Background
India traditionally a agrarian economy.
Challenges to Indian agriculture in post-WTO regime, technological changes, innovative irrigation techniques,productivity enhancements.
Distributed Regional Commodity markets with lack of efficient supply mechanisms.
Lack of transparency & inadequate information dissemination on prices.
Insufficient incentives for production with effects on quality, export competitiveness.
The Indian Definition: FCRA (1952)
Goods
“Every kind of movable property other than actionable claims, monies and securities”
Securities
“Shares, scrips, stocks, bonds, debentures, debentures-stocks or other marketable securities of a like nature in or any incorporated company or any body corporate and also government securities”
Commodities market
An exchange for buying and selling commodities for future delivery.
Trade contracts for delivery of any product or service that can be characterized in an interchangeable way.
They are complex, and include a wide array of instruments to manage risk.
"Commodity Exchange"
A commodity exchange is an association, or a company or any other body corporate organizing futures trading in commodities.
National - level Multi commodity exchanges
National Multi Commodity Exchange of India Ltd, Ahmedabad (NMCE)
This is presently working on-line and trading in many active commodities like castor seed/oil, rapeseed and mustard seed/oil, aluminum, soybean/oil, pepper, gold, silver etc.
National Board of Trade, Indore (N-BOT)-
This is also presently working but not completely on-line, screen-based. In this exchange maximum trades are carried out in soy oil.
National Commodity and Derivative Exchange, Mumbai (NCDEX)
The exchange is being promoted by ICICI Bank, National Stock Exchange (NSE), Life Insurance Corporation and NABARD.
It is more or less on the lines of the NSE of the capital market.
Multi Commodity Exchange of India Ltd, Mumbai (MCX)--
The exchange is promoted mainly by professionals and supported by Financial Technology (FT).
The exchange has started operations from November 10 and has offered gold, silver and castor seed in the first phase of trading facility.
“Spot" or “Cash" Contracts
A ready delivery contract is one, which provides for the delivery of goods and the payment of price there for, either immediately or
Within such period not exceeding 11 days after the date of the contract, subject to such conditions as may be prescribed by the Central Government.
A ready delivery contract is required by law to be fulfilled by giving and taking the physical delivery of goods.
In market parlance, the ready delivery contracts are commonly known as "spot" or "cash" contracts.
Forward contracts
All contracts in commodities providing for delivery of goods and/or payment of price after 11 days from the date of the contract are "forward" contracts.
Forward contracts are of two types -
"Specific Delivery Contracts" and
"Futures Contracts".
Specific delivery
Specific delivery contracts provide for the actual delivery of specific quantities and types of goods during a specified future period, and in which the names of both the buyer and the seller are mentioned.
Futures contract
A futures contract is a type of "forward contract". FCRA defines forward contract as "a contract for the delivery of goods and which not a ready delivery is contract".
The term 'Futures contract' is nowhere defined in the FCRA. But the Act implies that it is a forward contract, which is not a specific delivery contract.
However, being a forward contract, it is necessarily "a contract for the delivery of goods". A futures contract in which delivery is not intended is void (i.e., not enforceable by law), and is, therefore, not permitted for trading at any commodity exchange.
Commodities Futures
Presently futures trading is permitted in all the commodities.
Trading is taking place in about 50 commodities in 22 exchanges
The govt.has recently allowed four national level multi-commodity exchanges to trade in all permitted commodities.
The “Forward Markets Commission” (FMC) is the regulatory body for commodity futures/forward trade in India.
Who uses Futures market
The Futures market participants comprises of farmers, traders, producers, processors, exporters, importers and industries associated with commodities. The futures market is used for hedging the price risk and for trading or arbitrage.
Commodity Futures Contract
A commodity futures contract is a tradable standardized contract,
The futures contract is for a specified variety of a commodity, known as the "basis",
The quality parameters of the "basis" are all predetermined by the rules and regulations of the commodity exchange.
Consequently, the parties to the contract are required to negotiate only the quantity to be bought and sold, and the price.
Everything else is prescribed by the Exchange.
Because of the standardized nature of the futures contract, it can be traded with ease at a moment's notice.
The physical markets for commodities deal in either cash or spot contract for ready delivery and payment within 11 days, or forward (not futures) contracts for delivery of goods and/or payment of price after 11 days.
These contracts are essentially party to party contracts, and are fulfilled by the seller giving delivery of goods of a specified variety of a commodity as agreed to between the parties.
Rarely are these contracts for the actual or physical delivery allowed to be settled otherwise than by issuing or giving deliveries.
Such situations may arise when unforeseen and uncontrolled circumstances prevent the buyers and sellers from receiving or taking deliveries.
The contracts may then be settled mutually.
Futures markets trade in futures contracts which are primarily used for risk management (hedging) on commodity stocks or forward (physical market) purchases and sales.
Futures contracts are mostly offset before their maturity and, therefore, scarcely end in deliveries.
Speculators also use these futures contracts to benefit from changes in prices and are hardly interested in either taking or receiving deliveries of goods.
Price Risks
The two major economic functions of a commodity futures market are price risk management and price discovery.
The need for price risk management, through what is commonly called "hedging", arises from price risks in most commodities.
The larger, the more frequent and the more unforeseen is the price variability in a commodity, the greater is the price risk in it.
Insurance companies offer suitable policies to cover the risks of physical commodity losses due to fire, pilferage, transport mishaps, etc., they do not cover similarly the risks of value losses resulting from adverse price variations.
Hence, the need for price risk management or hedging through the use of futures contracts.
Hedging
Hedging involves buying or selling of a standardized futures contract against the corresponding sale or purchase respectively of the equivalent physical commodity.
The benefits of hedging flow from the relationship between the prices of contracts (either ready or forward) for physical delivery and those of futures contracts.
Hedging thus performs the economic function of helping to reduce significantly, if not eliminate altogether, the losses emanating from the price risks in commodities.
Hedging is the practice of off-setting the price risk inherent in any cash market position by taking an equal but opposite position in the futures market.
Price Discovery
Unlike the physical market, a futures market facilitates offsetting the trades without exchanging physical goods until the expiry of a contract.
Futures market attracts hedgers for risk management, and encourages considerable external competition from those who possess market information and price judgment to trade as traders in these commodities.
While hedgers have long-term perspective of the market, the traders or arbitragers, prefer an immediate view of the market.
However, all these users participate in buying and selling of commodities based on various domestic and global parameters such as price, demand and supply, climatic and market related information.
These factors, together, result in efficient price discovery, allowing large number of buyers and sellers to trade on the exchange.
