Commodity Market - Module I

Module - I
Module – I Commodity Markets and Exchanges: Growth of Global
and Domestic Commodities Derivatives Markets, Agricultural
Commodities Market and Non-Agricultural Commodities Markets.
Commodity Exchanges: Exchanges around the World and its Importance,
Commodity Exchanges in India. National Exchanges and Regional
Exchanges, platform – Structure, Exchange membership, Capital
requirements, commodities traded on National exchanges, instruments
available for trading and Electronic Spot Exchanges.
Mr. Swaminath S, M.Com, PGDFM, PGDBA, PGDMM, NET & JRF, K-SET, (MBA), (Ph.D)
Research Scholar, Department of Commerce, Bangalore University, Bangalore - 560001

INTRODUCTION:
The evolution and growth of the commodities market in India has
shown an impressive record of performance. This chapter discusses the
contours of development of the commodity market both in India and at a
global level. Broadly, the discussion on the market structure, role of
participants, and governance of the market and growth dimensions is also
made in this chapter.

COMMODITY MARKET EVOLUTION: GLOBAL SCENARIO:
• The world's first commodities arose from agriculture practices
(crop production and raising livestock).
• As trading developed, producers and dealers looked for ways to
preserve the price of their products.
• Factors such as weather, conflict, and supply and demand
wreaked havoc on pricing. In addition, as supplies became
more plentiful, storage was necessary; merchants sought ways
to raise money while their product sat until being sold. This is
how futures agreements began.
• According to Bruce Babcock - commodity futures trades
occurred in 17th century Japan & rice futures 6,000 years ago
in China.
• In the US during the early 1800s, agricultural commodities –
notably grains – first American exchange was set up in 1848 –
CBOT

• This group of brokers established a more efficient, standardized
method of exchanging goods and payment by creating futures
contracts. – More of Streamlining the process of Trading and
Settlement.
• For over 100 years, agricultural products remained the primary
class of futures trading.
• 1936 – Soybean, 1940 – Cotton, 1950 – Live Stock, 1960 –
Precious Metals, 1970 – Financial Futures (Stock market).
• 20th Century witnessed fast growth of commodity stock
exchanges all over the world.
• The re-birth of exchanges occurred in the 1970s. After Breton
Woods collapsed, numerous markets were created. – Nixon
Shock
• In the early 21st century the advent of the online trading systems
led to heightened interest in commodities and futures.

COMMODITY MARKET EVOLUTION: INDIAN SCENARIO:
• Commodity futures markets in India predominantly remain
underdeveloped compare to US and UK markets.
• The comprehensive government attention in the agricultural
sector in the post-independence era is a major contributor to this
fact.
• The production of several agricultural commodities is still
regularized by the state government and forwards as well as
futures trading have only been selectively familiarized with
rigorous regulative measures.
• Under the Essential Commodities Act (ECA), 1955, free trade in
many commodity items remains restricted.
• Under the Forward Contracts (Regulation) Act (FCRA), 1952
forwards and future contracts are limited to specific commodity
items.

• 1875 - Bombay Cotton Trade Association Ltd,
• Discontent between Brokers & Merchants lead to introduction of
Gujrati Vyapari Mandali in 1900 – Cotton & Oil Seeds.
• Calcutta Hessian Exchange Ltd. and the East India Jute Association
Ltd. were set up in 1919 and 1927.
• Several other exchanges were established in the country in due
course, alleviating trade in diverse commodities such as pepper,
turmeric, potato, sugar and jaggery.
• In December 1952, the Forward Contracts (Regulation) Act was
enacted by an expert committee headed by Prof. A.D. Shroff.
• 1954 - notified the Forward Contracts (Regulation) rules.
• The India Pepper and Spices Trade Association (IPSTA) in Cochin in
1957 first organized the futures trade in spices.
• Futures trade was completely banned by the government in 1966 in
order to monitor the price movements of several agricultural and
essential commodities.
• The government reintroduced futures on selected commodities as per
the June 1980 Khusro committee‘s recommendations.

• Expanding its coverage of agricultural commodities, along with
silver, the committee submitted its report in September 1994 –
Reintroduction futures contract which was banned in 1966.
• The Government of India appointed an expert committee on forward
markets under the chairmanship of Prof. K.N. Kabra in June 1993
following the introduction of economic reforms in 1991.
• The National Agricultural Policy 2000 conceived of external and
domestic market reforms and disassembling of all controls and
regulations in the agricultural commodity markets in order to
encourage the agricultural sector.
• Under the ministry of consumer affairs, the forward contract
(Regulation) Act was enacted in 1952 and the FMC or the forward
market commission was established in 1953.
• Currently, the future markets that exist in India are localized for
specific commodities. For example, Kerala has an exchange for
pepper; Ahmedabad for castor seeds, and Mumbai is the major
center for gold etc.

Any product that can be used for commerce or an article of commerce
which is traded on an authorized commodity exchange is known as
commodity.
The article should be movable or value, something which is bought or
sold and which is produced or used as the subject or barter or sale. In
short commodity includes all kinds of goods. Forward Contract
(regulation) Act (FCRA), 1952 defines “goods” as “every kind of
movable property other than actionable claims, money and securities”
In current situation, all goods and products of agricultural (including
Plantation), mineral and fossil origin are allowed for commodity trading
recognized under the FCRA.
COMMODITY MARKET - MEANING & DEFINITION:

The national commodity
exchanges, recognized by
the Central government ,
permits commodities
which includes precious
metals like (gold & silver)
and non-ferrous metals,
cereals and pulses, ginned
and un-ginned cotton(one
step in the process of
cotton manufacturing),
oilseeds, oil and oilcakes,
raw jute and jute goods,
sugar and gaur, potatoes
and onion, coffee and tea,
rubber and spices etc. for
trading.

What Makes a Commodity good?
• A long-standing value,
• highly valuable
• Scarcity
How Are Commodities Traded?
Bought or sold on the condition of its value
in the future.
Bought now at an agreed upon price in the
hopes that the same commodity will be worth
more in the future.
Buying at the going rate and selling higher
than before.
Agriculture and Non-Agriculture Commodity Markets:
Soft commodities: Corn, wheat, soybean, Soybean oil, sugar, etc.
Hard commodities: gold, oil, aluminum, etc.

