Description
Document about different types of commodity exchanges in India. It also examines purpose of commodity exchanges. It also explores scope and relevance of new commodity exchanges in India.
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Table of Contents
Introduction .................................................................................................................................................. 3 Commodity................................................................................................................................................ 3 Commodity Exchange ............................................................................................................................... 3 National Commodity & Derivatives Exchange Limited (NCDEX) ........................................................... 3 Multi Commodity Exchange of India Limited (MCX) ............................................................................. 3 National Multi-Commodity Exchange of India Limited (NMCEIL) ......................................................... 4 New Commodity Exchanges...................................................................................................................... 4 Indian Commodity Exchange Limited (ICEX) ......................................................................................... 4 Ace Derivatives and Commodity Exchange Limited (ACE) .................................................................... 5 Purpose of Commodity Exchanges ........................................................................................................... 5 Hedging ................................................................................................................................................. 5 Speculating ............................................................................................................................................ 5 Arbitrage ............................................................................................................................................... 6 Shifting of Risk....................................................................................................................................... 6 Information ........................................................................................................................................... 6 Scope & Relevance of new Commodity Exchanges in India ......................................................................... 6 Arguments for new commodity exchanges in India ................................................................................. 7 Growth of Indian Commodity Market - New products ......................................................................... 7 Increase competition ............................................................................................................................ 7 Reduce Transaction cost ....................................................................................................................... 8 Improve efficiency................................................................................................................................. 8 Liquidity Concerns ................................................................................................................................. 8 Spot Price Conundrum .......................................................................................................................... 9 Regulations.......................................................................................................................................... 10 Bibliography ................................................................................................................................................ 11
Introduction
Commodity
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 of 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 Contracts (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. The national commodity exchanges, recognized by the Central Government, permit commodities such as precious (gold and silver) and nonferrous metals; cereals and pulses; ginned and un-ginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur; potatoes and onions; coffee and tea; rubber and spices, etc.
Commodity Exchange
A Commodity exchange can be defined as an exchange for buying and selling commodities for future delivery. The major commodity markets are in the United Kingdom and in the USA. In India there are 25 recognized future exchanges, of which there are three national level multi-commodity exchanges. After a gap of almost three decades, Government of India has allowed forward transactions in commodities through Online Commodity Exchanges, a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities. The three exchanges are: ? ? ? National Commodity & Derivatives Exchange Limited (NCDEX) Multi Commodity Exchange of India Limited (MCX) National Multi-Commodity Exchange of India Limited (NMCEIL)
All the exchanges have been set up under overall control of Forward Market Commission (FMC) of Government of India. National Commodity & Derivatives Exchange Limited (NCDEX) National Commodity & Derivatives Exchange Limited (NCDEX) located in Mumbai is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956 and had commenced its operations on December 15, 2003.This is the only commodity exchange in the country promoted by national level institutions. It is promoted by ICICI Bank Limited, Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). It is a professionally managed online multi commodity exchange. NCDEX is regulated by Forward Market Commission and is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations. Multi Commodity Exchange of India Limited (MCX) Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an independent and demutualised exchange with a permanent recognition from Government of India. Key shareholders of
MCX are Financial Technologies (India) Ltd., State Bank of India, Union Bank of India, Corporation Bank, Bank of India and Canara Bank. MCX facilitates online trading, clearing and settlement operations for commodity futures markets across the country. MCX started offering trade in November 2003 and has built strategic alliances with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors’ Association of India, Pulses Importers Association and Shetkari Sanghatana. National Multi-Commodity Exchange of India Limited (NMCEIL) National Multi Commodity Exchange of India Limited (NMCEIL) is the first demutualized, 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 from November 26, 2002. It is being supported by Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. It got its recognition in October 2002. Commodity exchange in India plays an important role where the prices of any commodity are not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market judged upon the prices. Others never had a say. Today, commodity exchanges are purely speculative in nature. Before discovering the price, they reach to the producers, end-users, and even the retail investors, at a grassroots level. It brings a price transparency and risk management in the vital market. A big difference between a typical auction, where a single auctioneer announces the bids, and the Exchange is that people are not only competing to buy but also to sell. By Exchange rules and by law, no one can bid under a higher bid, and no one can offer to sell higher than someone else’s lower offer. That keeps the market as efficient as possible, and keeps the traders on their toes to make sure no one gets the purchase or sale before they do.
New Commodity Exchanges
Indian Commodity Exchange Limited (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. It has 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. This exchange is ideally positioned to tap the huge scope for increasing the depth and size of commodities’ market and fill in the structural gaps existing in the Indian market. Our head office is located in North India (Gurgaon), one of the key regions in India's Agri belt, with a vision to encourage participation of farmers, traders and actual users to hedge their positions against the wild price fluctuations.
