Groundnut in Indian Commodity Markets

8/14/2019 Groundnut in Indian Commodity Markets

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Detailed study of groundnut and groundnut oil ascommodities in major commodity exchanges in India

Prepared by:Partha Ghosh

MBA-SYMBIOSIS INTERNATIONAL UNIVERSITY


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Contents1. Introduction: ........................................................................................................................6

2. Literature Review: ...............................................................................................................7

History of Commodity Exchanges: ..........................................................................................7

Chicago Board of Trade: ..........................................................................................................8

Dalian Commodity Exchange: ............................................................................................... 20

NYSE EURONEXT: ............................................................................................................. 25

NCDEX: ................................................................................................................................ 27

MCX: .................................................................................................................................... 29

COMMODITY MARKET:.................................................................................................... 31

Overview of commodities exchanges in India: ....................................................................... 48

General information on groundnut as a commodity: ............................................................... 50 Description: ....................................................................................................................... 50

Overview:.......................................................................................................................... 50

History: ............................................................................................................................. 52

Cultivation pattern: ............................................................................................................ 53

Varieties of groundnut: ...................................................................................................... 53

Groundnut producing countries: ........................................................................................ 54

Production of groundnut in India ....................................................................................... 56

Indian groundnut market: .................................................................................................. 58

Market Influencing Factors ................................................................................................ 58

Major trading centers of groundnut: ................................................................................... 59

3. Objectives: ........................................................................................................................ 60

4. Methodology: .................................................................................................................... 61

5. Analysis of Data and Findings: .......................................................................................... 66

Objective b: To study the factors affecting the spot prices of these commodities in theexchanges. ............................................................................................................................. 66

Table: 5.1 Correlation between NCDEX spot price of groundnut (2007) and CPI (IW) of groundnut oil in Junagarh (2007): ...................................................................................... 66

Table: 5.2 Correlation between NCDEX spot price of groundnut (2007) and CPI (IW) of mustard oil in Junagarh (2007): ......................................................................................... 67


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Table: 5.3 Correlation between NCDEX spot price of groundnut (2007) and CPI (IW) of vanaspati in Junagarh (2007): ............................................................................................ 68

Objective c: To find the similarity/ dissimilarity in spot price trends of these commodities intwo major commodity exchanges in India (NCDEX and MCX): ............................................ 71

Table 5.5: Descriptive statistics of the two samples of price data for the year 2007: ........... 71 Table 5.6: Results for the two samples independent t-test: ................................................. 71

Objective d: To suggest a pricing model based on trend and fundamental analysis of prices of these two commodities: ......................................................................................................... 72

Table 5.7: detailed information about the regression model with time as an independentvariable (X) and prices of groundnut oil futures contract as the dependent variable (Y): .... 73

Table 5.8: detailed information about the regression model with time as an independentvariable (X) and prices of groundnut seed futures contract as the dependent variable (Y): . 74

Table 5.9: detailed information about the regression model with groundnut oil spot prices asindependent variable (X) and prices of groundnut oil futures contract as the dependentvariable from January 2007 and December 2007 at NCDEX(Y): ....................................... 76

Table 5.10: detailed information about the regression model with groundnut oil spot pricesas independent variable (X) and prices of groundnut oil futures contract as the dependentvariable from January 2007 and December 2007 at MCX(Y):............................................ 77

Objective e: To study the correlation of the futures prices of these commodities with majorfutures indices in these markets. ............................................................................................ 79

Table 5.11: correlation analysis of prices of grounut oil futures prices with FUTEXAGRI(the futures prices based index of NCDEX). ...................................................................... 79

Objective f: To have a qualitative view of the illiquidity of groundnut oil as a commodity inthe exchanges. ....................................................................................................................... 80

Objective g: To measure the accuracy achieved in price matching (spot and futures) of thesetwo commodities by the stock exchanges. .............................................................................. 80

Table 5.12: correlation results for spot and futures prices of groundnut oil in NCDEX. ..... 80

