) in USA and the
History of London Metal Exchange (LME) in UK successfully
launched their operations in 1848 and 1877,
Commodity respectively.
■ However, organized trading in commodity derivatives
Trading started in India in 1875 by the Bombay Cotton Trade
Association Limited with cotton as the underlying
commodity.
■ In the year 1919, the Calcutta Hessian Exchange was
setup which started trading in raw jute and jute goods.
■ Subsequently, many other commodity derivatives
trading centres emerged across the different states.
 ■ After Independence, the Constitution of India placed
the subject of "Stock Exchanges and Futures Market"

History of in the Union list and therefore the responsibility for

regulation of forward contracts devolved on the
Government of India.
Commodity ■ The Parliament passed the Forward Contracts
Trading in Regulation Act in 1952 to regulate the forward
contracts in commodities across the country-Forward

India Markets Commission was setup.

■ The Forward Contracts Regulation Act (FCRA) 1952
was repealed and regulation of commodity
derivatives market was shifted to the Securities and
Exchange Board of India (SEBI) under Securities
Contracts Regulation Act (SCRA) 1956 with effect
from 28th September, 2015.
 Spot market is a place where commodity
is traded and the transfer of ownership
takes place immediately.

This concept is also termed as “ready

delivery contract” under which payment
Spot Market and delivery of good happens
immediately.

There are two variants of spot market—

physical spot market and electronic spot
market.
 In a physical spot market, the commodities are
physically bought and sold by the buyers and sellers
respectively for immediate delivery.

Physical In addition to the buyers and the sellers, the spot

Spot market has traders who are licensed by the mandi to
trade in the market.

Market In a spot market, a physical commodity is sold or

bought at a price negotiated between the buyer and
the seller.

The spot markets can be either a retail market i.e.,

targeted towards the actual consumers or a wholesale
market i.e., market for intermediate traders.
 ■ A spot commodity exchange is an organized
marketplace where buyers and sellers come
together to trade commodity-related contracts
following the rules set by the respective
commodities exchange.
■ An electronic spot commodity exchange provides
a market place where the farmers or their Farmer

Electronic Producer Organisation (FPO) can sell their

produce and the processors, exporters, traders and
other users can buy such produce through an
Spot electronic trading system.
■ Electronic Spot Exchanges for agricultural
Exchange produce were setup to bring large number of
buyers and sellers on the same platform for better
price realization for the farmers.
■ Unlike in a traditional mandi market, here the
farmer plays a role in the price discovery and is
not a mere witness to the sale of the agricultural
commodity.
■ Example-E-NAM
Derivatives Market

Derivatives are financial instruments, the price of which is

directly dependent on or derived from the value of one or
more underlying securities such as equity indices, debt
instruments, commodities, weather, etc.

Derivatives are either traded on an exchange platform, or

bilaterally between counterparties, with the latter known as
the over the counter (OTC) market.
 Risk Transfer:

Price Discovery:
Role of
Derivative Transactional Efficiency:

Markets Derivatives lower the costs of

transacting in commodity markets. As a
result, investments become more
productive and lead to a higher rate of
economic growth. Therefore,
derivatives bring important social and
economic benefits to consumers and
producers alike and contribute
positively to economic development.
Region Wise Share in Total Global Global Market Share, by Category
Commodity Trade
Agriculture
Latin America Energy 7%
6% Non-Precious Metal 6%
Other 5%
3% Others
Europe 3%
19% Currency
Precious Metal 11%
1%

Interest rates
13%

Equity Index
Asia-Pacific
34%
39%

Individual equity
North America 20%
33%
Major Commodities Exchanges in the
World
■ Chicago Mercantile Exchange (CME) Group, which Includes NYMEX, CBOT,
COMEX
• Commodities Traded
Light sweet crude oil, natural gas, heating oil, gasoline, RBOB gasoline, electricity,
propane, gold, silver, copper, aluminum, platinum, palladium, corn, soya bean, soya bean
oil, soya bean meal, wheat, oats, ethanol, rough rice, gold, silver
■ London International Financial Futures and Options Exchange (LIFFE)
• Commodities Traded
Cocoa, robusta coffee, corn, potato, rapeseed, white sugar, feed wheat, milling wheat
■ London Metal Exchange (LME)
• Commodities Traded
Aluminium, copper, nickel, lead, tin, zinc, aluminium alloy, North American special
aluminium alloy (NASAAC), polypropylene, linear low density polyethylene
■ Intercontinental Exchange (ICE) group, which includes (its subsidiary —International
Petroleum Exchange or IPE), New York Board of Trade (NYBOT), Winnipeg Commodity
Exchange (WCE)
• Commodities Traded
Brent crude oil, coal, electricity, emissions, gas oil, heating oil, gasoline (RBOB), natural gas,
WTI, and all the futures contracts of its subsidiary IPE; cocoa, coffee, cotton, ethanol, sugar, froze
concentrated orange juice, pulp, and so forth; canola, feed wheat, western barley
■ Shanghai Futures Exchange (SHFE)
• Commodities Traded
Copper, aluminium, gold, silver, steel rebar, natural rubber, plywood, and long grained rice.
■ Zheng Zhou Commodity Exchange (CZCE)
• Commodities Traded
Coffee, Rubber
 ■ Multi Commodity Exchange of India Limited (MCX)
• Commodities traded:
Metal - Aluminium, Copper, Lead, Nickel, Zinc
Bullion - Gold, Silver
Major Agro Commodities - Cardamom, Cotton, Crude Palm Oil,
Kapas, Mentha Oil, Castor seed, RBD Palmolien, Black