Ace Derivatives and Commodity Exchange Limited (ACE) “Ace Derivatives and Commodity Exchange Limited” is a screen based online derivatives exchange for commodities anchored by the Kotak Group as a majority stake holder. Ace in its earlier Avatar has been in existence for more than 5 decades in Commodity Business, bringing in the best and transparent Business Practices in the commodity space. The Kotak group brings in more than 25 years of financial expertise and has pioneered many business practices existing in the financial services industry. With “Ace”, they bring to the market a new, state-of-the-art trading platform which combines the operational efficiency of global exchanges with deep domain expertise in each commodity vertical. Following the Kotak Group’s legacy of transparency in their dealings and providing the best solution to the market participants, Ace provides the confidence of trading on a world-class platform to manage risks and reduce complexities of commodity prices. Ace offers futures trading the following commodity groups: ? ? ? ? Agricultural products Bullion Base Metals Energy
With the lowest latency trading platform, Ace sets the industry benchmark for quicker trade synchronization and price information broadcast. Product innovation has always been central to Ace, bringing forward a basket of products that align to leading exchanges worldwide. In addition to its convenient trading platform, Ace provides a robust clearing & settlement infrastructure that supports the complete process of trade intermediation – including registration of trades, settlement of contracts and mitigation of counter-party risk; giving traders the peace of mind in times of increased market volatility.
Purpose of Commodity Exchanges
Hedging Commodities are subject to constant and extreme price fluctuations. Traders are the worst sufferers of the price risk. Forward contracts have come to their rescue. A forward contract requires a buyer and a seller to take and make a delivery of a definite quantity of a particular commodity at a future specified date. Such contracts are traded on an exchange, which provides guarantee for all futures dealings, and parties can "hedge" at suitable levels. Hedging lessens risk since it involves the purchase or sale of a commodity with the intention of counterbalancing the profit or loss of another investment. Therefore, any loss on the previous investment will be hedged, or compensated, by a matching profit from the hedging instrument. Speculating Speculators are people who are prepared to bear risks in anticipation of earning profits. Markets are granted liquidity by speculators and it is hard to conceive of a futures market devoid of speculators.
Arbitrage Arbitrage involves buying a commodity at a low price and instantly selling it for a higher price in another market. Thus, traders can profit from arbitrage opportunities occurring due to price differences between two exchanges. Shifting of Risk The minute a trader finalizes a deal and secures a price, he is no longer concerned by unfavorable price shifts. For example, if a seller trades a specific contract for $ 450 and soon after the price comes down to $440, there has been an unfavorable price shift but the seller has made a profit of $10. At this point, the risk has been transferred to the buyer of the contract. Speculators trade on commodities and derivatives by undertaking risks in order to maximize profits. Information Exchanges produce huge volumes of data that are intensely scrutinized and monitored by a wide crosssection of people as the data provides gainful insights about the prevailing economic conditions.
Scope & Relevance of new Commodity Exchanges in India
The government’s decision to allow MMTC to float a national commodity exchange, as part of a joint venture with India bulls, had set in motion this debate. With The commodity futures market in India, which saw trading worth Rs. 52 trillion in 2008-09, had a new entrant in September—Indian Commodity Exchange (ICEX), the country’s fourth national commodity exchange. Ace Derivatives and Commodity Exchange, the first to be transformed from a regional exchange to a national multi-commodities futures trading platform, was launched October 2010, the country’s fifth national commodity exchange. The Kotak-anchored exchange does futures trading in soybean, soya oil, rape/mustard seed, chana and castor seed. Commodity market regulator Forward Markets Commission (FMC) on Thursday said it has received a proposal from Gontermann Peipers (India) for setting up a national-level commodity exchange. The cumulative turnover of the commodity market — trading on which was re-introduced in April, 2003 by the government — is expected to register a 50 per cent jump to a record Rs 1,05,00,000 crore by the end of this year from Rs 70,00,000 crore last year. The agri-commodity exchange, National Commodity & Derivatives Exchange, saw business increase by 69 per cent to touch US$ 183.43 billion, in the period under review. Since its launch in November 21, 2009, ICEX generated business worth US$ 22.29 billion. Meanwhile the turnover of the National Board of Trade has increased to over US$ 5.5 billion in the current fiscal. New entrant ICEX clocked business of Rs 3,78,006 crore, which was higher than the turnover of the oldest national bourse, NMCE. Its turnover rose by just 6 per cent to Rs 1,80,727 crore from Rs 1,70,419 crore in the review period. With more commodity exchange in line, it is necessary to know whether we need more exchanges or not.