Indian market - Bullion Market
Largest consumer (Rs. 400 bn) – traditional form of investment
Large stock of unaccounted metal
Skills in hand made jewellery
Potential
Use it as monetary unit to boost rural economy
Effective instrument for investment diversification
Boost jewellery exports
Impediments
Differences in sales tax, octroi & stamp duty among states
Lack of good assaying practices – difficult to liquidate investment
Little avenue to hedge price risk of jewellery exporters
Indian market – Other Metals
Market
Indian Production (Al, Cu & steel) – Rs. 600 bn
Largest exporter of iron ore and alumina
Large importer of copper
Current trade by negotiation / price setting by producers
Potential
Increased scope for aluminum & steel exports (as against alumina and iron ore)
Stable metal prices can fuel boom in downstream industries
Rival China as preferred manufacturing location
Growth in manufacturing to equal that in services
Impediments
No organised exchange in India – price discovery difficult
Significant PSU participation
Indian market - Agriculture
Market
Agricultural share in GDP – 26% (Rs. 5000 bn)
Large producer of cotton, cereals, sugar, fruits, spices etc
Current exports of about USD 4 bn
Specific commodity based exchanges – not very successful
Potential
Diverse gene pool and climatic conditions
Increase in agricultural exports – sugar, cereals
Increase in processed foods production & consumption
Impediments
Restrictions on inter state movement
Poor transport & warehousing – 30% wastage in cereals
Member controlled exchanges – transparency issues
For all Bullion futures Contracts
Gold Futures Contract
Silver Futures Contract
For All Agri Contracts
Soya Bean Contract
Refined Soya Bean Oil Contract
Crude Palm Oil Contract
Benefits of futures trading
Price discovery for commodity players
A farmer can plan his crop by looking at prices prevailing in the futures market
Hedging against price risk
A manufacturing firm can reduce most of its volatility in earnings
An exporter can commit to a price to his foreign clients
Competitive finance for commodity market players
Volume of Existing Exchanges
Volumes in Commodity Derivatives Worldwide
Derivatives volumes of non-US exchanges in the last decade has been increasing
Comparison of Commodities & Equities
Format for Tickers
XXXYYYZZZ
XXX – three letters for the commodity
YYY – three letters for the grade
Where ever there is no particular grade, either STD (standard) or GR1 (grade 1) has been used
ZZZ – three letters for the location
Eg.
SYOREFIND
SYO : Soy Oil
REF : Refined
IND : Indore
Format for Tickers
GLD100MUM : “Gold”+“100% pure”+“Mumbai”
SLV100DEL : “Silver”+“100% pure”+“Delhi”
SYBGR1IND : “Soy Bean”+“GR1”+“Indore”
SYOREFIND : “Soy Oil”+ “Refined”+ “Indore”
RMSGR1JPR : “Rape/Mustard”+“GR1”+“Jaipur”
RMOEXPJPR : “Rape/Mustard Oil”+ “Expeller”+ “Jaipur”
RBDPLNKAK : “RBD”+“Palm Olein”+ “Kakinada”
CPOSTDKDL : “Crude Palm Oil”+ “STD”+ “Kandla”
CTMJ34BTD : “Cotton Medium Staple Length”+“J-34”+“Bhatinda”
CTLS06ABD : “Cotton Long Staple Length”+“S-06”+“Ahmedabad”
Instrument Type
“Instrument Type” is NCDEX to denote whether the ticker is a futures contract or a spot price being disseminated or an options contract
COMDTY – used for commodity spot price dissemination
FUTCOM – used for futures on commodity
OPTCOM – used for options on futures on commodity
Contract Expiry
Contract Expiry for the Futures contract will be written as 20mmmYYYY
mmm – used to denote the month, eg. DEC, JAN etc
YYYY – used to denote the year eg. 2003, 2004 etc
For the spot price, no expiry date will be displayed or required
What to quote for buy/sell
Gold – for buying futures of say 500 gm, you will need to enter “Quantity” as 500, and price in “Rs/10gm”
Silver – for buying futures of say 25 Kg, you will need to enter “Quantity” as 25 and the price in “Rs/Kg”
All oils and oilseeds – for buying futures of say 5 MT, you will need to enter “Quantity” as 5 and
the price for Soy Bean in “Rs/Quintal”
the price for Rapeseed/Mustard Seed in “Rs/20 Kg”
the price for all edible oils in “Rs/10 Kg”
Cotton – for buying futures of say 44 bales, you will need to enter “Quantity” as 44 and the price in “Rs/Quintal”
ORDER TYPES
Regular lot order
Limit Order
Market Order
Qualifiers
Stop Loss
Futures Spread (SB) – specified difference between two different calendar months in same commodity
Immediate or Cancel (IOC)
2L Order (2L) – Both price and quantity is specified for each of the two legs
3L Order (3L) – Price and quantity is specified for three legs
TIME VALIDITY OF TRADES
Day-Valid only for that day
Good Till Date (GTD) – Valid for specified no. of days (Max 7 days)
Good Till Canceled (GTC) – Valid till cancelled (Max 7 days)
BOOK TYPES
REGULAR LOT BOOK
All regular lot orders except Stop Loss (SL)
STOP LOSS BOOK
SPREAD BOOK
SYSTEM CHECKS AND BALANCES SINGLE ORDER
REGULAR LOT ORDERS
Validity of the contract and time of entry
Order quantity to be a multiple of lot size
Order price to be a multiple of tick size
“Warning Quantity” order to be confirmed by dealer
“Freeze Quantity” to be confirmed by Exchange
Branch order limits as set by corporate manager should be adhered to
MATCHING RULES –SINGLE ORDER
Incoming single order will be matched with the best priced counter order in the regular lot book.
Unmatched orders will be written to the book
Stop Loss orders are written into a special book after trigger have same matching rules
MATCHING RULES-SPREAD ORDERS
Search for the best price counter orders in the Regular Lot books and see if a match is possible
Unmatched orders will be written to the book
For 2L AND 3L orders if either leg is not matched the order is cancelled
TIME PRIORITY OF MODIFIED ORDERS
Time priority lost in case
The order is moved from one book to another
The order price is changed
The order quantity is increased
Changing an order from PRO to CLI or vice-versa
Time priority is not lost in case
The order quantity is decreased
The participant id is changed
TRADE MANAGEMENT
Trade confirmation – On-line confirmation on trader workstation – either on-line or tabular
Dealers can print these confirmations during the day – will be overwritten the next day
Trade modification – can be done only for Account Number, Participant, Open / Close & covered / uncovered
Quantity modification needs Exchange approval
Any trade cancellation needs Exchange approval or concurrence of both the parties
DEALER REPORTS
Available to corporate and branch managers from log-on screen
Reports can be printed at any time during the day (except Bhav Copy report)
Type of reports
Open orders today
Order Log
Trades done today
Spread open orders today
Spread Trades done today
Market Statistics (Bhav Copy) report
Settlements – An Introduction
A contract has a life cycle of one month or longer.
Two weeks before the expiry of a contract, the contract enters into a tender period.
At the start of the tender period, both the parties must state their intentions to give or receive delivery, based on which the parties are supposed to act or bear the penal charges for any failure in doing so.
Those who do not express their intention to give or receive delivery at the beginning of tender period are required to square-up their open positions before the expiry of the contract.
In case they do not their positions are closed out at 'due date rate'.
The links to the physical market through the delivery process ensures maintenance of uniformity between spot and futures prices.
Settlements – An Introduction
When is the Settlement done?
A Daily Mark to Market (MTM) Settlement is done for each Member
At the end of every trading day, for all the trades
This is done till the date of the Contract expiry
A daily settlement is done to take care of DAILY PRICE FLUCTUATION for all trades
A Final Settlement will be done for each Member
On expiry of the Contract
This will handle the FINAL obligation of the Member for all trades in that contract.
Settlements – Daily MTM Settlement
The Daily Settlement is done by calculating the daily profits and losses for the Member
Profits and Losses are determined on the positions for Member, for each client and for each contract
All trades are marked to the market at the Daily Settlement Price which is = Closing price for the day.
A total Mark to Market Profit or Loss is calculated for the Member
Settlements – Daily Settlement Price
Daily settlement price is the consensus price that clears maximum volume of trade during this period
A closing session is held daily for 15 minutes after trading hours
Single price call auction in the closing session
The consensus price is valid only if Order for at least 15 contracts are executed by a minimum number of 5 Constituents Else, all the orders collected in the closing session shall be cancelled and alternative methods used Settlements – Consensus Price
Settlements – Daily MTM Settlement Example
Funds transaction flow
Settlements – Daily MTM Settlement
When is Daily MTM Settlement done ?
The information on MTM amount ( paid or received) by the broker is given thru the Extranet at the end of the day
Actual payment and receipt of funds will be made by the Member on the next trading day i.e T+1. (‘T’ being the trade date)
How does the Transfer of funds happen?