Commodity Market:
Markets where raw or primary products are exchanged.
One of the most volatile markets to trade in
These raw commodities are traded on regulated
commodities exchanges
It’s a place where trading in commodities takes place,
buying n selling of commodities.
Allows global investors to make or lose money by
predicting the rise or fall of primary products.
Fortunes are literally made and lost within a day.
Unlike stocks, commodities do not cease to exist
(unless the resource has been completely depleted)
The value can be affected by political turmoil, wars or
cultural shifts.
Use commodities contracts to hedge their based upon
perspective.

Agricultural Commodity Markets:
Agriculture sector in India has always been a major field of government
intervention since long back. Government tries to protect the interests of
the poor Indian farmers by procuring crops at remunerative prices
directly from the farmers without involving middlemen in between. This
way Government maintains sufficient buffer stocks and at the same
time provides the farmers safeguard against the fluctuating food crop
prices. But government at the same time has restricted this traditional
sector by fixing prices of crops at a particular level and also by imposing
several other restrictions on export and import of agricultural
commodities.
Agriculture provides the principal means of livelihood for over 58.4% of
India's population. It contributes approximately one-fifth of total gross
domestic product (GDP). Agriculture accounts for about 10% of the total
export earnings and provides raw material to a large number of
industries. nearly 55.7% of area is dependent on rainfall.

A Question may be – How farmers will get benefited from
Derivative Contracts or more specifically futures contract?
Naturally a sudden price crash of food crops will have
devastating effects on farmers. Here comes the significant role
of futures market. If the buyers in the commodity market
anticipate shortage of a particular crop in the coming season,
future price of that crop will increase now and this will act as a
signal to the farmers who will accordingly plan their seeding
decisions for the next season.
This helps them to take the risk of innovations, by using new
high yielding varieties of seeds, fertilizers and new techniques
of cultivation.

1. Edible oil complex include actively traded commodities like soy
beans, refined soy oil, soy meal, Mustard seed and Crude palm oil.
CBOT bench mark rate for oil complex.
2. India has moved rapidly from being an importer of food grains to
becoming an exporter. Today, it is the second largest rice producer
after China, with a share of 20% of world in production, and is
ranked tenth amongst the world's wheat growers.
3. Currently India is one of the largest producers of cereals and grains.
India produced more than 200 million tonnes of different food grains
every year.
4. India's food grains production is now at around 230-240 million
tonnes. These include rice, jawar, bajra, maize, wheat, gram and
pulses.
5. India is the world's largest producer, consumer of pulses. Chana, Tur,
Urad, Moong are some of the major pulses grown in the country. Of
the total pulses production in India Chana contributes more than
40%.
Facts & Figures – Agriculture Production

6. India is known as the 'The home of spices'. India is the leading
producer, consumer and exporter of spices in the world. India
contributes about 48% to the world spices demand. At present,
India produces around 2.75 million tons of different spices valued
at approximately 4.2 billion US $, and holds the premier position
in the world spices market.
7. Chilli, Coriander, Jeera, Pepper, Turmeric and cardamom
constitute spice complex for derivatives trading in India.
8. India plays a crucial role in both the commodities Cotton and
Sugar.
9. India is the second largest producer consumer and exporter of
Cotton. While production and global trade of sugar is very volatile
because India is the largest consumer of sugar in the world,
surplus or deficit in India tilts the global prices in the one or the
other direction.
10. Derivative segment for both the commodities is in nascent stage
and does not justify the wide economic base it has in the country.

Non-Agricultural Commodity Markets:
India has huge deposits of natural resources in form of minerals like copper,
iron ore, bauxite, and gold. Even on demand front India is one the major
consumer of industrial metals and largest consumer of Gold. India is one of the
few high growth economies. India's energy consumption has been increasing at
one of the fastest rates in the world due to population growth and economic
development.
Base metal complex is alternatively known as Non-Ferrous complex and
includes metals like - Copper, Aluminum, Lead, Nickel and Zinc. – LME
Benchmark Price.
Energy sources can be divided into two major groups- renewable (an energy
source that can be easily replenished) and nonrenewable (an energy source that
we are using up and cannot recreate). We get most of our energy from
nonrenewable energy sources, which include the fossil fuels - crude oil, natural
gas, and coal.
A precious metal is a rare, naturally occurring metal of high economic value.
The best-known precious metals are Platinum and other types, gold and silver.

Commodity Exchanges in the World:
A commodities exchange is an exchange where various commodities
and derivatives products are traded. Most commodity markets across
the world trade in agricultural products and other raw materials (like
wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products,
pork bellies, oil, metals, etc.) and contracts based on them. These
contracts can include spot prices, forwards, futures and options
on futures. Other sophisticated products may include interest rates,
environmental instruments, swaps, or ocean freight contracts.
Speculators and investors also buy and sell the futures contracts in
attempt to make a profit and provide liquidity to the system.
However, due to the financial leverage provided to traders by the
exchange, commodity futures traders face a substantial risk.
The following are the list of various Commodity Exchanges located
across the world:- Refer Notes

Important International Commodity Exchanges:
A. Chicago Board of Trade (CBOT)
B. Chicago Mercantile Exchange (CME)
C. London Metal Exchange (LME)
D. New York Mercantile Exchange (NYMEX)
E. Tokyo Commodity Exchange (TOCOM)
F. Dalian Commodity Exchange (DCE)

As early as 1840s Chicago Board of Trade (CBOT) was formed
to trade in grains.
The CBOT, established in 1848, is the world’s oldest futures and
options exchange. More than 50 different options and futures contracts
are traded by over 3,600 CBOT members.
In 1864, the CBOT listed the first ever standardized “Exchange
traded” forwards contracts. Which were called futures contracts; in
1919, the Chicago Butter and Egg Board, a spin-off of the CBOT, was
recognized to enable member traders to allow future trading, and its
name was changes to Chicago Mercantile Exchange (CME).
(CBOT CME)
1865-Formalise grain trading.
CHICAGO BOARD
OF TRADE
(CBOT)

Trading Platform
The Pit
Trading Platform
Electronic Trading

CHICAGO MERCANTILE EXCHANGE
The Chicago Mercantile Exchange (CME) (often called "the Chicago
Merc or the Merc") is an American financial and commodity derivative
exchange based in Chicago. The CME was founded in 1898 as the
Chicago Butter and Egg Board. Originally, the exchange was a non-
profit organization. The exchange demutualized in November 2000, went
public in December 2002, and it merged with the Chicago Board of
Trade in July 2007 to become a designated contract market of the CME
Group Inc. On August 18, 2008 shareholders approved a merger with
the New York Mercantile Exchange (NYMEX) and COMEX. The
Merger - CBOT, NYMEX and COMEX are now markets owned by the
CME Group. CME Group exchanges offer the widest range of global
benchmark products across all major asset classes, including futures and
options based on interest rates, equity indexes, foreign exchange, energy,
agricultural commodities, metals, weather and real estate.