Arguments for new commodity exchanges in India
Growth of Indian Commodity Market - New products Volumes are expected to grow after options and index futures are introduced but we are primarily looking at the value addition these derivative products would bring to futures market participants. Such products would enable the market to reach a higher level of sophistication and impart greater efficiency in both the price discovery and risk management processes. They would also enable greater participation in the futures market since there will be something to suit the needs of every participant. The introduction of options is expected to facilitate farmers' participation on the futures platform, a development that has been the FMC and the government's endeavour all these years. With the introduction of new commodity derivates and intangible derivates like freight , weather etc. The volumes on exchanges are going to increase. The amendments to Forward Contracts (Regulation) Act, 1952, will insert an enabling provision for futures and options trading in various indices (such as freight and weather). The FMC will be extremely cautious about introducing these products; it will permit them only when sufficient awareness of the associated risks has been created among market participants. The asymmetric risk profile of options (which is perfect risk insurance product otherwise), especially in intangibles, makes it a highly risky product if not used properly. Increase competition Major global economies like US, Japan and Europe (as a whole) have multiple stock exchanges simultaneously operational, with most of the exchanges doing really well. In contrast to mention of Bimal Jalan committee report, the advancement in technology has actually triggered to the rise to new exchanges like BATS BYX and others that are finding their niche in equity market space. The healthy competition is economy only adds to the market efficiency. Santos and Scheinkman (2001, “Competition Among Exchanges”) in their quest to find that does competition among financial intermediaries lead to excessively low standards?; exhibits various examples where private information is present, and competition produces higher standards than monopoly. On similar lines below are few points by Oesterle (2001, Securities Markets Regulation - Time to Move to a Market-Based Approach in Policy Analysis no 374); ? ? If an exchange faces stiff market competition, the deviation between rules and practice can disappear. In a tough, competitive market, any one competitor has an incentive to honestly reveal its costs and methods of operation, as a means of showing that it offers a better deal than its competitors and thereby attracting customers. Trading markets are no different from any other service market: the more competition the better, the less government intervention the better. Securities markets are indispensable for a prosperous free-market economy.
? ?
Lee in ‘The Future of Securities Exchanges” (2002 under Ch. 1, Brookings-Wharton Papers on Financial Services) has following views; ? ? The key goal of the regulators of such markets is to ensure that entry and exit costs, to and from, such markets remain low. Even though entry and exit costs are now low in the market for securities exchanges, as trading systems can be bought relatively cheaply off-the-shelf, dominant incumbent securities exchanges still, however, have many ways in which they can exploit their monopolistic positions without worrying about the activities of new entrants.
Each of the three existing national exchanges—MCX, NCDEX and NMCE—has carved out a niche for itself. MCX has focused on metal/mercantile contracts, for example, while NCDEX has opted to specialize in agri-commodities, and partly as a consequence, the competition among the three on the ground has not been significant. Moreover, considering the extent of reforms that are pending, it is even less obvious that another exchange will actually aid competition and lead to better price discovery. Reduce Transaction cost Exchanges are crucial components of financial infrastructure, which reduces transaction cost and waste in transit, benefiting both consumers and farmers. A robust and modern exchange focused on multiple commodities can bring about a transformation to the inclusive benefit of all stakeholders across the nation. Improve efficiency With more innovation and better technology, the commodities exchange would become efficient. The commodity market in India is under penetrated. Products are introduced such as livestock trading; hence there is certainly a large market. Innovation will be the driver for the success for any exchange. Liquidity Concerns Traditionally commodity exchanges in India have been product specific. The need for a national multi?commodity exchange (NMCE) is now well articulated and accepted. However the mere setting up of a multi?commodity exchange is not going to result in a vibrant and liquid commodities derivatives market. There are a host of issues which need to be addressed along with the setting up of NMCE in order to develop the markets. The key to success is liquidity and the challenge is to create this liquidity where other exchanges have not been very successful so far. In this context it may be worthwhile to go back to first principles. Who are the players that drive any derivatives markets? Typically they are hedgers, arbitrageurs and speculators. In the absence of these categories of players, especially the latter, it is unlikely that any derivatives market will be very liquid. So do we have these categories of players in the existing commodities markets? A cursory examination of these markets shows that there are limited hedgers and arbitrageurs scattered across the various markets. There is no professional body of arbitrageurs participating in commodity derivatives; the lack of well developed organized spot markets and price discovery mechanism is a major impediment to arbitraging. Typically there are traders and trade bodies in the distribution chain that