Payment will be done through a designated Clearing bank of the Exchange
The Broker makes arrangement for funds in his Settlement A/c with the bank
Instruction to the Bank for debiting/crediting the broker’s account will be sent by the Clearing Corporation (NSCCL)
Settlements – Daily MTM Settlement
What are the other payments to be made ?
Besides the MTM , Daily Margin payments will be made by the Members
Margin files will be downloaded on the Extranet
Member arranges for funds in the Settlement A/c
The Clearing Corporation debits the funds on the next day after the trading date.
What happens in case of failure ?
If the Member fails to make the payment of MTM or Margin amount, trading terminal is disabled immediately Trading will commence on deposit of funds by the Member
Settlements – Daily MTM Settlement
Where is the information on Daily Settlement available?
All information pertaining to Settlements is available on the Member Extranet
This is available in specific folders for the Members
How do I access the Extranet?
Thru the VSAT / Leased Lines connectivity using FTP protocol
Login using Trading member Id and password during non-trading hours
Settlements – Bank Accounts
How do I open my bank accounts with the designated Clearing banks?
There are currently 4 banks with whom accounts can be opened.
Canara Bank
HDFC Bank
ICICI Bank
UTI Bank
More banks to be available
What are the different accounts to be opened?
There are 4 accounts to be opened by each Member
Settlement A/c for payments and receipts
Exchange Dues A/c for charges and fees
Client A/c for client transactions
Own funds account
Opening new positions and Closing of open positions by Member
Daily MTM Settlement and Margins
Determination of positions for each Member
Final Settlement of all open positions
Settlements – Final Settlement
The Settlement done for Open Buy and Sell positions on the Contract Expiry Date is called Final Settlement
Settlements – Final Settlement
Who is responsible for Final Settlement of trades?
The responsibility of settlement is on a Trading cum Clearing Member (TCM) for all trades done on his own account and his clients’ trades
A Professional Clearing Member is responsible for settling all the Participant trades which he has confirmed to the Exchange
On confirmation by the PCM , the Participant trades get transferred from the TCM to the PCM
How is the Contract settled on Expiry?
A contract is settled at the Final Settlement Price on the Date of Expiry
The Final Settlement Price is the price of the commodity in the underlying spot markets
Settlements – Deliveries
Can actual delivery of the commodity be done on Expiry?
A Member can give and take delivery of commodities by completing the Delivery formalities and giving delivery information to the Exchange
Settlements – Deliveries
What are procedures required before Delivery?
Opening a CM Pool account for the purpose of settlements
Beneficiary Demat account for own transactions
Opening of Client’s Demat account with the empanelled DP
The List of DPs empanelled so far
ICICI Bank
UTI Bank
Canara Bank
Global Trust Bank
Infrastructure leasing & Financial Services (ILFS)
Settlements – Deliveries
When is the delivery information submitted ?
The Information can be submitted any time during the trading hours on the Expiry Date
Information submitted – Thru the delivery request window on the Trading Terminal
Settlements - Deliveries
Information required for Delivery
Commodity code
Quantity
Location/branch preference for physical receipt/delivery of commodities
Demat Indicator
In case two Members want to undertake direct delivery, the Counter party Code has to be specified
Screen shot
Settlements at NCDEX – Deliveries
How is the delivery information processed ?
The information submitted by the Members is matched at NCDEX at the end of the day
All trades which are matched are locked for delivery
A Delivery Request number is generated for all delivery information submitted
Settlements – Deliveries
How does the matching of delivery information take place?
Validation of delivery information
On Client’s Net Open Position
On Delivery lot for commodity
Excess quantity is rejected and is cash settled.
Matching limited to the total capacity at the Warehouse
Matching is done for the deliveries based on
Commodity
Location
Branch
Quantity
When will the delivery of commodities be done ?
Settlement Calendar
Settlements – Entity Interaction
Settlements – Cash Settlement
Is there a provision for settling in Cash ?
All unmatched/rejected/excess positions are Cash Settled
All open positions for which NO delivery information is submitted is also settled in Cash
What is the method for cash settlement?
The Cash Settlement is done at the Final Settlement Price
Settlement – Information to members
How does the Member get information on the Obligations?
On Contract Expiry, the Exchange downloads open positions to Members, through the extranet
Delivery margins are charged on all deliverable positions from expiry of contract till date of final settlement
Settlement at NCDEX – Information to Members
Detailed Position Report
For Trading Cum Clearing Members (TCM)
Information for all client and proprietary positions for each day
For Professional Clearing Members (PCM)
Information for each trading member and participant
Trades report for all members
Trades executed on the trading day
Bank Report
Containing pay-in, pay out of funds for mark-to market profit/loss settlement and futures final settlement
All funds transactions for the date are clubbed together to form one single payable or receivable transaction
Settlement – Information to members
Bank Summary Report
Detailed transaction wise report of all instructions sent by the Exchange to the member’s bank account for debit/credit
Bank Transaction Report
Transaction wise report of all instructions and status of each instruction, sent by the Exchange to the member’s bank account for debit/credit
Contracts
Information on active contracts for the day
Contracts available for trading from the next trading day
Settlement – Pay In
Pay-in will take place on date as specified in Settlement Calendar
Commodities:
Seller ensures demat of commodities prior to Pay-in
Instruction to DP by seller to move commodities to Clearing Member Pool Account
Pay-in of commodities on Settlement Date thru Clearing member pool account
Funds:
Pay-in of funds – Thru the Clearing bank of the Member on the Pay-in day
Settlement – Pay out
Pay-out will take place on date as specified in Settlement Calendar
Commodities
Credit given into the Buyer member CM Pool A/c
Instruction by Member to transfer from CM pool to buyer client’s Demat account
Subsequent remat of commodities and physical movement handled by buyer
Funds
Funds pay-out is done into the designated bank account of the Member with the Clearing bank
Settlement – Supplemental Settlement
Differences arising on account of
Quality differences - Premium/Discounts
Quantity differences - Shortage/Excess in deliveries
Sales Tax rates
Pay in and Pay out conducted after final settlement as per Settlement Calendar
Netting of funds payable and receivable from members
Amounts debited/credited to members’ clearing bank account
Settlement – Premium/ Discount
Standard Acceptable grade is defined in contract specification based on the
Nature of the commodity,
Grades available in the market place
The acceptability for settlement
Variation in grade and Premiums/Discounts for
Gold
Mustard Seed
Cotton
No variations in grade for
Silver
Soya Oil
Soya Seed
Mustard Oil
CPO Crude Palm oil
RBD Palm Olein
Settlement – Premium/ Discount
Delivery accepted within the ‘Acceptable grade’ from the Delivering (Seller) Member
Quality Specifications are assayed by accredited Assayer
Premium/Discount - Calculated based on the grade of commodity delivered
Clearing member wise premiums/discount report is generated
Date of settlement of the premiums/discounts
Grades delivered
Premiums/discounts for each case
Net funds to pay or receive for each clearing member.
Example - GOLD
Standard Specifications:
Key differentiator for GOLD: Purity
The purity of standard grade is Fineness is 100 %.
Computation of premium/discount =
100 – (Purity level for the grade /purity level for the standard grade)X100.
Standard Specifications:
Key differentiator for Mustard Seed : Oil Content
Oil content for standard grade mustard seed < 42%>
Computation of premium/discount =
100 – (Purity level for the grade /purity level for the standard grade)X100
Settlements – Sales Tax
Incidence of Sales Tax
Sales tax to be discharged by the clearing members
Receiving clients to pay sales tax to the delivering clients thru Clearing Members
Sales tax based on quality/quantity delivered by seller
Settlements – Sales Tax
NCDEX shall verify the information provided by Buyer & Seller with Sales Tax master to arrive at Sales Tax incidence.