VARIOUS PARTICIPANTS: Red jackets, Light or dark Blue
jackets, Green, Gold jackets

1919 - Chicago Mercantile Exchange
1961 - A frozen pork belly futures contract (Pork bellies are used
to make bacon.)
1964 - Live cattle futures contract. This is the first futures
contract to be based on a non-storable commodity
1972 - world's first financial futures contracts by introducing
futures on seven foreign currencies
- British pound, Canadian dollar, Deutsche mark, French franc,
Japanese yen, Mexican peso
Swiss franc
In 1975 they introduced interest rate futures and in 1982 the
innovative Stock Index Futures.
1981 - Eurodollar futures begin trading, becoming the first
contracts to be settled in cash, rather than the physical delivery of a
commodity.
1982 - CME introduces stock index futures products
1984 – First international link between futures exchange (CME
and Singapore Exchange Derivatives Trading Ltd. (SGX)

1992 - First international post-market electronic transaction
system, begins live trading.
2000 – CME becomes the first U.S. financial exchange to
demutualize by converting its membership interests into shares of common
stock that can trade separately from exchange trading privileges.
2002 - went public in December 2002
2007 - A designated contract market of the CME Group Inc, it
merged with the Chicago Board of Trade in 12 July 2007 to become CME
Group. Both merged to form the CME Group Inc.
The Chief Executive Officer of CME Group is Craig s. Donohue.
On Aug, 18, 2008 shareholders approved a merger with the New York
Mercantile Exchange.
On March 17, 2008, the New York Mercantile Exchange
(NYMEX) accepted an offer from CME group, the parent of the Chicago
Mercantile Exchange, to purchase it for $8.9 billion in cash and CME
Group Stock. The Acquisition was formally completed on August 22,
2008, and the NYMEX systems are expected to be fully integrated by
September 30, 2009.

Who Trades at CME? - 4 divisions of individual CME memberships
CME (B1) membership:
Trades: Any CME-listed contract
Badge: Gold
International Monetary Market (IMM) (B2) membership:
Trades: Foreign exchange, interest rate and equity index futures, and all, IOM
and GEM products.
Badge: Green
Index and Option Market (IOM) (B3) membership:
Trades: Index futures contracts, random length lumber contracts, all options
contracts, and all GEM products.
Badge: Blue
Growth and Emerging Markets (GEM) (B4) membership:
Trades: Various products, including contracts related
to emerging market countries; restricted financials
Badge: Gray

Eligibility and Requirements: To be an individual member of CME,
you must be an adult and possess good moral character, a good
reputation and business integrity. In addition, you must have adequate
financial resources to assume the responsibilities and privileges of
membership.
Corporate: standard corporate membership for banks, hedge funds,
commodity brokers etc.
Electronic Corporate: corporate membership designed to benefit firms
that conduct large amounts of trading using the CME Globex system.
Clearing: Highest level of membership; for large organizations; that play
a clearing role (underpinning transactions) in the Chicago Mercantile
Exchange.
Trading Hours: Normal trading session: unique for each futures
contract ,though generally sometime between 9.00am & 1.30 pm central
time (GMT 6 hours). Electronic trading session: 9.05am - 4.00 pm, with
Friday close at 1.30pm

Commodities:
Eggs, Butter
Energy Commodities: Ethanol
Agricultural commodities: Butter, Cheese, Class 3 Milk, Class 4
Milk, Dry Whey, Feeder Cattle, Frozen Pork Bellies, Hardwood Pulp,
Lean Hogs, Live Cattle, Non-Fat Dry Milk, Random Length Lumber,
Softwood Pulp.
In addition to commodities, the Chicago Mercantile Exchange
has expanded to trade a number of other products. Forex trading now
forms a large part of the CME’s business: as well as major currencies
like the Dollar, Sterling, the Euro and the Yen, a basket of other
currencies are traded. There are also opportunities to trade in equity
indexes like the Nasdaq 100 and S&P 500, as well as futures and options
based on interest rates, and weather-based futures and options that allow
speculation based on general and specific weather conditions in the
United States and beyond

London Metal Exchange: The LME and Exchange Company were
founded in 1877, but the market traces its origins back to 1571 and the
opening of the Royal Exchange, London. At first, only copper was
traded, lead and zinc were soon added but only gained official trading
status in 1920. The exchange was closed over World War II and did not
re-open until 1952. Other metals traded extended to include aluminium
(1978), nickel (1979), and aluminium alloy (1992), steel (2008) and
plastics in 2005.
The total value of the trade is around $US 10.24 Trillion annually.
Established for over 130 years and located in the heart of The City of
London, the London Metal Exchange is the world premier non-ferrous
metals market. It offers a range of futures and options contracts for non-
ferrous, minor metals and steel.

Membership:
Category 1 - Ring dealing
Category 2 - Associate broker clearing
Category 3 - Associate trade clearing
Category 4 - Associate broker
Category 5 - Associate trade
Services at LME:
Transparent Pricing
Risk Management
Delivery Points of Lost Resort
Trading – Open Outcry, Warehousing, Delivery,
Branding, Regulation & Compliance
Delivery Points: As a market of “last resort”, industry can use the LME’s
delivery option to sell excess stock in times of oversupply and as a source of
material in times of extreme shortage. In reality, physical delivery occurs in a
very small percentage of cases on the LME as most organizations use the LME
for hedging purposes. However, the small percentage which does result in
delivery plays a vital role in creating price convergence.