take advantage of lack of price discovery and arbitrage the same. However these are restricted to small set of traders and are not wide enough to drive liquidity. The existing exchanges being product specific, speculators if any, are intrinsically linked to the trade and are limited in number. This also points to another key facet of existing exchanges. Since these have been traditionally set up by trade bodies, spot traders and others in the distribution chain have typically been member?brokers of such exchanges. Discussions with some of the traders suggest that the focus of brokers is hedging. Arbitraging with the spot market is done to a limited extent. Wider participation by arbitrageurs and speculators is ruled out as there are too many impediments and it is not attractive enough. This in fact also makes a case to provide a multi?commodity platform which will allow professional arbitrageurs and speculators to participate. The other key constituent is the hedger. Today the scope to hedge positions in a commodity is limited by access to the market. Smaller and retail level participation is not possible because of the closed door nature of existing exchanges. There is need to open up the markets and provide a distribution chain which will encourage and allow a wider body of participants. This suggests that there is need to develop a professional body of brokers in the commodities markets who will provide services across commodities and across the country. Moneys will tend to flow to areas of highest risk adjusted reward. If the commodity derivatives markets can be designed to insulate the arbitrageurs and hedgers from some of the peculiarities of commodities settlement it may even be possible to use the existing derivatives infrastructure and set of equity derivatives brokers to jump start this process. Mutual funds’ entry into the commodity futures space still needs to be cleared by FMC’s capital market counterpart Securities and Exchange Board of India (Sebi). Spot Price Conundrum The other important issue arising from the above is the state of the spot market and spot price discovery process. It is difficult to develop a good derivatives market without adequate spot price discovery. This also becomes extremely important in the context of physical settlement of commodities. Spot markets are scattered throughout the country and exist close to production centers. They are quite unorganized. Relatively more organized spot markets and mandis are run by Agricultural Produce Market Committee (APMC) under the state governments. However there is little transparency in trading and pricing along subsequent distribution channels. A lot needs to be done to strengthen spot markets especially in the collection and dissemination of spot prices (domestic and international) on on?line basis and organized trading in spot contracts wherever possible. There are also several structural and regulatory issues relating to the spot markets which impact spot price discovery and settlements. Currently the commodities markets are regulated by various entities in a manner which directly impact spot prices, sales and inter?state movement in several commodities, especially agri? commodities significantly. There is central governmental intervention by way of minimum support price, minimum and maximum price bands for specific commodities, quotas and reservations, procurement through Food Corporation of India etc. As ’agriculture’ is a state subject, the extent and variety of instruments used to intervene in the agriculture sector also vary from state to state. Some examples of these are;
? ?
Licensing requirements for wholesale trade, storage, processing of virtually all commodities in all states Official permits are required for out?of?state sales of some commodities (paddy in Tamil Nadu and AP, edible oil in Gujarat, cotton and alcohol in Maharashtra).
The basic precondition for establishing a viable commodity derivatives market is the existence of large, competitive and transparent spot market. Unfortunately, the existing cash markets for most commodities fail to satisfy this precondition. NMCE may be required to actively participate in the process of information collection and dissemination and may even be required to set up spot markets or tie up with spot exchanges as and when they emerge. To begin with NMCE may have to do what existing exchanges are doing ? take some reference price either by polling a set of traders or use some officially announced price such as by APMC. Polling market participants for prices is fraught with the risk of misreporting and manipulation. It may be possible to still evolve some reference rate based on polling methodology. A good case in point is the MIBID/MIBOR rate announced by the National Stock Exchange (NSE) which has today found wide acceptance. The NMCE may be required to institute a similar approach to spot price reference rates. Regulations The amendment to the Forward Contracts & Regulation Act (FCRA) that would grant autonomy to the commodities regulator, the Forward Markets Commission (FMC), has been pending for a while. FMC needs to be empowered if it is to monitor more exchanges and regulate the market effectively. FMC needs to be empowered if it is to monitor more exchanges and regulate the market effectively. Though the volumes in the futures market have grown rapidly over the last three years, it is yet to attain critical mass. Allowing more exchanges without broader participation and innovation would only result in splitting existing trade volumes among roughly the same set of players, with the pie expanding only slightly. This will not only impact the stability of the exchanges, but more importantly, affect the creation of infrastructure such as warehouses, quality control laboratories and the like. Past observation of operations also suggests that more exchanges do not necessarily mean more competition. There have been instances of the exchanges simply replicating each other’s contracts, rather than offering innovative products to wean away clients. Innovation could possibly come in and also technology and best practices to spur growth. Just another exchange would hardly be of any use. The number of exchanges will eventually be decided by the market. If the market feels there is scope for fewer exchanges, then consolidation is a possibility. We will have to see how the markets shape up, especially after other products are introduced and institutional and corporate players enter. But we can see the experience of the global exchanges where the process of consolidation has already set in. China had a large number of commodity exchanges, which eventually consolidated into three exchanges, each having its own product specialisation. So that possibility in the medium to long term cannot be ruled out.
Bibliography
? ? ? ? ? ? http://www.ftkmc.com http://www.mcxindia.com http://www.ncdex.com http://www.nmce.com http://www.icexindia.com http://www.aceindia.com
doc_720680970.docx
Document about different types of commodity exchanges in India. It also examines purpose of commodity exchanges. It also explores scope and relevance of new commodity exchanges in India.