6. Implications of Results and Findings: ................................................................................ 82

Results and conclusion pertaining to objective b: ................................................................... 82

Results and conclusion pertaining to objective c: ................................................................... 82

Results and conclusion pertaining to objective d: ................................................................... 82

Results and conclusion pertaining to objective e: ................................................................... 83

Results and conclusion pertaining to objective f: .................................................................... 83

Results and conclusion pertaining to objective g: ................................................................... 83


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7. Conclusion: ....................................................................................................................... 84

8. References: ........................................................................................................................ 84

ANNEXURE I .......................................................................................................................... 85

Tables displaying F test results and ANOVA results for the regression models: ..................... 85

Table 3.4: F test and ANOVA results for model ................................................................ 85

Table 3.7: F test and ANOVA results for model: ............................................................... 87

Y = 0.X10+ 1.X9+ 2.X8+ 3.X7+ 4.X6+ 5.X5+ 6.X4+ 7.X3+ 8.X2+ 9.X+ 10 ............ 87


Y = 0.X10+ 1.X9+ 2.X8+ 3.X7+ 4.X6+ 5.X5+ 6.X4+ 7.X3+ 8.X2+ 9.X+ 10 ............ 90


Y = 0.X8+ 1.X7+ 2.X6+ 3.X5+ 4.X4+ 5.X3+ 6.X2+ 7.X+ 8 ...................................... 93

Table 3.10: F test and ANOVA results for model: ............................................................. 96

Y = 0.X9+ 1.X8+ 2.X7+ 3.X6+ 4.X5+ 5.X4+ 6.X3+ 7.X2+ 8.X+ 9 .......................... 96

ANNEXURE 2 ......................................................................................................................... 99

Groundnut (in shell) Product Note ......................................................................................... 99

Authority ........................................................................................................................... 99

Unit of Trading .................................................................................................................. 99

Months Traded In .............................................................................................................. 99

Tick Size ........................................................................................................................... 99 Basis Price......................................................................................................................... 99

Unit for Price Quotation .................................................................................................... 99

Hours of Trading ............................................................................................................... 99

Mark to Market ................................................................................................................. 99

Position limits ................................................................................................................. 100

Margin Requirements ...................................................................................................... 100

Delivery Default Penalty ................................................................................................. 101

Arbitration ....................................................................................................................... 101

Unit of Delivery .............................................................................................................. 101

Delivery Size ................................................................................................................... 101

Delivery Requests ........................................................................................................... 101

Delivery Allocation ......................................................................................................... 102


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Actual Delivery ............................................................................................................... 102

Accredited Warehouse ..................................................................................................... 102

Quality Standards ............................................................................................................ 102

Packaging ........................................................................................................................ 102

Standard Allowances ....................................................................................................... 103


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1. Introduction:Groundnut is an important crop both for oil and food. It is grown in over 100 countries in the

world and plays an important role in the economy of several countries. About two thirds of the

crop produced in the world is crushed to extract oil and one-third is used to make other edible

products. India accounts for 40 per cent of the world area and 30 per cent of world output of

groundnut.

On the other hand groundnut and groundnut oil is the most illiquid commodity in the commodity

exchanges in India. Therefore the focus of the study is to understand the trade volume of

groundnut as a commodity in commodity exchanges all over the world and gain knowledge

about various factors governing supply, demand and price of these commodities in Indian

market.

The major objective of this project is to understand the functioning of commodity markets and

how derivatives based on underlying (groundnut kernel and groundnut oil in this case) behave in

their price fluctuations depending on certain fundamental factors.

Throughout the report certain features of derivative trading like cross hedging using two

different commodities having high correlation would also be explained using the selected

underlying and major agricultural indices of the markets.

Thus the project is a gateway into the world of commodity using two very unique commodities.


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2. Literature Review:

Various web based literatures have been referred to for gaining an understanding of the

following:

Which are the major commodity exchanges in the world? And what is their nature of

operation?

Which are the major commodity exchanges in India? What is their modus operandi?