Invoice to be submitted by seller client to buyer client at the Delivery value of the transaction through clearing members
Delivery valuation for Sales Tax
(Delivered quantity X Final settlement price) + or – (Premium/discount for grade actually delivered)
Settlements – Defaults
Calculated as (Quantity to Deliver) – (Quantity Delivered)
Acceptable Shortages
Quantity within acceptable limits for the commodity
Difference settled in Supplemental Settlement
Default shortages
Pay out is withheld
Quantity beyond acceptable limits for the commodity
Position closed out at the Close out price
Close Out Price
Highest Traded Price of the Spot contract from the date of expiry + Markup % over the price as penalty
Seller’s account debited and Buyer’s account credited with the Close out price
Settlement – Defaults
For any default by member in the Pay-In, the Pay-out is withheld.
Deposits and collateral assets of member are utilized to meet shortages
In case of insufficient Funds to meet shortfalls , Member declared a ‘Defaulter’ under the Bye-Laws, Rules, Regulations of the Exchange under the Rules of the Settlement Guarantee Fund
Settlements – Settlement Guarantee Fund
The SGF guarantees financial settlement of all executed trades on NCDEX
Guarantee extends
to NCDEX members and covers all transactions that have been executed, registered and accepted for clearing and settlement by NCDEX
Member initial contribution towards SGF – Rs. 25 lakhs
Dematerialization – An Introduction
Dematerialization is the process of recording physical holdings (Warehouse receipts) in electronic form
Facilitates easy transfer of holdings through the electronic mode
Parties involved in the Demat process
Client, Warehouse, Depository Participant, R&T Agent, Depository
Procedure
Opening of account with a Depository Participant of NSDL
Deposit Confirmation to the Registrar & Transfer Agent and Depository
Validation and Confirmation of request by the R&T Agent
Electronic credit of the balance in the Demat account of the account holder
Dematerialization – An introduction
Dematerialization – Entities
Dematerialization - ISIN
Commodities identification using ISIN (International Securities Identification Number)
ISIN is a Unique number allotted by the depository (NSDL)
ISIN to be unique for handling
Commodity type
Grade
Warehouse operator
Location/branch
Validity period for delivery in the exchange
Commodity ISINs are communicated to Members by NCDEX
Dematerialization - Good delivery norms
Standard grade of commodity notified by the Exchange
ISIN Code is allotted based on this Standard grade
Rate of premium and discount to the standard grade is also identified
Validity date specified for each ISIN
Commodities not conforming to Standards specified are considered Bad delivery
Dematerialization – Process flow
Dematerialization – Demat credit
Assaying of goods done by approved assayer
List of accredited Assayers
SGS India Pvt. Ltd
Dr.Amin Superintendents & Surveyors Pvt. Ltd
J.B.Boda Surveyors Pvt. Ltd.
Geo-Chem Laboratories (P) Ltd.
Acceptable grade and quality specifications for the commodity are assessed
Electronic transmission of information of deposit to NSDL
Confirmation by NSDL
Validation and Credit into demat account of seller client under the specified ISIN
Statement of Credit available thru NSDL under specified ISIN
Dematerialization - Warehouse
Deposit of commodity at the accredited warehouse by Client
Accredited Warehouses
Re-materialization
Actual Physical Delivery of Commodities by the BUYER from the Warehouse
Remat - Outside Exchange mechanism
Buyer Client makes request to NSDL system and the R&T Agent
R&T Agent authorizes the Warehouse to release physical delivery to the Buyer client
Warehouse releases the commodity to the Client
The Client shall not be entitled to receive delivery of the commodities at any other location
Rematerialization - Process flow
Member insurance
Mandatory insurance cover for members
Based on volume of business for each member
Policy to cover following risks
Infidelity of employees
Loss of cash/property
Liability on account of
Incomplete transaction
Errors and Omissions
Legal fees/Cost of defence
Billing
Billing is done for member on transaction charges
Transaction charges will be imposed @ Rs 6/- lac of turnover
Bills will be raised on a monthly basis
Advance Transaction Charge of Rs 50,000 will be adjusted against the bills and only the balance will become payable
Transaction charges will be recovered by the Exchange thru a direct debit to the members’ account with a designated bank
How does a buyer receive delivery?
Buyers intending to take delivery will receive it, if there are sellers willing
There are commission agents who help the brokers with handling of the delivery, logistic support, associated quality certification through empanelled agencies and associated billings due to tax implications.
This support is required as the buyer may be in a different city than the place where the delivery is being received.
The client of a buyer may use this delivery for his consumption in the industry, or for exports, or he may sell in the spot market or may sell in futures market in the subsequent contract, if he is a regular trader.
Generally the commodities available in the physical form are consumed by the industry and, rarely, commodities, are stored in the warehouse for a longer period.
Percentage of delivery in the futures market.
The percentage is fairly low.
Generally, the futures markets all over the world are used for hedging where actual delivery percentage is about 1%.
Any user in the commodities ecosystem unlike the physical spot or forward to give delivery.
The Buyer will have to make the payment within three days after the delivery is allotted.
The buyer will take actual delivery from the market does not use these markets for regular consumption.
What is the role of a Warehouse in Futures Market?
In India, vibrant spot markets, in various commodities, exists for 100s of years.
In these markets, there are farmers, industrialists, warehouses, consumers, dealers and traders, who buy and sell commodities.
There are warehouses, which stores commodities and there are consumers, who consume them eventually.
MCX or, for that matter, any other Futures Exchange do not aim to replace, replicate or substitute such spot markets, rather the only value added service of MCX is to support the spot market players by developing their price risk efficiency through providing hedging tools.
Therefore, a Futures Exchange has to base its delivery process on the basis of existing physical market practices and use existing warehouse infrastructure, which is capable of handling billion dollars worth of physical market trades.
So the same infrastructure can properly take care of minuscule delivery tendered in a futures market.
When is the role of a Warehouse most necessary?
The role of a warehouse is most necessary in the spot market where a farmer after having harvested his crop sells them to commission agents who in turn sells them to a Mandi.
The Traders in Mandi may then sell it to a large consumer or to a trader who in turn will sell it to some other consumer, industry, exporter or miller at the right time and right price.
The Goods during this period are stored in the warehouse.
It is seen that today 80% of the warehousing capacity is used by the Government for storing various commodities under the Public Distribution System andfor storing fertilizers.
What is a Demat Electronic Warehouse receipt?
Demat Electronic Warehouse Receipts are expected to be electronic records created by an approved agency after dematerialisation of the physical receipt issued by a Warehouse.
In securities market the physical shares of the company are dematerialized by their Registrar and Transfer Agents using a Depository empowered under the Depositories Act.
Also, the total shares of a company are monitored by the Registrar of Companies and the Stock Exchanges.
Contd…
In commodities market, there is no standardization of monitoring of warehouse receipts issued by a warehouse by any regulatory body.
Similarly, the transfer of ownership also gets affected under a mutual agreement and not as per any Statutory Act.
It remains to be seen whether such transfer will be considered good transfer under Negotiable Instruments Act and whether electronic records will be good title considering the above shortcomings.
And also the fact that commodity is perishable and may not be a good delivery if the buyer finds out that it has deteriorated beyond the specifications mentioned in the contract.
Myth: Commodities markets are small due to the transaction size and number of players.
Reality: Securities cash :
Rs. 12,00,000Crore
Derivatives: Rs. 25,00,000Crore
Commodities cash: Rs. 4,00,000Crore
Derivatives: 20 times internationally and assumed to be 10 times in India.
Possible commodity futures market size: Rs. 40,00,000Crore
India traditionally a agrarian economy.