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Table of Contents
Introduction .................................................................................................................................................. 3 Commodity................................................................................................................................................ 3 Commodity Exchange ............................................................................................................................... 3 National Commodity & Derivatives Exchange Limited (NCDEX) ........................................................... 3 Multi Commodity Exchange of India Limited (MCX) ............................................................................. 3 National Multi-Commodity Exchange of India Limited (NMCEIL) ......................................................... 4 New Commodity Exchanges...................................................................................................................... 4 Indian Commodity Exchange Limited (ICEX) ......................................................................................... 4 Ace Derivatives and Commodity Exchange Limited (ACE) .................................................................... 5 Purpose of Commodity Exchanges ........................................................................................................... 5 Hedging ................................................................................................................................................. 5 Speculating ............................................................................................................................................ 5 Arbitrage ............................................................................................................................................... 6 Shifting of Risk....................................................................................................................................... 6 Information ........................................................................................................................................... 6 Scope & Relevance of new Commodity Exchanges in India ......................................................................... 6 Arguments for new commodity exchanges in India ................................................................................. 7 Growth of Indian Commodity Market - New products ......................................................................... 7 Increase competition ............................................................................................................................ 7 Reduce Transaction cost ....................................................................................................................... 8 Improve efficiency................................................................................................................................. 8 Liquidity Concerns ................................................................................................................................. 8 Spot Price Conundrum .......................................................................................................................... 9 Regulations.......................................................................................................................................... 10 Bibliography ................................................................................................................................................ 11
Introduction
Commodity
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 of 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 Contracts (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. The national commodity exchanges, recognized by the Central Government, permit commodities such as precious (gold and silver) and nonferrous metals; cereals and pulses; ginned and un-ginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur; potatoes and onions; coffee and tea; rubber and spices, etc.
Commodity Exchange
A Commodity exchange can be defined as an exchange for buying and selling commodities for future delivery. The major commodity markets are in the United Kingdom and in the USA. In India there are 25 recognized future exchanges, of which there are three national level multi-commodity exchanges. After a gap of almost three decades, Government of India has allowed forward transactions in commodities through Online Commodity Exchanges, a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities. The three exchanges are: ? ? ? National Commodity & Derivatives Exchange Limited (NCDEX) Multi Commodity Exchange of India Limited (MCX) National Multi-Commodity Exchange of India Limited (NMCEIL)
All the exchanges have been set up under overall control of Forward Market Commission (FMC) of Government of India. National Commodity & Derivatives Exchange Limited (NCDEX) National Commodity & Derivatives Exchange Limited (NCDEX) located in Mumbai is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956 and had commenced its operations on December 15, 2003.This is the only commodity exchange in the country promoted by national level institutions. It is promoted by ICICI Bank Limited, Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). It is a professionally managed online multi commodity exchange. NCDEX is regulated by Forward Market Commission and is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations. Multi Commodity Exchange of India Limited (MCX) Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an independent and demutualised exchange with a permanent recognition from Government of India. Key shareholders of
MCX are Financial Technologies (India) Ltd., State Bank of India, Union Bank of India, Corporation Bank, Bank of India and Canara Bank. MCX facilitates online trading, clearing and settlement operations for commodity futures markets across the country. MCX started offering trade in November 2003 and has built strategic alliances with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors’ Association of India, Pulses Importers Association and Shetkari Sanghatana. National Multi-Commodity Exchange of India Limited (NMCEIL) National Multi Commodity Exchange of India Limited (NMCEIL) is the first demutualized, 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 from November 26, 2002. It is being supported by Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. It got its recognition in October 2002. Commodity exchange in India plays an important role where the prices of any commodity are not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market judged upon the prices. Others never had a say. Today, commodity exchanges are purely speculative in nature. Before discovering the price, they reach to the producers, end-users, and even the retail investors, at a grassroots level. It brings a price transparency and risk management in the vital market. A big difference between a typical auction, where a single auctioneer announces the bids, and the Exchange is that people are not only competing to buy but also to sell. By Exchange rules and by law, no one can bid under a higher bid, and no one can offer to sell higher than someone else’s lower offer. That keeps the market as efficient as possible, and keeps the traders on their toes to make sure no one gets the purchase or sale before they do.
New Commodity Exchanges
Indian Commodity Exchange Limited (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. It has 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. This exchange is ideally positioned to tap the huge scope for increasing the depth and size of commodities’ market and fill in the structural gaps existing in the Indian market. Our head office is located in North India (Gurgaon), one of the key regions in India's Agri belt, with a vision to encourage participation of farmers, traders and actual users to hedge their positions against the wild price fluctuations.