Commodities Pepper.
Energy - Crude Oil, Natural Gas.

Exchanges in ■ National Commodity & Derivatives Exchange Limited

(NCDEX)

India • Commodities traded:

Chana, Barley, Bajra, Wheat, Kapas, Guar Seeds, Guar
Gum, Castor Seeds, Cotton Seed Oilcake, Soyabean,
Turmeric, Coriander, Moong, Maize, Paddy, 29mm
Cotton, Refined Soya Oil, Mustard Seed, Gur, Jeera, Palm
Oil.
 ■ Indian Commodity Exchange Limited (ICEX)
• Commodities traded:

Major Gold, Silver, Copper, Zinc, Nickel, Crude Oil, Natural

Gas, Refine Soya Oil, Mustard Seed, Guar Seed,
Turmeric, Soyabean
Commodities ■ National Stock Exchange

Exchanges in
• Commodities traded:
Gold, Silver, Brent Crude

India ■ Bombay Stock Exchange

• Commodities Traded:
Oman Crude Oil, Gold, Silver, Copper, Guar Gum, Guar
Seed, Cotton, Turmeric.
 ■ Broadly, the participants in the commodity
derivatives markets can be classified as
hedgers, speculators and arbitrageurs, and are
represented by manufacturers, traders,
Participants farmers / Farmer Producer Organisations
(FPO), processors, exporters, and investors.
■ An efficient market for commodity futures
requires a large number of market participants
with diverse risk profiles.
■ Are Speculators required?
 Delivery Process

Factors Quality of the underlying

assets-
Differentiating • Discount and Premium Matrix
Equity
Warehousing
Markets and
Commodities • Exchange accredited warehouse

Market Delivery notice period

• Tender Period
Commodity ecosystems comprises of various entities
providing services for the smooth flow of goods
from the producer to the ultimate consumer.

These entities provide services such as transport,

insurance, grading, storage and warehousing,
banking, etc. Commodity
Markets
Ecosystem
These commodity ecosystem players play a major
role in ensuring smooth transfer of ownership and
delivery from sellers to buyers.

These intermediaries act as a link between the

producer and the ultimate consumer and play a
pivotal role in the commodity supply chain from the
time it is ready for sale till it reaches the ultimate
consumer.
 ■ Membership of Commodity Derivatives Exchange is governed by the SEBI
Stock Brokers Regulation.

Membership ■ The Regulation prescribes the procedures of grant of recognition of member,

different types of members, networth criteria, deposit for these members’ fees
and charges for different categories of members.
on ■ Commodity Exchanges prescribe different eligibility criterion for different
classes of membership.
Commodity ■ While admitting members, the commodity exchanges generally take into
account specific factors such as corporate structure, capital adequacy,
Derivatives track record, education, experience, infrastructure set-up, manpower etc.
to ensure that the members are equipped to offer quality broking services so as