The most actively
traded commodities
are: Palladium,
Platinum, Coal, Propane,
Natural gas, Uranium,
Crude oil, Electricity,
Gasoline,Heating oil,
Aluminum, Copper,
Gold, Silver.
Regulatory Board:
The floor of the NYMEX is regulated by the Commodity Futures
Trading Commission, an independent agency of the United States
government.
Trading Platform:
1. Open Outcry System
2. Electronic Trading Platform

Commodity exchanges began in the middle of the 19th century,
when businessmen began organizing market forums to make
buying and selling of commodities easier. These marketplaces
provided a place for buyers and sellers to set the quality,
standards, and establish rules of business. By the late 19th
century about 1,600 marketplaces had sprung up at ports and
railroad stations. In 1872, a group of Manhattan dairy
merchants got together and created the Butter and Cheese
Exchange of New York. In 1882, the New York Mercantile
Exchange was opened for trading in dried fruits, canned goods,
and poultry. In 1933, the Commodity Exchange (COMEX) was
established through the merger of four smaller exchanges; the
National Metal Exchange, the Rubber Exchange of New York,
the National Raw Silk Exchange, and the New York Hide
Exchange. On August 3, 1994, the NYMEX and COMEX
finally merged under the NYMEX name.

Dalian Commodity Exchange (DCE): It was
established on February 28, 1993. Since the
establishment, it has been an important player in the
production and circulation of mainland soybeans; over
the next decade of market ratification. DCE earned a
reputation among investors for its financial integrity
with prudent risk management and great market
functionality in international price correlation,
transparency and liquidity.
Shanghai Metal Exchange, Dalian Commodity Exchange, Zhengzhou
Commodity Exchange. The number of futures contracts was cut back further to
12 from 35 and more brokers were closed, leaving just 175 standing from the
early 1990s peak of 1,000. Margins were standardized and regulations further
toughened. Trading on foreign futures exchange was further restricted to a
small number of large, global entities. Soybeans, soy meal and beer barley were
traded at DCE.
On July 17, 2000, DCE restarted trading Soy meal, the first product listed since
the last tumultuous rectification of China’s futures exchanges. Until 2004, soy
meal futures had been one of the most rapidly developing futures contract at
China’s futures market.

Tokyo Commodity Exchange (TOCOM): TOCOM is a non-profit
organization, and regulates trading of futures contracts and option
products of all commodities in Japan. The Tokyo Gold Exchange, the
Tokyo Rubber Exchange, and the Tokyo Textile Exchange merged in
1984 to form TOCOM.
Commodities Traded:
Metals: - Gold, Silver, Platinum, Aluminum, Palladium
Oil: - Crude Oil, Kerosene, Gasoline; rubber
Open Outcry: Open-outcry is the oldest and most popular way of trading on
the exchange. It is central to the process of ‘price discovery’. Prices are derived
from the most liquid periods of trading; the short open-outcry “ring” trading
sessions, and are most representative of industry supply and demand. The
official settlement price, on which contracts are settled, is determined by the
last offer price before the bell is sounded to mark the end of the official ring.

ECONOMIC IMPORTANCE OF COMMODITY
MARKET ACROSS GLOBE:
• Prices of Petroleum products are determined by NYMEX
futures, New York.
• Prices of Gold determined by COMEX futures, New York.
• Prices of Copper, Nickel etc. determined by LME, London.
• Prices of Coffee beans influenced by LIFFE & ICE futures at
London & Atlanta (US)
• Prices of Rubber influenced by TOKOM, Tokyo.
• Prices of Agriculture Commodities determined by COBOT,
Chicago.

Indian Commodity Exchanges:
• Ace Derivatives & Commodity Exchange
• Bhatinda Om & Oil Exchange Ltd., Batinda
• E-Commodities Ltd & Esugarindia.com
• First Commodity Exchange of India Ltd, Kochi
• Haryana Commodities Ltd., Hissar
• Multi-Commodity Exchange of India (MCX)
• National Board of Trade Limited (NBOT)
• National Commodity & Derivatives Exchange Limited (NCDEX)
• National Multi-Commodity Exchange of India Ltd (NMCE)
• Rajdhani Oils and Oilseeds Exchange Ltd. , Delhi
• Surendranagar Cotton oil & Oilseeds Association Ltd
• The Bikaner Commodities Exchange Limited
• The Bombay Commodity Exchange Ltd
• The Bullion Association Limited
• The Central India Commercial Exchange Ltd, Gwaliar (ICE)
• The Chamber of Commerce
• The East India Cotton Association
• The East India Jute & Hessian Exchange Ltd,
• The Indian Pepper and Spice Trade Association
• The Meerut Agro Commodities Exchange Co. Ltd., Meerut
• The Rajkot Seeds oil & Bullion Merchants` Association Ltd
• The Spices and Oilseeds Exchange Ltd.
• Vijay Beopar Chamber Limited., Muzaffarnagar
• Indian Commodity Exchange Limited

No. EXCHANGES COMMODITIES TRADED
1
Multi Commodity
Exchange of India
Limited, Mumbai
Gold, Silver, Copper, Crude Oil, Zinc, Lead, Nickel, Natural
gas, Aluminium, Mentha Oil, Crude_Palm_Oil, Refined Soya
Oil, Cardamom, Guar Seeds, Kapas, Potato, ChanaGram,
Melted Menthol Flakes, Almond, Wheat, Barley, Long Steel,
Maize, Soybean Seeds, Gasoline US, Tin, Kapaskhali,
Platinum, Heating Oil
2
National
Commodity &
Derivative
Exchange Limited,
Mumbai
Guar Seed, Soy Bean, Soy Oil, Chana,RM Seed, Jeera,
Turmeric, Guar Gum, Pepper, Cotton Cake, Long Steel, Gur,
Kapas, Wheat, Red Chilli, Crude Oil, Maize, Gold, Copper,
Castor Seeds, Potato, Barley, Kachhi Ghani Mustard Oil,
Silver, Indian 28 Mm Cotton, Platinum
3
National Multi
Commodity
Exchange of India
Limited,
Ahmedabad
Rape/Mustard Seed, Guar Seeds, Nickel, Jute, Refined
Soya Oil, Zinc, Rubber, ChanaGram, Isabgul, Lead, Gold,
Aluminium, Copper, Turmeric, Copra, Silver, Raw Jute, Guar
Gum, Pepper, Coffee Robusta, Castor Seeds, Mentha oil
4.
Indian Commodity
Exchange Ltd,
Gold, Crude Oil, Copper, Silver – (Gurgaon)