Ace Derivatives and Commodity Exchange Limited (ACE) “Ace Derivatives and Commodity Exchange Limited” is a screen based online derivatives exchange for commodities anchored by the Kotak Group as a majority stake holder. Ace in its earlier Avatar has been in existence for more than 5 decades in Commodity Business, bringing in the best and transparent Business Practices in the commodity space. The Kotak group brings in more than 25 years of financial expertise and has pioneered many business practices existing in the financial services industry. With “Ace”, they bring to the market a new, state-of-the-art trading platform which combines the operational efficiency of global exchanges with deep domain expertise in each commodity vertical. Following the Kotak Group’s legacy of transparency in their dealings and providing the best solution to the market participants, Ace provides the confidence of trading on a world-class platform to manage risks and reduce complexities of commodity prices. Ace offers futures trading the following commodity groups: ? ? ? ? Agricultural products Bullion Base Metals Energy
With the lowest latency trading platform, Ace sets the industry benchmark for quicker trade synchronization and price information broadcast. Product innovation has always been central to Ace, bringing forward a basket of products that align to leading exchanges worldwide. In addition to its convenient trading platform, Ace provides a robust clearing & settlement infrastructure that supports the complete process of trade intermediation – including registration of trades, settlement of contracts and mitigation of counter-party risk; giving traders the peace of mind in times of increased market volatility.
Purpose of Commodity Exchanges
Hedging Commodities are subject to constant and extreme price fluctuations. Traders are the worst sufferers of the price risk. Forward contracts have come to their rescue. A forward contract requires a buyer and a seller to take and make a delivery of a definite quantity of a particular commodity at a future specified date. Such contracts are traded on an exchange, which provides guarantee for all futures dealings, and parties can "hedge" at suitable levels. Hedging lessens risk since it involves the purchase or sale of a commodity with the intention of counterbalancing the profit or loss of another investment. Therefore, any loss on the previous investment will be hedged, or compensated, by a matching profit from the hedging instrument. Speculating Speculators are people who are prepared to bear risks in anticipation of earning profits. Markets are granted liquidity by speculators and it is hard to conceive of a futures market devoid of speculators.
Arbitrage Arbitrage involves buying a commodity at a low price and instantly selling it for a higher price in another market. Thus, traders can profit from arbitrage opportunities occurring due to price differences between two exchanges. Shifting of Risk The minute a trader finalizes a deal and secures a price, he is no longer concerned by unfavorable price shifts. For example, if a seller trades a specific contract for $ 450 and soon after the price comes down to $440, there has been an unfavorable price shift but the seller has made a profit of $10. At this point, the risk has been transferred to the buyer of the contract. Speculators trade on commodities and derivatives by undertaking risks in order to maximize profits. Information Exchanges produce huge volumes of data that are intensely scrutinized and monitored by a wide crosssection of people as the data provides gainful insights about the prevailing economic conditions.
Scope & Relevance of new Commodity Exchanges in India
The government’s decision to allow MMTC to float a national commodity exchange, as part of a joint venture with India bulls, had set in motion this debate. With The commodity futures market in India, which saw trading worth Rs. 52 trillion in 2008-09, had a new entrant in September—Indian Commodity Exchange (ICEX), the country’s fourth national commodity exchange. Ace Derivatives and Commodity Exchange, the first to be transformed from a regional exchange to a national multi-commodities futures trading platform, was launched October 2010, the country’s fifth national commodity exchange. The Kotak-anchored exchange does futures trading in soybean, soya oil, rape/mustard seed, chana and castor seed. Commodity market regulator Forward Markets Commission (FMC) on Thursday said it has received a proposal from Gontermann Peipers (India) for setting up a national-level commodity exchange. The cumulative turnover of the commodity market — trading on which was re-introduced in April, 2003 by the government — is expected to register a 50 per cent jump to a record Rs 1,05,00,000 crore by the end of this year from Rs 70,00,000 crore last year. The agri-commodity exchange, National Commodity & Derivatives Exchange, saw business increase by 69 per cent to touch US$ 183.43 billion, in the period under review. Since its launch in November 21, 2009, ICEX generated business worth US$ 22.29 billion. Meanwhile the turnover of the National Board of Trade has increased to over US$ 5.5 billion in the current fiscal. New entrant ICEX clocked business of Rs 3,78,006 crore, which was higher than the turnover of the oldest national bourse, NMCE. Its turnover rose by just 6 per cent to Rs 1,80,727 crore from Rs 1,70,419 crore in the review period. With more commodity exchange in line, it is necessary to know whether we need more exchanges or not.