Exchange ■
to build and sustain confidence among investors in the Exchange’s operations.
An applicant for commodity exchange membership must possess the
minimum stipulated Networth which varies across commodity exchanges as
per their rules, regulations and bye-laws. The membership categories are more
or less similar across the exchanges, but vary considerably on criteria of the
membership in terms of deposit/networth requirements, admission fees and
other membership requirements.
For a commodity to be suitable for
futures trading, it must possess the following
characteristics:
■ The commodity should have a suitable demand and supply conditions i.e., volume and marketable
surplus should be large.
■ Prices should be volatile to necessitate hedging through derivatives. As a result, there would be a
demand for hedging facilities.
■ The commodity should be free from substantial control from Government regulations (or other
bodies) imposing restrictions on supply, distribution and prices of the commodity.
■ The commodity should be homogenous or, alternately it must be possible to specify a standard, as
it is necessary for the futures exchange to deal in standardized contracts.
■ The commodity should be storable. In the absence of this condition, arbitrage would not be
possible and there would be no relationship between spot and futures markets.
Delivery Process
■ Each commodity has its own delivery logic that is clearly specified
in the contract specification.
■ The tendering of deliveries is permitted by the exchange on
specific tender days during delivery period as indicated in the
contract.
■ The buyer will be obliged to take delivery within such period as
may be specified by the Exchange.
■ Staggered Delivery Period
 Seller has deposited the quality certified
goods in the warehouse and received the
warehouse receipt and quality certificate
before the initiation of step 1.
Preconditions
for Delivery Buyer has given the money equivalent to
the members via bank transfer. This is
also taken care by stepping up delivery
margin on buyers once delivery period
starts in order to avoid sudden shock on
exchange and on buyer.
Delivery Process
Trading Member Q (Sellers TM) will transfer the quality certificate
Step 1 along with warehouse receipt pertaining to the goods of client
Y(Seller) to the clearing member B.

Clearing member B will initiate the commodity pay-in process with

Step 2
Clearing corporation.

Trading member P (Buyers TM) will transfer funds received from

client X (Buyer) to the clearing member A. In the commodity Pay
Step 3
in process the clearing member will transfer the warehouse receipt
to the clearing corporation.

Clearing member A will transfer funds to the clearing corporation

Step 4
which is defined as Funds pay in process.

Clearing Corporation makes a commodity pay out to the clearing

Step 5 member A by transferring the ownership of warehouse receipt on
the concerned buyer’s (X’s) name.
Delivery Process
Clearing member, A transfers the warehouse receipt received from
Step 6 the clearing corporation to the Client X which completes the pay-
out of commodities process

Clearing Corporation with the help of clearing banks transfer the

Step 7
funds equivalent to the contract value to the clearing member B.

Clearing member B gives a credit in the trading/ledger account of

Step 8 funds to the client Y which completes the process of funds pay-out
by the exchange.
 ■ SEBI has laid down the following guidelines on

Penalty for sellers default in case of compulsory delivery.

■ The total amount of the penalty on the seller, in case
Delivery of delivery default will be equal to 3.0 percent of the
difference between the Final Settlement Price (FSP)
Default by and the average of the three highest of the last spot
prices of the 5 (five) succeeding days after the expiry
the Seller of the contract (E+1 to E+5 days), if the average
price so determined is higher than FSP; else this
component will be zero.
■ The 3.0 percent penalty collected is utilised as
follows: a) 1.75 percent component of the penalty
shall be deposited in the Investor Protection Fund of
the Exchange; b) 1.0 percent component of the
penalty shall go to the Buyer who was entitled to
receive the delivery; c) Balance 0.25 percent
component of penalty shall be retained by the
Exchange towards administration expenses.
 ■ Under the staggered delivery mechanism, the
seller has an option of marking an intention
Staggered of delivery on any day during the last 10 days
of the expiry of the contract.
Delivery ■ The corresponding buyer will be randomly
allocated by the trading system of the
exchange and he/she will have to take the
delivery on T+2 day from the delivery centre
where the seller has delivered the commodity.
■ This is to ensure confirmation of delivery in
the near month contract and to keep the price
volatility under check.
 Maintaining the identity of the original depositor of
the commodity.
Flexibility for acceptance of non-standard (small
lots) quantities.

Functions of On-line viewing of warehouse charges/ stocks.

the E-NWR Consolidation and splitting of the goods in

deliverable lots as per the contract specification.
Stacking and weight tracking information.

Ability to capture quality related information and

receipt expiry dates.
Warehousing
In order to facilitate the physical delivery of commodities, it is imperative to have
a wide and reliable network of warehouses at the delivery centres.

As per SEBI Regulations, only WDRA registered warehouses can be used by

exchange-empanelled WSPs for storing goods which are meant for settlement of
trades on exchanges.

WDRA registers warehouses and recognizes each warehouse separately rather than
WSP.

SEBI vide its circular dated September 27, 2016 had prescribed warehousing
norms for agricultural and agri-processed commodities traded on the derivatives
exchanges.
Recent Developments in Commodity
Markets
■ FMC merged with SEBI
■ All exchanges are allowed to start commodity trading.
■ Foreign entities allowed.
■ Allowed Options and Commodity Indices
■ E-NWR treated as equivalent to good delivery
■ Compulsory Delivery Contracts
■ Flexible timings for exchanges
References

■ Commodities Derivatives Module by NISM

■ MCCP Reference Book
THANK YOU