Challenges to Indian agriculture in post-WTO regime, technological changes, innovative irrigation techniques,productivity enhancements.
Distributed Regional Commodity markets with lack of efficient supply mechanisms.
Lack of transparency & inadequate information dissemination on prices.
Insufficient incentives for production with effects on quality, export competitiveness.
The Indian Definition: FCRA (1952)
Goods
“Every kind of movable property other than actionable claims, monies and securities”
Securities
“Shares, scrips, stocks, bonds, debentures, debentures-stocks or other marketable securities of a like nature in or any incorporated company or any body corporate and also government securities”
Commodities market
An exchange for buying and selling commodities for future delivery.
Trade contracts for delivery of any product or service that can be characterized in an interchangeable way.
They are complex, and include a wide array of instruments to manage risk.
"Commodity Exchange"
A commodity exchange is an association, or a company or any other body corporate organizing futures trading in commodities.
National - level Multi commodity exchanges
National Multi Commodity Exchange of India Ltd, Ahmedabad (NMCE)
This is presently working on-line and trading in many active commodities like castor seed/oil, rapeseed and mustard seed/oil, aluminum, soybean/oil, pepper, gold, silver etc.
National Board of Trade, Indore (N-BOT)-
This is also presently working but not completely on-line, screen-based. In this exchange maximum trades are carried out in soy oil.
National Commodity and Derivative Exchange, Mumbai (NCDEX)
The exchange is being promoted by ICICI Bank, National Stock Exchange (NSE), Life Insurance Corporation and NABARD.
It is more or less on the lines of the NSE of the capital market.
Multi Commodity Exchange of India Ltd, Mumbai (MCX)--
The exchange is promoted mainly by professionals and supported by Financial Technology (FT).
The exchange has started operations from November 10 and has offered gold, silver and castor seed in the first phase of trading facility.
“Spot" or “Cash" Contracts
A ready delivery contract is one, which provides for the delivery of goods and the payment of price there for, either immediately or
Within such period not exceeding 11 days after the date of the contract, subject to such conditions as may be prescribed by the Central Government.
A ready delivery contract is required by law to be fulfilled by giving and taking the physical delivery of goods.
In market parlance, the ready delivery contracts are commonly known as "spot" or "cash" contracts.
Forward contracts
All contracts in commodities providing for delivery of goods and/or payment of price after 11 days from the date of the contract are "forward" contracts.
Forward contracts are of two types -
"Specific Delivery Contracts" and
"Futures Contracts".
Specific delivery
Specific delivery contracts provide for the actual delivery of specific quantities and types of goods during a specified future period, and in which the names of both the buyer and the seller are mentioned.
Futures contract
A futures contract is a type of "forward contract". FCRA defines forward contract as "a contract for the delivery of goods and which not a ready delivery is contract".
The term 'Futures contract' is nowhere defined in the FCRA. But the Act implies that it is a forward contract, which is not a specific delivery contract.
However, being a forward contract, it is necessarily "a contract for the delivery of goods". A futures contract in which delivery is not intended is void (i.e., not enforceable by law), and is, therefore, not permitted for trading at any commodity exchange.
Commodities Futures
Presently futures trading is permitted in all the commodities.
Trading is taking place in about 50 commodities in 22 exchanges
The govt.has recently allowed four national level multi-commodity exchanges to trade in all permitted commodities.
The “Forward Markets Commission” (FMC) is the regulatory body for commodity futures/forward trade in India.
Who uses Futures market
The Futures market participants comprises of farmers, traders, producers, processors, exporters, importers and industries associated with commodities. The futures market is used for hedging the price risk and for trading or arbitrage.
Commodity Futures Contract
A commodity futures contract is a tradable standardized contract,
The futures contract is for a specified variety of a commodity, known as the "basis",
The quality parameters of the "basis" are all predetermined by the rules and regulations of the commodity exchange.
Consequently, the parties to the contract are required to negotiate only the quantity to be bought and sold, and the price.
Everything else is prescribed by the Exchange.
Because of the standardized nature of the futures contract, it can be traded with ease at a moment's notice.
The physical markets for commodities deal in either cash or spot contract for ready delivery and payment within 11 days, or forward (not futures) contracts for delivery of goods and/or payment of price after 11 days.
These contracts are essentially party to party contracts, and are fulfilled by the seller giving delivery of goods of a specified variety of a commodity as agreed to between the parties.
Rarely are these contracts for the actual or physical delivery allowed to be settled otherwise than by issuing or giving deliveries.
Such situations may arise when unforeseen and uncontrolled circumstances prevent the buyers and sellers from receiving or taking deliveries.
The contracts may then be settled mutually.
Futures markets trade in futures contracts which are primarily used for risk management (hedging) on commodity stocks or forward (physical market) purchases and sales.
Futures contracts are mostly offset before their maturity and, therefore, scarcely end in deliveries.
Speculators also use these futures contracts to benefit from changes in prices and are hardly interested in either taking or receiving deliveries of goods.
Price Risks
The two major economic functions of a commodity futures market are price risk management and price discovery.
The need for price risk management, through what is commonly called "hedging", arises from price risks in most commodities.
The larger, the more frequent and the more unforeseen is the price variability in a commodity, the greater is the price risk in it.
Insurance companies offer suitable policies to cover the risks of physical commodity losses due to fire, pilferage, transport mishaps, etc., they do not cover similarly the risks of value losses resulting from adverse price variations.
Hence, the need for price risk management or hedging through the use of futures contracts.
Hedging
Hedging involves buying or selling of a standardized futures contract against the corresponding sale or purchase respectively of the equivalent physical commodity.
The benefits of hedging flow from the relationship between the prices of contracts (either ready or forward) for physical delivery and those of futures contracts.
Hedging thus performs the economic function of helping to reduce significantly, if not eliminate altogether, the losses emanating from the price risks in commodities.
Hedging is the practice of off-setting the price risk inherent in any cash market position by taking an equal but opposite position in the futures market.
Price Discovery
Unlike the physical market, a futures market facilitates offsetting the trades without exchanging physical goods until the expiry of a contract.
Futures market attracts hedgers for risk management, and encourages considerable external competition from those who possess market information and price judgment to trade as traders in these commodities.
While hedgers have long-term perspective of the market, the traders or arbitragers, prefer an immediate view of the market.
However, all these users participate in buying and selling of commodities based on various domestic and global parameters such as price, demand and supply, climatic and market related information.
These factors, together, result in efficient price discovery, allowing large number of buyers and sellers to trade on the exchange.