Arguments for new commodity exchanges in India
Growth of Indian Commodity Market - New products Volumes are expected to grow after options and index futures are introduced but we are primarily looking at the value addition these derivative products would bring to futures market participants. Such products would enable the market to reach a higher level of sophistication and impart greater efficiency in both the price discovery and risk management processes. They would also enable greater participation in the futures market since there will be something to suit the needs of every participant. The introduction of options is expected to facilitate farmers' participation on the futures platform, a development that has been the FMC and the government's endeavour all these years. With the introduction of new commodity derivates and intangible derivates like freight , weather etc. The volumes on exchanges are going to increase. The amendments to Forward Contracts (Regulation) Act, 1952, will insert an enabling provision for futures and options trading in various indices (such as freight and weather). The FMC will be extremely cautious about introducing these products; it will permit them only when sufficient awareness of the associated risks has been created among market participants. The asymmetric risk profile of options (which is perfect risk insurance product otherwise), especially in intangibles, makes it a highly risky product if not used properly. Increase competition Major global economies like US, Japan and Europe (as a whole) have multiple stock exchanges simultaneously operational, with most of the exchanges doing really well. In contrast to mention of Bimal Jalan committee report, the advancement in technology has actually triggered to the rise to new exchanges like BATS BYX and others that are finding their niche in equity market space. The healthy competition is economy only adds to the market efficiency. Santos and Scheinkman (2001, “Competition Among Exchanges”) in their quest to find that does competition among financial intermediaries lead to excessively low standards?; exhibits various examples where private information is present, and competition produces higher standards than monopoly. On similar lines below are few points by Oesterle (2001, Securities Markets Regulation - Time to Move to a Market-Based Approach in Policy Analysis no 374); ? ? If an exchange faces stiff market competition, the deviation between rules and practice can disappear. In a tough, competitive market, any one competitor has an incentive to honestly reveal its costs and methods of operation, as a means of showing that it offers a better deal than its competitors and thereby attracting customers. Trading markets are no different from any other service market: the more competition the better, the less government intervention the better. Securities markets are indispensable for a prosperous free-market economy.
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Lee in ‘The Future of Securities Exchanges” (2002 under Ch. 1, Brookings-Wharton Papers on Financial Services) has following views; ? ? The key goal of the regulators of such markets is to ensure that entry and exit costs, to and from, such markets remain low. Even though entry and exit costs are now low in the market for securities exchanges, as trading systems can be bought relatively cheaply off-the-shelf, dominant incumbent securities exchanges still, however, have many ways in which they can exploit their monopolistic positions without worrying about the activities of new entrants.
Each of the three existing national exchanges—MCX, NCDEX and NMCE—has carved out a niche for itself. MCX has focused on metal/mercantile contracts, for example, while NCDEX has opted to specialize in agri-commodities, and partly as a consequence, the competition among the three on the ground has not been significant. Moreover, considering the extent of reforms that are pending, it is even less obvious that another exchange will actually aid competition and lead to better price discovery. Reduce Transaction cost Exchanges are crucial components of financial infrastructure, which reduces transaction cost and waste in transit, benefiting both consumers and farmers. A robust and modern exchange focused on multiple commodities can bring about a transformation to the inclusive benefit of all stakeholders across the nation. Improve efficiency With more innovation and better technology, the commodities exchange would become efficient. The commodity market in India is under penetrated. Products are introduced such as livestock trading; hence there is certainly a large market. Innovation will be the driver for the success for any exchange. Liquidity Concerns Traditionally commodity exchanges in India have been product specific. The need for a national multi?commodity exchange (NMCE) is now well articulated and accepted. However the mere setting up of a multi?commodity exchange is not going to result in a vibrant and liquid commodities derivatives market. There are a host of issues which need to be addressed along with the setting up of NMCE in order to develop the markets. The key to success is liquidity and the challenge is to create this liquidity where other exchanges have not been very successful so far. In this context it may be worthwhile to go back to first principles. Who are the players that drive any derivatives markets? Typically they are hedgers, arbitrageurs and speculators. In the absence of these categories of players, especially the latter, it is unlikely that any derivatives market will be very liquid. So do we have these categories of players in the existing commodities markets? A cursory examination of these markets shows that there are limited hedgers and arbitrageurs scattered across the various markets. There is no professional body of arbitrageurs participating in commodity derivatives; the lack of well developed organized spot markets and price discovery mechanism is a major impediment to arbitraging. Typically there are traders and trade bodies in the distribution chain that