5. National Board of Trade, Indore Soybean, Soy oil
6. Chamber of Commerce, Hapur Gur, Mustard Seed
7. Ahmedabad Commodity Exchange Limited Castorseed
8. Rajkot Commodity Exchange Ltd, Rajkot Castorseed
9. Surendranagar Cotton & Oilseeds Association Ltd, S.nagar Kapas
10. The Rajdhani Oil and Oilseeds Exchange Ltd., Delhi Gur, Mustard Seed
11. Haryana Commodities Ltd.,Sirsa
Mustard seed, Cotton seed
Oil Cake
12. India Pepper & Spice Trade Association. Kochi
Pepper Domestic-
MG1,Pepper 550 G/L,
13. Vijay Beopar Chamber Ltd.,Muzaffarnagar Gur
14. The Meerut Agro Commodities Exchange Co. Ltd., Meerut Gur
15. Bikaner Commodity Exchange Ltd.,Bikaner Guarseed,
16. First Commodity Exchange of India Ltd, Kochi Coconut oil
17. The Bombay Commodity Exchange Ltd. Mumbai Castor Seed
18. The Central India Commercial Exchange Ltd, Gwaliar Mustard seed
19. Bhatinda Om & Oil Exchange Ltd., Batinda. Gur
20. The Spices and Oilseeds Exchange Ltd., Sangli Turmeric
21. The East India Jute & Hessian Exchange Ltd, Kolkatta Raw Jute
22. The East India Cotton Association Mumbai. Cotton

National Exchanges:
1. Compulsory online trading
2. Transparent trading
3. Exchanges to be de-mutualized
4. Exchange recognized on permanent basis
5. Multi commodity exchange
6. Large expanding volumes
Regional Exchanges:
1. Online trading not compulsory.
2. De-mutualization not mandatory.
3. Recognition given for fixed period after
which it could be given for re-regulation.
4. Generally, these are single commodity
exchanges. Exchanges have to apply for trading
each commodity.
5. Low volumes in niche markets.

National Commodity & Derivative Exchange Limited (NCDEX):
Introduction:
NCDEX is a public limited company incorporated on April 23, 2003
under the Companies Act, 1956. It obtained its Certificate for
Commencement of Business on May 9, 2003. It has commenced its
operations on December 15, 2003. NCDEX is regulated by Forward
Market Commission in respect of futures trading in commodities.
Besides, NCDEX is subjected to various laws of the land like the
Companies Act, Stamp Act, Contracts Act, Forward Commission
(Regulation) Act and various other legislations, which impinge on its
working.

NCDEX Spot Exchange Ltd. (NSPOT) is a professionally managed
online commodity spot exchange established on October, 18 2006. It has
commenced operations and has plans to encompass the entire spectrum
of commodities across the country to bring home the advantages of an
electronic spot trading platform to all market participants in the
agricultural and non-agricultural segments.
NCDEX is a nation-level, technology driven De-Mutualized on-line
commodity exchange with an independent Board of Directors and
professionals not having any vested interest in commodity markets. It is
committed to provide a world-class commodity exchange platform for
market participants to trade in a wide spectrum of commodity derivatives
driven by best global practices, professionalism and transparency.
NCDEX is located in Mumbai and offers facilities to its members in
more than 390 centers throughout India. The reach will gradually be
expanded to more centers.

Promoters:
ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India
(LIC)
National Bank for Agriculture and Rural Development (NABARD)
National Stock Exchange of India Limited (NSE), Indian Farmers
Fertilizer Cooperative Limited (IFFCO), Punjab National Bank (PNB).
CRISIL Limited (formerly the Credit Rating Information Services of
India Limited), and Canara Bank by subscribing to the equity shares have
joined the initial promoters as shareholders of the Exchange.
Objectives:
To create a world class commodity exchange platform for
the market participants.
To bring professionalism and transparency into commodity
trading.
To inculcate best international practices like de-
modularization, technology platforms, low cost solutions and
information dissemination without noise etc. into the trade.
To provide nationwide reach and consistent offering.
To bring together the entities that the market can trust.

Exchange Membership: Membership of NCDEX is open to any person,
association of persons, partnerships, co-operative societies, companies.
Trading cum Clearing Members (TCM): Members can carry out the
transactions (Trading, clearing and settlement) on their own account and also
on their clients' accounts. Applicants accepted for admission as TCM are
required to pay the requisite fees/ deposits and also maintain net worth as
explained in the following section.
Professional Clearing Members (PCM): Members can carry out the
settlement and clearing for their clients who have traded through TCMs or
traded as TMs. Applicants accepted for admission as PCMs are required to
pay the requisite fee/ deposits and also maintain net worth.
Trading Member (TM): Member who can only trade through their account
or on account of their clients and will however clear their trade through
PCMs/STCMs.
Strategic Trading cum Clearing Member (STCM): This is up gradation
from the TCM to STCM. Such member can trade on their own account, also
on account of their clients. They can clear and settle these trades and also
clear and settle trades of other trading members who are only allowed to trade
and are not allowed to settle and clear.