Indian market - Bullion Market
Largest consumer (Rs. 400 bn) – traditional form of investment
Large stock of unaccounted metal
Skills in hand made jewellery
Potential
Use it as monetary unit to boost rural economy
Effective instrument for investment diversification
Boost jewellery exports
Impediments
Differences in sales tax, octroi & stamp duty among states
Lack of good assaying practices – difficult to liquidate investment
Little avenue to hedge price risk of jewellery exporters
Indian market – Other Metals
Market
Indian Production (Al, Cu & steel) – Rs. 600 bn
Largest exporter of iron ore and alumina
Large importer of copper
Current trade by negotiation / price setting by producers
Potential
Increased scope for aluminum & steel exports (as against alumina and iron ore)
Stable metal prices can fuel boom in downstream industries
Rival China as preferred manufacturing location
Growth in manufacturing to equal that in services
Impediments
No organised exchange in India – price discovery difficult
Significant PSU participation
Indian market - Agriculture
Market
Agricultural share in GDP – 26% (Rs. 5000 bn)
Large producer of cotton, cereals, sugar, fruits, spices etc
Current exports of about USD 4 bn
Specific commodity based exchanges – not very successful
Potential
Diverse gene pool and climatic conditions
Increase in agricultural exports – sugar, cereals
Increase in processed foods production & consumption
Impediments
Restrictions on inter state movement
Poor transport & warehousing – 30% wastage in cereals
Member controlled exchanges – transparency issues
For all Bullion futures Contracts
Gold Futures Contract
Silver Futures Contract
For All Agri Contracts
Soya Bean Contract
Refined Soya Bean Oil Contract
Crude Palm Oil Contract
Benefits of futures trading
Price discovery for commodity players
A farmer can plan his crop by looking at prices prevailing in the futures market
Hedging against price risk
A manufacturing firm can reduce most of its volatility in earnings
An exporter can commit to a price to his foreign clients
Competitive finance for commodity market players
Volume of Existing Exchanges
Volumes in Commodity Derivatives Worldwide
Derivatives volumes of non-US exchanges in the last decade has been increasing
Comparison of Commodities & Equities
Format for Tickers
XXXYYYZZZ
XXX – three letters for the commodity
YYY – three letters for the grade
Where ever there is no particular grade, either STD (standard) or GR1 (grade 1) has been used
ZZZ – three letters for the location
Eg.
SYOREFIND
SYO : Soy Oil
REF : Refined
IND : Indore
Format for Tickers
GLD100MUM : “Gold”+“100% pure”+“Mumbai”
SLV100DEL : “Silver”+“100% pure”+“Delhi”
SYBGR1IND : “Soy Bean”+“GR1”+“Indore”
SYOREFIND : “Soy Oil”+ “Refined”+ “Indore”
RMSGR1JPR : “Rape/Mustard”+“GR1”+“Jaipur”
RMOEXPJPR : “Rape/Mustard Oil”+ “Expeller”+ “Jaipur”
RBDPLNKAK : “RBD”+“Palm Olein”+ “Kakinada”
CPOSTDKDL : “Crude Palm Oil”+ “STD”+ “Kandla”
CTMJ34BTD : “Cotton Medium Staple Length”+“J-34”+“Bhatinda”
CTLS06ABD : “Cotton Long Staple Length”+“S-06”+“Ahmedabad”
Instrument Type
“Instrument Type” is NCDEX to denote whether the ticker is a futures contract or a spot price being disseminated or an options contract
COMDTY – used for commodity spot price dissemination
FUTCOM – used for futures on commodity
OPTCOM – used for options on futures on commodity
Contract Expiry
Contract Expiry for the Futures contract will be written as 20mmmYYYY
mmm – used to denote the month, eg. DEC, JAN etc
YYYY – used to denote the year eg. 2003, 2004 etc
For the spot price, no expiry date will be displayed or required
What to quote for buy/sell
Gold – for buying futures of say 500 gm, you will need to enter “Quantity” as 500, and price in “Rs/10gm”
Silver – for buying futures of say 25 Kg, you will need to enter “Quantity” as 25 and the price in “Rs/Kg”
All oils and oilseeds – for buying futures of say 5 MT, you will need to enter “Quantity” as 5 and
the price for Soy Bean in “Rs/Quintal”
the price for Rapeseed/Mustard Seed in “Rs/20 Kg”
the price for all edible oils in “Rs/10 Kg”
Cotton – for buying futures of say 44 bales, you will need to enter “Quantity” as 44 and the price in “Rs/Quintal”
ORDER TYPES
Regular lot order
Limit Order
Market Order
Qualifiers
Stop Loss
Futures Spread (SB) – specified difference between two different calendar months in same commodity
Immediate or Cancel (IOC)
2L Order (2L) – Both price and quantity is specified for each of the two legs
3L Order (3L) – Price and quantity is specified for three legs
TIME VALIDITY OF TRADES
Day-Valid only for that day
Good Till Date (GTD) – Valid for specified no. of days (Max 7 days)
Good Till Canceled (GTC) – Valid till cancelled (Max 7 days)
BOOK TYPES
REGULAR LOT BOOK
All regular lot orders except Stop Loss (SL)
STOP LOSS BOOK
SPREAD BOOK
SYSTEM CHECKS AND BALANCES SINGLE ORDER
REGULAR LOT ORDERS
Validity of the contract and time of entry
Order quantity to be a multiple of lot size
Order price to be a multiple of tick size
“Warning Quantity” order to be confirmed by dealer
“Freeze Quantity” to be confirmed by Exchange
Branch order limits as set by corporate manager should be adhered to
MATCHING RULES –SINGLE ORDER
Incoming single order will be matched with the best priced counter order in the regular lot book.
Unmatched orders will be written to the book
Stop Loss orders are written into a special book after trigger have same matching rules
MATCHING RULES-SPREAD ORDERS
Search for the best price counter orders in the Regular Lot books and see if a match is possible
Unmatched orders will be written to the book
For 2L AND 3L orders if either leg is not matched the order is cancelled
TIME PRIORITY OF MODIFIED ORDERS
Time priority lost in case
The order is moved from one book to another
The order price is changed
The order quantity is increased
Changing an order from PRO to CLI or vice-versa
Time priority is not lost in case
The order quantity is decreased
The participant id is changed
TRADE MANAGEMENT
Trade confirmation – On-line confirmation on trader workstation – either on-line or tabular
Dealers can print these confirmations during the day – will be overwritten the next day
Trade modification – can be done only for Account Number, Participant, Open / Close & covered / uncovered
Quantity modification needs Exchange approval
Any trade cancellation needs Exchange approval or concurrence of both the parties
DEALER REPORTS
Available to corporate and branch managers from log-on screen
Reports can be printed at any time during the day (except Bhav Copy report)
Type of reports
Open orders today
Order Log
Trades done today
Spread open orders today
Spread Trades done today
Market Statistics (Bhav Copy) report
Settlements – An Introduction
A contract has a life cycle of one month or longer.
Two weeks before the expiry of a contract, the contract enters into a tender period.
At the start of the tender period, both the parties must state their intentions to give or receive delivery, based on which the parties are supposed to act or bear the penal charges for any failure in doing so.
Those who do not express their intention to give or receive delivery at the beginning of tender period are required to square-up their open positions before the expiry of the contract.
In case they do not their positions are closed out at 'due date rate'.
The links to the physical market through the delivery process ensures maintenance of uniformity between spot and futures prices.
Settlements – An Introduction
When is the Settlement done?
A Daily Mark to Market (MTM) Settlement is done for each Member
At the end of every trading day, for all the trades
This is done till the date of the Contract expiry
A daily settlement is done to take care of DAILY PRICE FLUCTUATION for all trades
A Final Settlement will be done for each Member
On expiry of the Contract
This will handle the FINAL obligation of the Member for all trades in that contract.
Settlements – Daily MTM Settlement
The Daily Settlement is done by calculating the daily profits and losses for the Member
Profits and Losses are determined on the positions for Member, for each client and for each contract
All trades are marked to the market at the Daily Settlement Price which is = Closing price for the day.
A total Mark to Market Profit or Loss is calculated for the Member
Settlements – Daily Settlement Price
Daily settlement price is the consensus price that clears maximum volume of trade during this period
A closing session is held daily for 15 minutes after trading hours
Single price call auction in the closing session
The consensus price is valid only if Order for at least 15 contracts are executed by a minimum number of 5 Constituents Else, all the orders collected in the closing session shall be cancelled and alternative methods used Settlements – Consensus Price
Settlements – Daily MTM Settlement Example
Funds transaction flow
Settlements – Daily MTM Settlement
When is Daily MTM Settlement done ?
The information on MTM amount ( paid or received) by the broker is given thru the Extranet at the end of the day
Actual payment and receipt of funds will be made by the Member on the next trading day i.e T+1. (‘T’ being the trade date)
How does the Transfer of funds happen?