What are the essential features of groundnut as a crop and as a commodity?

The first section of the literature review would concentrate the major commodity exchanges in

world, brief history, nature of derivative market. The second part of the literature review would

concentrate on groundnut as a commodity, its cropping pattern, production, major markets and

its significance as a commodity traded in exchange.

History of Commodity Exchanges:

Link: http://www.business.headlinesindia.com/commodity/

Markets for futures trading were developed initially to help agricultural producers and consumers

manage the price risks they faced harvesting, marketing and processing food crops each year.Today, futures exist not only on agricultural products, but also a wide array of financial, stock

and forex markets.

The world's oldest established futures exchange, the Chicago Board of Trade, was founded in

1848 by 82 Chicago merchants. The first of what were then called "to arrive" contracts were

flour, timothy seed and hay, which came into use in 1849. "Forward" contracts on corn came into

use in 1851 and gained popularity among merchants and food processors.

Meanwhile, what is now the nation's largest futures exchange, the Chicago Mercantile Exchange,

was founded as the Chicago Butter and Egg Board in 1898. At that time, trading was offered in

you guessed it butter and eggs.
http://www.business.headlinesindia.com/commodity/http://www.business.headlinesindia.com/commodity/http://www.business.headlinesindia.com/commodity/http://www.business.headlinesindia.com/commodity/


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In 2007, CME and CBOT officially merged, and are now collectively known as CME group Inc.,

the world's largest and most diverse derivatives exchange.

Other prominent U.S. commodities exchanges were formed before or just after the turn of the

century, and also had their roots in agriculture. At one time, you could trade on the NationalMetal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the

New York Hide Exchange. Small exchanges like these ultimately merged to become the

exchanges we have today.

In the 21st century, online commodity trading has become increasingly popular, and commodity

brokers offer front-end interfaces to trade these electronic-based markets. A commodities broker

may also continue to offer access to the traditional pit-traded, or open-outcry, markets that

established the commodity exchanges.

The major commodity exchanges in world are as follows:

Chicago Board of Trade:

Link: http://www.cbot.com/cbot/pub/page/0,3181,942,00.html#1848

History:

1848

On April 3, 1848, the Chicago Board of Trade (CBOT) was officially founded by 83 merchants

at 101 South Water Street. Thomas Dyer is elected the first president of the CBOT.

1849-50

"To arrive" contracts come into use for future delivery of flour, timothy seed and hay.

1851

The earliest "forward" contract for 3,000 bushels of corn is recorded. Forward contracts gain

popularity among merchants and processors.

1852

The Exchange moves to Clark and South Water streets.
http://www.cbot.com/cbot/pub/page/0,3181,942,00.html#1848http://www.cbot.com/cbot/pub/page/0,3181,942,00.html#1848http://www.cbot.com/cbot/pub/page/0,3181,942,00.html#1848http://www.cbot.com/cbot/pub/page/0,3181,942,00.html#1848


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1856

Rising from an 1851 total of 38 members, 122 new members are admitted in 1856. The

Exchange moves to South Water and LaSalle streets.

1859

Exchange receives charter from State of Illinois. Exchange is mandated to set standards of

quality, product uniformity and routine inspections of grain.

1861

The Civil War begins. CBOT finances formation of three regiments and an artillery battery for

the Union Army. CBOT adopts gold coin as its standard of value.

1865

CBOT formalizes grain trading by developing standardized agreements called "futures

contracts." CBOT also begins requiring performance bonds called "margin" to be posted bybuyers and sellers in its grain markets.

CBOT moves to its first permanent home, Chamber of Commerce Building, on corner of LaSalle

and Washington streets.

1866

First trans-Atlantic cable laid, facilitates communication between Chicago and foreign markets;

transmission of message cut from three days to three hours.

1868

CBOT Board of Directors states any members engaging in a transaction to corner a market

would be expelled from trading.

1870

Early version of octagonal trading pit introduced; present type patented in 1878.