Trading:
Fully automated screen-based trading.
Order driven market.
Complete transparency of trading operations.
Timings of the NCDEX are 10.00 a.m. to 4.00 pm
Contract specifications from time to time.
NCDEX trades commodity futures contracts having one-
month, two-month and three-month expiry cycles.
All contracts expire on the 20th of the expiry month.
Clearing:
National Securities Clearing Corporation Limited (NSCCL)
Settlement Guarantee Fund is maintained and managed by
NCDEX.
Professional Clearing Members (PCMs) only are entitled to
clear and settle contracts through the clearing house.
Settlement:
MTM Settlement
Final Settlement

Future Trading System:
The trading system on the NCDEX provides a fully automated screen-based
trading for futures on commodities on a nationwide basis as well as an
online monitoring and surveillance mechanism. It supports an order driven
market and provides complete transparency of trading operations. The trade
timings on the NCDEX are 10.00 a.m. to 4.00 p.m. After hours trading has
also been proposed for implementation at a later stage.
The NCDEX system supports an order driven market, where
orders match automatically. Order matching is essentially on the basis of
commodity, its price, time and quantity. All quantity fields are in units and
price in rupees. The exchange specifies the unit of trading and the delivery
unit for futures contracts on various commodities. The exchange notifies the
regular lot size and tick size for each of the contracts traded from time to
time. When any order enters the trading system, it is an active order. It tries
to find a match on the other side of the book. If it finds a match, a trade is
generated. If it does not find a match, the order becomes passive and gets
queued in the respective outstanding order book in the system. Time
stamping is done for each trade and provides the possibility for a complete
audit trail if required.

The Value at risk (VaR) based margining and limits on position levels are
transparent and applied uniformly across market participants. In
commodity futures markets, margins are collected from market
participants to cover adverse movements in futures prices. Prudent risk
management requires that margining system of the Exchange should
respond to price volatility to ensure that members are able to meet their
counter party liability. In the long run, this ensures financial discipline in
the market and aids in the development of the market.
RISK MANAGEMENT
Financial soundness of the members.
Follows value-at-risk (VaR) based margining through
SPAN.
Open positions of the members are marked to market
based on contract settlement price for each contract; the
difference is settled in cash on a T+l basis.
Actual position monitoring and margining is carried out
on-line through the SPAN (Standard Portfolio Analysis of Risk)
system.

Multi Commodity Exchange of India Limited
Introduction:
Inaugurated in November 2003 by Shri Mukesh Ambani,
Chairman & Managing Director, Reliance Industries Ltd,
Having started operations in November 2003, today, MCX holds
a market share of over 80% of the Indian commodity futures market, and
has more than 2000 registered members operating through over 100,000
trader work stations, across India. The Exchange has also emerged as the
sixth largest and amongst the fastest growing commodity futures
exchange in the world, in terms of the number of contracts traded in
2009.

Today MCX is offering spectacular growth opportunities and advantages to a
large cross section of the participants including Producers / Processors, Traders,
Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives,
Industry Associations, amongst others MCX being nation-wide commodity
exchange, offering multiple commodities for trading with wide reach and
penetration and robust infrastructure, is well placed to tap this vast potential.
Headquartered in Mumbai, Multi Commodity Exchange of India Ltd (MCX) is
a state-of-the-art electronic commodity futures exchange. The demutualized
Exchange set up by Financial Technologies (India) Ltd (FTIL) has permanent
recognition from the Government of India to facilitate online trading, and
clearing and settlement operations for commodity futures across the country.
MCX offers more than 40 commodities across various segments such as
bullion, ferrous and non-ferrous metals, and a number of Agri-commodities on
its platform. The Exchange is the world's largest exchange in Silver, the second
largest in Gold, Copper and Natural Gas and the third largest in Crude Oil
futures, with respect to the number of futures contracts traded.

MCX has been certified to three ISO standards including ISO 9001:2000
Quality Management System standard, ISO 14001:2004 Environmental
Management System standard and ISO 27001:2005 Information Security
Management System standard. The Exchange’s platform enables
anonymous trades, leading to efficient price discovery. Moreover, for
globally-traded commodities, MCX’s platform enables domestic
participants to trade in Indian currency.
Key Shareholders: Promoted by FTIL, MCX enjoys the confidence of blue
chips in the Indian and international financial sectors. MCX's broad-based
strategic equity partners include State Bank of India and its associates
(SBI), National Bank for Agriculture and Rural Development (NABARD),
National Stock Exchange of India Ltd (NSE), State Bank of Indore, State
Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd.,
SBI Life Insurance Co Ltd, Bank of India (BOI) , Bank of Baroda (BOB),
Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank, Fid
Fund (Mauritius) Ltd. - an affiliate of Fidelity International, Merrill Lynch,
Euro next N.V., Financial Technologies (India) Ltd., and others.

Commodities:
- Bullions: - Gold, Gold Guinea, Gold HNI, Gold M,
Platinum, Silver, Silver HNI, Silver M, Silver Micro.
- Plantations: - Rubber.
- Metals: - Aluminum, Aluminum Mini, Copper, Iron Ore,
Lead, Lead Mini, Nickel, Tin, Mid Steel Ingot, Billets, Zinc, Zinc
Mini.
- Energy: - ATF, Brent Crude Oil, Crude Oil, Electricity
Monthly & weekly, Gasoline, Heating Oil, Imported Thermal Coal,
Natural gas.
- Weather: - Carbon (CER), Carbon (CFI).
- Oil & Oil Seeds: - Crude Palm Oil, Kapasia Khali, Refined
Soya Oil, Soya Bean.
- Cereals: - Barley, Wheat, Maize-Feed/Industrial Grade.
- Fiber: - Kapas
- Pulses: - Chana
- Others: - Almond, Gaur Seed, Melted Menthol Flakes,
Mentha Oil, Potato (Agra), Potato (Tarkeshwar), Sugar M.
- Spices: - Cardamom, Coriander, Turmeric.

Arbitration Process in MCX
MCX bye-laws prescribe that all claims, differences or disputes between the
members or between a member and a client in relation to trades, contracts
and transactions executed on exchange shall be resolved by way of
conciliation proceedings and in case such conciliation proceedings do not
result in a settlement, arbitration as provided in the bye-laws. Such
arbitration is conducted by Arbitrators selected from an arbitration panel of
exchange. The bye-laws provide that the arbitral tribunal shall make the
arbitral award within three months from the date of entering upon the
reference.
The exchange provides a list of eligible persons. Persons who form part of
the loss of Arbitrators are the ones who possess an expertise in their
respective fields including Banking, Finance, Legal (Judges) and Capital
Market areas (Brokers). An application for arbitration has to be filled within
6 months from the date of dispute. Arbitration is being conducted by the
Exchange at four regional arbitration centers (Delhi, Kolkata, Mumbai and
Chennai).