Payment will be done through a designated Clearing bank of the Exchange
The Broker makes arrangement for funds in his Settlement A/c with the bank
Instruction to the Bank for debiting/crediting the broker’s account will be sent by the Clearing Corporation (NSCCL)
Settlements – Daily MTM Settlement
What are the other payments to be made ?
Besides the MTM , Daily Margin payments will be made by the Members
Margin files will be downloaded on the Extranet
Member arranges for funds in the Settlement A/c
The Clearing Corporation debits the funds on the next day after the trading date.
What happens in case of failure ?
If the Member fails to make the payment of MTM or Margin amount, trading terminal is disabled immediately Trading will commence on deposit of funds by the Member
Settlements – Daily MTM Settlement
Where is the information on Daily Settlement available?
All information pertaining to Settlements is available on the Member Extranet
This is available in specific folders for the Members
How do I access the Extranet?
Thru the VSAT / Leased Lines connectivity using FTP protocol
Login using Trading member Id and password during non-trading hours
Settlements – Bank Accounts
How do I open my bank accounts with the designated Clearing banks?
There are currently 4 banks with whom accounts can be opened.
Canara Bank
HDFC Bank
ICICI Bank
UTI Bank
More banks to be available
What are the different accounts to be opened?
There are 4 accounts to be opened by each Member
Settlement A/c for payments and receipts
Exchange Dues A/c for charges and fees
Client A/c for client transactions
Own funds account
Opening new positions and Closing of open positions by Member
Daily MTM Settlement and Margins
Determination of positions for each Member
Final Settlement of all open positions
Settlements – Final Settlement
The Settlement done for Open Buy and Sell positions on the Contract Expiry Date is called Final Settlement
Settlements – Final Settlement
Who is responsible for Final Settlement of trades?
The responsibility of settlement is on a Trading cum Clearing Member (TCM) for all trades done on his own account and his clients’ trades
A Professional Clearing Member is responsible for settling all the Participant trades which he has confirmed to the Exchange
On confirmation by the PCM , the Participant trades get transferred from the TCM to the PCM
How is the Contract settled on Expiry?
A contract is settled at the Final Settlement Price on the Date of Expiry
The Final Settlement Price is the price of the commodity in the underlying spot markets
Settlements – Deliveries
Can actual delivery of the commodity be done on Expiry?
A Member can give and take delivery of commodities by completing the Delivery formalities and giving delivery information to the Exchange
Settlements – Deliveries
What are procedures required before Delivery?
Opening a CM Pool account for the purpose of settlements
Beneficiary Demat account for own transactions
Opening of Client’s Demat account with the empanelled DP
The List of DPs empanelled so far
ICICI Bank
UTI Bank
Canara Bank
Global Trust Bank
Infrastructure leasing & Financial Services (ILFS)
Settlements – Deliveries
When is the delivery information submitted ?
The Information can be submitted any time during the trading hours on the Expiry Date
Information submitted – Thru the delivery request window on the Trading Terminal
Settlements - Deliveries
Information required for Delivery
Commodity code
Quantity
Location/branch preference for physical receipt/delivery of commodities
Demat Indicator
In case two Members want to undertake direct delivery, the Counter party Code has to be specified
Screen shot
Settlements at NCDEX – Deliveries
How is the delivery information processed ?
The information submitted by the Members is matched at NCDEX at the end of the day
All trades which are matched are locked for delivery
A Delivery Request number is generated for all delivery information submitted
Settlements – Deliveries
How does the matching of delivery information take place?
Validation of delivery information
On Client’s Net Open Position
On Delivery lot for commodity
Excess quantity is rejected and is cash settled.
Matching limited to the total capacity at the Warehouse
Matching is done for the deliveries based on
Commodity
Location
Branch
Quantity
When will the delivery of commodities be done ?
Settlement Calendar
Settlements – Entity Interaction
Settlements – Cash Settlement
Is there a provision for settling in Cash ?
All unmatched/rejected/excess positions are Cash Settled
All open positions for which NO delivery information is submitted is also settled in Cash
What is the method for cash settlement?
The Cash Settlement is done at the Final Settlement Price
Settlement – Information to members
How does the Member get information on the Obligations?
On Contract Expiry, the Exchange downloads open positions to Members, through the extranet
Delivery margins are charged on all deliverable positions from expiry of contract till date of final settlement
Settlement at NCDEX – Information to Members
Detailed Position Report
For Trading Cum Clearing Members (TCM)
Information for all client and proprietary positions for each day
For Professional Clearing Members (PCM)
Information for each trading member and participant
Trades report for all members
Trades executed on the trading day
Bank Report
Containing pay-in, pay out of funds for mark-to market profit/loss settlement and futures final settlement
All funds transactions for the date are clubbed together to form one single payable or receivable transaction
Settlement – Information to members
Bank Summary Report
Detailed transaction wise report of all instructions sent by the Exchange to the member’s bank account for debit/credit
Bank Transaction Report
Transaction wise report of all instructions and status of each instruction, sent by the Exchange to the member’s bank account for debit/credit
Contracts
Information on active contracts for the day
Contracts available for trading from the next trading day
Settlement – Pay In
Pay-in will take place on date as specified in Settlement Calendar
Commodities:
Seller ensures demat of commodities prior to Pay-in
Instruction to DP by seller to move commodities to Clearing Member Pool Account
Pay-in of commodities on Settlement Date thru Clearing member pool account
Funds:
Pay-in of funds – Thru the Clearing bank of the Member on the Pay-in day
Settlement – Pay out
Pay-out will take place on date as specified in Settlement Calendar
Commodities
Credit given into the Buyer member CM Pool A/c
Instruction by Member to transfer from CM pool to buyer client’s Demat account
Subsequent remat of commodities and physical movement handled by buyer
Funds
Funds pay-out is done into the designated bank account of the Member with the Clearing bank
Settlement – Supplemental Settlement
Differences arising on account of
Quality differences - Premium/Discounts
Quantity differences - Shortage/Excess in deliveries
Sales Tax rates
Pay in and Pay out conducted after final settlement as per Settlement Calendar
Netting of funds payable and receivable from members
Amounts debited/credited to members’ clearing bank account
Settlement – Premium/ Discount
Standard Acceptable grade is defined in contract specification based on the
Nature of the commodity,
Grades available in the market place
The acceptability for settlement
Variation in grade and Premiums/Discounts for
Gold
Mustard Seed
Cotton
No variations in grade for
Silver
Soya Oil
Soya Seed
Mustard Oil
CPO Crude Palm oil
RBD Palm Olein
Settlement – Premium/ Discount
Delivery accepted within the ‘Acceptable grade’ from the Delivering (Seller) Member
Quality Specifications are assayed by accredited Assayer
Premium/Discount - Calculated based on the grade of commodity delivered
Clearing member wise premiums/discount report is generated
Date of settlement of the premiums/discounts
Grades delivered
Premiums/discounts for each case
Net funds to pay or receive for each clearing member.
Example - GOLD
Standard Specifications:
Key differentiator for GOLD: Purity
The purity of standard grade is Fineness is 100 %.
Computation of premium/discount =
100 – (Purity level for the grade /purity level for the standard grade)X100.
Standard Specifications:
Key differentiator for Mustard Seed : Oil Content
Oil content for standard grade mustard seed < 42%>
Computation of premium/discount =
100 – (Purity level for the grade /purity level for the standard grade)X100
Settlements – Sales Tax
Incidence of Sales Tax
Sales tax to be discharged by the clearing members
Receiving clients to pay sales tax to the delivering clients thru Clearing Members
Sales tax based on quality/quantity delivered by seller
Settlements – Sales Tax
NCDEX shall verify the information provided by Buyer & Seller with Sales Tax master to arrive at Sales Tax incidence.