take advantage of lack of price discovery and arbitrage the same. However these are restricted to small set of traders and are not wide enough to drive liquidity. The existing exchanges being product specific, speculators if any, are intrinsically linked to the trade and are limited in number. This also points to another key facet of existing exchanges. Since these have been traditionally set up by trade bodies, spot traders and others in the distribution chain have typically been member?brokers of such exchanges. Discussions with some of the traders suggest that the focus of brokers is hedging. Arbitraging with the spot market is done to a limited extent. Wider participation by arbitrageurs and speculators is ruled out as there are too many impediments and it is not attractive enough. This in fact also makes a case to provide a multi?commodity platform which will allow professional arbitrageurs and speculators to participate. The other key constituent is the hedger. Today the scope to hedge positions in a commodity is limited by access to the market. Smaller and retail level participation is not possible because of the closed door nature of existing exchanges. There is need to open up the markets and provide a distribution chain which will encourage and allow a wider body of participants. This suggests that there is need to develop a professional body of brokers in the commodities markets who will provide services across commodities and across the country. Moneys will tend to flow to areas of highest risk adjusted reward. If the commodity derivatives markets can be designed to insulate the arbitrageurs and hedgers from some of the peculiarities of commodities settlement it may even be possible to use the existing derivatives infrastructure and set of equity derivatives brokers to jump start this process. Mutual funds’ entry into the commodity futures space still needs to be cleared by FMC’s capital market counterpart Securities and Exchange Board of India (Sebi). Spot Price Conundrum The other important issue arising from the above is the state of the spot market and spot price discovery process. It is difficult to develop a good derivatives market without adequate spot price discovery. This also becomes extremely important in the context of physical settlement of commodities. Spot markets are scattered throughout the country and exist close to production centers. They are quite unorganized. Relatively more organized spot markets and mandis are run by Agricultural Produce Market Committee (APMC) under the state governments. However there is little transparency in trading and pricing along subsequent distribution channels. A lot needs to be done to strengthen spot markets especially in the collection and dissemination of spot prices (domestic and international) on on?line basis and organized trading in spot contracts wherever possible. There are also several structural and regulatory issues relating to the spot markets which impact spot price discovery and settlements. Currently the commodities markets are regulated by various entities in a manner which directly impact spot prices, sales and inter?state movement in several commodities, especially agri? commodities significantly. There is central governmental intervention by way of minimum support price, minimum and maximum price bands for specific commodities, quotas and reservations, procurement through Food Corporation of India etc. As ’agriculture’ is a state subject, the extent and variety of instruments used to intervene in the agriculture sector also vary from state to state. Some examples of these are;
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Licensing requirements for wholesale trade, storage, processing of virtually all commodities in all states Official permits are required for out?of?state sales of some commodities (paddy in Tamil Nadu and AP, edible oil in Gujarat, cotton and alcohol in Maharashtra).
The basic precondition for establishing a viable commodity derivatives market is the existence of large, competitive and transparent spot market. Unfortunately, the existing cash markets for most commodities fail to satisfy this precondition. NMCE may be required to actively participate in the process of information collection and dissemination and may even be required to set up spot markets or tie up with spot exchanges as and when they emerge. To begin with NMCE may have to do what existing exchanges are doing ? take some reference price either by polling a set of traders or use some officially announced price such as by APMC. Polling market participants for prices is fraught with the risk of misreporting and manipulation. It may be possible to still evolve some reference rate based on polling methodology. A good case in point is the MIBID/MIBOR rate announced by the National Stock Exchange (NSE) which has today found wide acceptance. The NMCE may be required to institute a similar approach to spot price reference rates. Regulations The amendment to the Forward Contracts & Regulation Act (FCRA) that would grant autonomy to the commodities regulator, the Forward Markets Commission (FMC), has been pending for a while. FMC needs to be empowered if it is to monitor more exchanges and regulate the market effectively. FMC needs to be empowered if it is to monitor more exchanges and regulate the market effectively. Though the volumes in the futures market have grown rapidly over the last three years, it is yet to attain critical mass. Allowing more exchanges without broader participation and innovation would only result in splitting existing trade volumes among roughly the same set of players, with the pie expanding only slightly. This will not only impact the stability of the exchanges, but more importantly, affect the creation of infrastructure such as warehouses, quality control laboratories and the like. Past observation of operations also suggests that more exchanges do not necessarily mean more competition. There have been instances of the exchanges simply replicating each other’s contracts, rather than offering innovative products to wean away clients. Innovation could possibly come in and also technology and best practices to spur growth. Just another exchange would hardly be of any use. The number of exchanges will eventually be decided by the market. If the market feels there is scope for fewer exchanges, then consolidation is a possibility. We will have to see how the markets shape up, especially after other products are introduced and institutional and corporate players enter. But we can see the experience of the global exchanges where the process of consolidation has already set in. China had a large number of commodity exchanges, which eventually consolidated into three exchanges, each having its own product specialisation. So that possibility in the medium to long term cannot be ruled out.
Bibliography
? ? ? ? ? ? http://www.ftkmc.com http://www.mcxindia.com http://www.ncdex.com http://www.nmce.com http://www.icexindia.com http://www.aceindia.com
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