National Multi-Commodity Exchange of India Limited
(NMCEIL)
Introduction:
NMCEIL is the first De-Mutualized, Electronic Multi-Commodity
Exchange in India. On 25th July, 2001, it was granted approval by the
government to organize trading in the edible oil complex; it has
operationalized form November 26, 2002; Derivative trading through
DTSS (Derivative Trading Settlement System). It got its recognition in
October 2002. National Multi-Commodity Exchange of India Limited is
committed to provide world class services of on-line screen based
Futures Trading of permitted commodities and efficient Clearing and
guaranteed settlement, while complying with Statutory/ Regulatory
requirements.

NMCE has many firsts to its credit - the first, online, demutualized,
multi-commodity exchange in the country to get national status. NMCE
not only revived futures trade electronically in the commodities in India
after a gap of 41 years, but also integrated the centuries old commodity
market with the latest technology. It is backed by compulsory delivery
based settlement to ensure transparent and fair trade practices. NMCE
offers electronic platform for future trading in plantation, spices, food
grains, non-ferrous metals, oil seeds and their derivatives. NMCE is
promoted by commodity-relevant public institutions, viz., Central
Warehousing Corporation (CWC), Punjab National Bank (PNB) National
Agricultural Cooperative Marketing Federation of India (NAFED),
Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State
Agricultural Marketing Board (GSAMB), Neptune Overseas Limited
(NOL), National Institute of Agricultural Marketing (NIAM), NMCE
invites applications for Institutional Clearing Membership,
Professional Clearing Membership, Trading Cum Clearing
Memberships, and Trading Memberships.

Entities eligible:
For TM and TCM:
- Individuals (Proprietary firms)
- Registered Partnership Firms, Corporate Bodies
- Association and their subsidiaries
- Banks and Financial Institutions, including their subsidiaries
- HUFs/ Co-operative Bodies
- Individuals (Proprietary firms)
- Registered Partnership Firms
- Association and their subsidiaries
- Corporate Bodies
- Banks and Financial Institutions, including their subsidiaries
- HUFs/ Co-operative Bodies
For ICM:
- Company and Institution (Commodity Exchanges, Stock
Exchanges, Trade and Industry Associations, Co-operative Bodies and
large Retail Network Stock and Commodity Brokers)
For ITCM:
- Corporate bodies, Banks, Financial institutions & subsidiaries

Commodities Traded:
Oil and oil seeds: Castor seed 10 MT- CASTORF, Copra –
COPRAF, Rape/mustard seed- RAPESF, Soya oil- SOYO10F.
Spices: Cardamom – CARDAMF, Pepper – PEPPERF,
Turmeric – TURMICFF
Pulses: Chana – CHANAF
Precious metals: Gold – GOLDF, Gold Guinea –
GOLDG8F, Kilo Gold- KGOLDF, Silver – SILVERF
Base metals: Aluminum – ALUMF, Aluminum 5 ton –
ALUM5F, Copper –COPPERF, Lead-LEADF, Zinc- ZINC,
Nickel- NICKELF
Others: Wheat, Raw jute, Menthol Crystal, Rubber, Guar
seed, Coffee
Promoters: NAFED, Central Warehousing Corporation, National Institute of
Agricultural Marketing, Gujarat State Agricultural Marketing Board, Punjab
National Bank, Neptune Overseas Limited, Gujarat Agro Industries
Corporation Limited.
Investors: Reliance Money & Bajaj Holdings and Investment Limited.

Warehouse Receipt:
The term “Warehousing Receipt” has been defined in The State Warehouses
Act. “Receipt” means a Warehouse Receipt in the prescribed form issued by
a Warehouse Man to a person depositing goods in the warehouse. A licensed
warehouseman is authorized to issue a negotiable or a non-negotiable
warehouse receipt. It evidences a contract for storage of goods. It is
accepted by the commercial banks as collateral security for grant of loan
against the goods stored in the warehouses. A warehouse receipt can be
negotiated by endorsement and delivery. It is a document of title of goods as
per the Sale of Goods Act, 1930. The goods covered by a negotiable
warehouses receipt can be transferred by an endorsement on the Warehouse
Receipt and its delivery to the endorsee.
Receipt Financing: Warehouse Receipts (WR) are documents issued by
warehouse operators as evidence that specified commodities of stated
quantity and quality, have been deposited at particular licensed warehouses
by named depositors.
Depositor: Producer, Farmer, Trader, Exporter, Importer, Processor etc.

Benefits of Receipt Financing: - Farmers / Traders / Exporter:
1. Producer gets better return
2. Minimize price risk
3. Price discovery
4. Liquidity of Funds
5. Bank Finance at better interest rate & longer terms
6. More opportunity to invest and more flexibility in trade
7. Avoid distress sale during harvest
8. Confidence in terms of storage
9. Confidence in grade/Quality
10. Preservation of Stocks to avoid any kind of damage &
deterioration
Exchange / Broker
1. Turnover/liquidity of the Exchange/ broker will increase
2. Transaction charges/Brokerage will increase due to increase
in turnover
3. Increase in member/ client base

Institutional Banker:
1. Secured Finance
2. No Risk for Quality, Quantity & Price fall
3. Interest Revenue
4. Increase in client base of other services
5. Minimum procedural work
Risk Management: For efficient clearing & settlement of trades, NMCE
has an automated clearing and settlement system with HDFC Bank as its
Clearing Bank. The software automatically calculates Initial Margins
using VAR (Value at Risk) and MTM (Mark to Market) margins on a
daily basis. In the same way, members’ positions are also computed on a
daily basis. The information regarding pay-ins and pay-outs arising in
calculations of positions of members is transferred at the end of trading
hours electronically, using flat files for the clearing banks and members.

Exposure Limits: Exchange provides facility in the system enabling the
TCMs to select the commodities in which the TM can trade and also fix
the trading limits for each TM. TCM can also monitor the position of
TMs online.
Initial Margin, Mark to Market Margin, Special Margin, Price Bands,
Final Settlement and On-Line Surveillance and Off-Line surveillance.
On-Line Surveillance: includes the monitoring of prices, volume &
volatility in various series and its analysis using various methods like
real time graphs, queries, alerts etc.
Off-Line surveillance: includes margining requirements, procedures in
respect of exception handling, position monitoring, exposure limits,
investigation techniques & disciplinary action procedures.