Invoice to be submitted by seller client to buyer client at the Delivery value of the transaction through clearing members
Delivery valuation for Sales Tax
(Delivered quantity X Final settlement price) + or – (Premium/discount for grade actually delivered)
Settlements – Defaults
Calculated as (Quantity to Deliver) – (Quantity Delivered)
Acceptable Shortages
Quantity within acceptable limits for the commodity
Difference settled in Supplemental Settlement
Default shortages
Pay out is withheld
Quantity beyond acceptable limits for the commodity
Position closed out at the Close out price
Close Out Price
Highest Traded Price of the Spot contract from the date of expiry + Markup % over the price as penalty
Seller’s account debited and Buyer’s account credited with the Close out price
Settlement – Defaults
For any default by member in the Pay-In, the Pay-out is withheld.
Deposits and collateral assets of member are utilized to meet shortages
In case of insufficient Funds to meet shortfalls , Member declared a ‘Defaulter’ under the Bye-Laws, Rules, Regulations of the Exchange under the Rules of the Settlement Guarantee Fund
Settlements – Settlement Guarantee Fund
The SGF guarantees financial settlement of all executed trades on NCDEX
Guarantee extends
to NCDEX members and covers all transactions that have been executed, registered and accepted for clearing and settlement by NCDEX
Member initial contribution towards SGF – Rs. 25 lakhs
Dematerialization – An Introduction
Dematerialization is the process of recording physical holdings (Warehouse receipts) in electronic form
Facilitates easy transfer of holdings through the electronic mode
Parties involved in the Demat process
Client, Warehouse, Depository Participant, R&T Agent, Depository
Procedure
Opening of account with a Depository Participant of NSDL
Deposit Confirmation to the Registrar & Transfer Agent and Depository
Validation and Confirmation of request by the R&T Agent
Electronic credit of the balance in the Demat account of the account holder
Dematerialization – An introduction
Dematerialization – Entities
Dematerialization - ISIN
Commodities identification using ISIN (International Securities Identification Number)
ISIN is a Unique number allotted by the depository (NSDL)
ISIN to be unique for handling
Commodity type
Grade
Warehouse operator
Location/branch
Validity period for delivery in the exchange
Commodity ISINs are communicated to Members by NCDEX
Dematerialization - Good delivery norms
Standard grade of commodity notified by the Exchange
ISIN Code is allotted based on this Standard grade
Rate of premium and discount to the standard grade is also identified
Validity date specified for each ISIN
Commodities not conforming to Standards specified are considered Bad delivery
Dematerialization – Process flow
Dematerialization – Demat credit
Assaying of goods done by approved assayer
List of accredited Assayers
SGS India Pvt. Ltd
Dr.Amin Superintendents & Surveyors Pvt. Ltd
J.B.Boda Surveyors Pvt. Ltd.
Geo-Chem Laboratories (P) Ltd.
Acceptable grade and quality specifications for the commodity are assessed
Electronic transmission of information of deposit to NSDL
Confirmation by NSDL
Validation and Credit into demat account of seller client under the specified ISIN
Statement of Credit available thru NSDL under specified ISIN
Dematerialization - Warehouse
Deposit of commodity at the accredited warehouse by Client
Accredited Warehouses
Re-materialization
Actual Physical Delivery of Commodities by the BUYER from the Warehouse
Remat - Outside Exchange mechanism
Buyer Client makes request to NSDL system and the R&T Agent
R&T Agent authorizes the Warehouse to release physical delivery to the Buyer client
Warehouse releases the commodity to the Client
The Client shall not be entitled to receive delivery of the commodities at any other location
Rematerialization - Process flow
Member insurance
Mandatory insurance cover for members
Based on volume of business for each member
Policy to cover following risks
Infidelity of employees
Loss of cash/property
Liability on account of
Incomplete transaction
Errors and Omissions
Legal fees/Cost of defence
Billing
Billing is done for member on transaction charges
Transaction charges will be imposed @ Rs 6/- lac of turnover
Bills will be raised on a monthly basis
Advance Transaction Charge of Rs 50,000 will be adjusted against the bills and only the balance will become payable
Transaction charges will be recovered by the Exchange thru a direct debit to the members’ account with a designated bank
How does a buyer receive delivery?
Buyers intending to take delivery will receive it, if there are sellers willing
There are commission agents who help the brokers with handling of the delivery, logistic support, associated quality certification through empanelled agencies and associated billings due to tax implications.
This support is required as the buyer may be in a different city than the place where the delivery is being received.
The client of a buyer may use this delivery for his consumption in the industry, or for exports, or he may sell in the spot market or may sell in futures market in the subsequent contract, if he is a regular trader.
Generally the commodities available in the physical form are consumed by the industry and, rarely, commodities, are stored in the warehouse for a longer period.
Percentage of delivery in the futures market.
The percentage is fairly low.
Generally, the futures markets all over the world are used for hedging where actual delivery percentage is about 1%.
Any user in the commodities ecosystem unlike the physical spot or forward to give delivery.
The Buyer will have to make the payment within three days after the delivery is allotted.
The buyer will take actual delivery from the market does not use these markets for regular consumption.
What is the role of a Warehouse in Futures Market?
In India, vibrant spot markets, in various commodities, exists for 100s of years.
In these markets, there are farmers, industrialists, warehouses, consumers, dealers and traders, who buy and sell commodities.
There are warehouses, which stores commodities and there are consumers, who consume them eventually.
MCX or, for that matter, any other Futures Exchange do not aim to replace, replicate or substitute such spot markets, rather the only value added service of MCX is to support the spot market players by developing their price risk efficiency through providing hedging tools.
Therefore, a Futures Exchange has to base its delivery process on the basis of existing physical market practices and use existing warehouse infrastructure, which is capable of handling billion dollars worth of physical market trades.
So the same infrastructure can properly take care of minuscule delivery tendered in a futures market.
When is the role of a Warehouse most necessary?
The role of a warehouse is most necessary in the spot market where a farmer after having harvested his crop sells them to commission agents who in turn sells them to a Mandi.
The Traders in Mandi may then sell it to a large consumer or to a trader who in turn will sell it to some other consumer, industry, exporter or miller at the right time and right price.
The Goods during this period are stored in the warehouse.
It is seen that today 80% of the warehousing capacity is used by the Government for storing various commodities under the Public Distribution System andfor storing fertilizers.
What is a Demat Electronic Warehouse receipt?
Demat Electronic Warehouse Receipts are expected to be electronic records created by an approved agency after dematerialisation of the physical receipt issued by a Warehouse.
In securities market the physical shares of the company are dematerialized by their Registrar and Transfer Agents using a Depository empowered under the Depositories Act.
Also, the total shares of a company are monitored by the Registrar of Companies and the Stock Exchanges.
Contd…
In commodities market, there is no standardization of monitoring of warehouse receipts issued by a warehouse by any regulatory body.
Similarly, the transfer of ownership also gets affected under a mutual agreement and not as per any Statutory Act.
It remains to be seen whether such transfer will be considered good transfer under Negotiable Instruments Act and whether electronic records will be good title considering the above shortcomings.
And also the fact that commodity is perishable and may not be a good delivery if the buyer finds out that it has deteriorated beyond the specifications mentioned in the contract.
Myth: Commodities markets are small due to the transaction size and number of players.
Reality: Securities cash :
Rs. 12,00,000Crore
Derivatives: Rs. 25,00,000Crore
Commodities cash: Rs. 4,00,000Crore
Derivatives: 20 times internationally and assumed to be 10 times in India.
Possible commodity futures market size: Rs. 40,00,000Crore