National Board of Trade (NBOT)
NBOT was incorporated on July 30, 1999 to offer integrated, state-of-
the-art commodity futures exchange. It was incorporated to offer
transparent and efficient trading platform to various market
intermediaries in the commodity futures trade. Today NBOT is one of the
fastest growing commodity exchanges recognized by the Government of
India under the aegis of the Forward Markets Commission. Within a
short span of seven years, NBOT has carved out a niche for itself in the
commodities market. With a humble beginning of trading in February
2000 its average daily volume has reached a staggering 60,000 MTs
(approx.) in terms of Soya oil.
Objective: Futures Exchange helps to achieve dual economic purposes:
Price Discovery & Risk-Management.
Commodities: Soybean, its oil and cake; Rape/Mustard seed, their oil
and cake; RBD Palmolein, Crude Palm Oil, CPO Refined and Crude
Palmolein.

Indian Commodity Exchange Ltd (ICEX)
Indian Commodity Exchange Limited is a screen based on-line
derivatives exchange for commodities and has established a reliable, time
tested, and a transparent trading platform. It is also in the process of
putting in place robust assaying and warehousing facilities in order to
facilitate deliveries. This exchange is ideally positioned to leverage the
huge potential of commodities market and encourage participation of
farmers, traders, and actual users to benefit from the opportunities of
hedging, risk management and supply chain management in the
commodities markets. The Exchange is a public-private partnership with
Reliance Exchange next Ltd. as anchor investor and has MMTC Ltd.,
India bulls Financial Services Ltd., Indian Potash Ltd., KRIBHCO and
IDFC among others, as its partners.
Key Shareholders and Shareholding Pattern: Reliance Exchange next
Ltd. 26%; MMTC Limited 26%; India bulls Financial Services Limited
14%; Indian Potash Limited 10%; KRIBHCO 5%; IDFC 5%; Others
14%.

Commodities Traded:
Precious Metals : Gold, silver
Metals: Copper, Zinc, Nickel
Energy: Crude Oil, Natural Gas
Other Agro Products: Mentha Oil, Soybean,
Guar Seed, Mustard Seed
Oil & Oilseed Complex: Mustard Oil, Refine
Soya Oil(RSO)
Minerals: Iron Ore
Fibers: Raw Jute
Market Operation:
Trading
Risk Management
Market Surveillance
Clearing & Settlement
Delivery

Ahmedabad Commodity Exchange Ltd (ACE): ACE Derivatives and
Commodity Exchange Ltd. operates as a screen based online derivatives
exchange for commodities in India. It offers futures trading in various
commodity groups, such as agricultural products, bullion, base metals, and
energy. The company provides an online multi-commodity platform; and
clearing and settlement infrastructure that supports the process of trade
intermediation, including registration of trades, settlement of contracts, and
mitigation of counter-party risk.
ACE Derivatives and Commodity Exchange Ltd. was formerly known as
Ahmedabad Commodity Exchange Limited. The company was founded in
1952 and is based in Mumbai, India. ACE Derivatives and Commodity
Exchange Ltd. is a subsidiary of Kotak Mahindra Bank Limited.
Kotak Anchored, Ace Derivatives and Commodity Exchange Limited is a
screen based online derivatives exchange for commodities in India. Ace
Commodity Exchange earlier known as Ahmedabad Commodity Exchange
has been in existence for more than 5 decades in Commodity Business,
bringing in the best and transparent Business Practices in the Indian
commodity space.

TOP TRADED COMMODITIES:
Exchange Commodities
NYMEX Crude oil, Natural Gas, Gold
CBOT Corn, Soybean, Wheat, Soybean oil
ICE,US Sugar, Coffee, Cotton, Cocoa
CME Live Cattle, Lean Hogs, Feeder Cattle
Shanghai Futures Exchange Copper, Rubber, Fuel oil, Zinc,
Aluminum
Dalian Commodity Exchange Soy Meal, Soy oil, Polyethylene,
Soybeans, Palm oil
Zhengzhou Commodity Exchange Sugar, Pure Terephthalic acid (PTA),
Rapeseed oil, Wheat, Cotton
ICE Futures UK Brent Crude oil, WTI Crude, Gasoil,
Natural Gas
LME UK Aluminum, Copper, Zinc, Nickel,
Lead
Tokyo Commodity Exchange Gold, Platinum, Rubber, Gasoline

National Spot Exchange: About National Spot Exchange Limited
(NSEL): National Spot Exchange Limited (NSEL), was incorporated in
May 2005 as a spot exchange for trading in commodities. Central
Government by a notification dated June 7, 2007 had granted an
exemption u/s 27 of the Forward Contracts Regulation Act (FCRA), to
NSEL from complying with all the provisions of the FCRA subject to
certain conditions. In October 2008, NSEL commenced operations
providing an electronic trading platform to willing participants for spot
trading of commodities, such as bullion, agricultural produce, metals, etc.
Like NSE and BSE, NSEL has its registered trading members,
commonly referred to as brokers, who execute commodity trades on the
NSEL platform on behalf of and in accordance with the instructions of
their respective clients across India. The trading operations of NSEL was
suspended with effect from August 6, 2013, only after a notification
dated September 19, 2014, when the Central Government withdrew the
gazette notification dated June 5, 2007.

Facilities Offered:
• 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 facility available
• Fungibility of delivery between National Spot Exchange
and MCX with common ICIN no’s.
• Loan facility against pledge of demats / warehouse
receipt, Cash futures arbitrage opportunity.
E-Series product: A new form of commodities investment: Initiative of
NSEL with E-Series Products. For the first time in India, National Spot
Exchange has introduced E-Series products in commodities. Retail
investors can now trade and invest in commodities like they invest in
equities. This will be a unique market segment, which will function just
like cash segment in equities, but offer commodities in the demat form in
smaller denominations.

REQUIREMENT OF BASE MINIMUM CAPITAL FOR MEMBERS OF
NATIONAL COMMODITY EXCHANGES
Note: Algorithmic trading (automated trading, block-box trading or simply algo-trading
is the process of using computers programmed to follow a defined set of instructions for
placing a trader in order to generate profits at a speed and frequency that is impossible
for a human trader.

Commodity Market - Module I

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