1871-1872

The Great Chicago Fire destroys CBOT's first building and with it all records therein. The

Exchange closed October 9-10, opens two weeks after fire. A 90-ft by 90-ft, wigwam at

Washington and Market streets becomes Exchange's temporary quarters.


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1873

During the Financial Panic of 1873, the CBOT remains open despite large financial institution

failures.

1875

Chicago newspapers voice CBOT's sentiment against state grain inspection, favor Board of

Trade inspection; Exchange felt that state politicians, unfamiliar with grain business and

antagonistic toward grain dealers, were diverting grain from Chicago by misgrading.

1876

First appearance of a "bucketshop" in Chicago (such a shop was dishonest, executing orders and

anticipating profit from market price changes adverse to the customer's interest.)

1877

Futures trading becomes more formalized and "speculators" enter the picture.

1885

As a result of the explosive growth of futures, the CBOT erects a new building at LaSalle Street

and Jackson Boulevard, Chicago's tallest building at the time. It's the city's first commercial

structure with electrical lighting.

1893

The Exchange galleries are opened to the public for first time in honor of World's Columbian

Exposition in Chicago.

1897

Wheat prices rise from 60 cents a bushel to $1.00 and William Jennings Bryan states higher

prices due to crop shortages in India and Europe are not political events.1909

The CBOT organizes the largest meeting ever of grain exchanges, some 20 exchanges meet at

the Board of Trade in the U.S.


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1912

Under auspices of the CBOT Grain Inspection Committee, improvements are made in inspection

and grading, including civil service examinations.

1914

World War I begins.

1916

War grinds on; corn reaches $1.05 per bushel, highest since Civil War.

1917-20

War makes the market unstable; wheat trades at $3.25 per bushel, highest ever paid for a future

delivery.Grain trade and railroads nationalized during and for a period after the end of World War I on

November 11, 1918.

1922

The federal government establishes the Grain Futures Administration to regulate grain trading.

1923

The U.S. Supreme Court upholds the Capper-Tincher Act (Grain Futures Act), to eliminate price

manipulation and other trade abuses.

1924

The U.S. government discusses assuming power to set daily trading limits; called by Exchange

President Frank L. Carey a deplorable, unhealthy restriction of supply-demand freedom.

1925The CBOT Board of Directors is given authority to declare an emergency situation and establish

daily price limits. CBOT has one of its most successful years; 26.9 billion bushels of grain

traded.


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1926

Board of Trade Clearing Corporation founded to guarantee trades made on the CBOT.

1929

Exchange outgrows its building, temporarily relocates to quarters at Clark and Van Buren streets

while new building is erected at the LaSalle and Jackson site.

CBOT seat sells for $62,500, a record at the time.

1930

CBOT moves into 45-story new home at LaSalle and Jackson; building was tallest in Chicago,

dominating skyline.

1936

CBOT launches Soybean futures contracts.

1940

During World War II, Paris falls to the German army and open wheat futures shrink 37 million

bushels in six days of liquidation and prices decline.

1950-51:

The CBOT completes the Soybean complex with the introduction of Soybean Oil and Soybean

Meal futures.

1952

The Exchange joins American Red Cross to obtain blood donors for American forces in Korea.

1956

The CBOT hires its first paid, non-member president. Robert C. Liebenow, 34. He is the

youngest person to hold the post of CBOT president. At the same time, Julius Mayer is elected

the first CBOT Chairman.


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CBOT introduces the industry's first examination for commodity brokers.

1963

CBOT closes for funeral of President Kennedy on November 25.

1966

CBOT introduces the first examination in the futures industry for commission house

representatives.

1967

New, fast, automatic electronic price display boards are installed on the walls above the trading

floors, replacing chalkboard markers and Morse code telegraph clicks. Price reporting time is cut

to seconds.

1968

Iced broilers, the CBOT's first non-grain related commodity, begins trading.

CBOT names its first public directors: John Hopkins University President Milton S.

Eisenhower; former Bureau of the Budget Director Charles L. Schultze; and Inland Steel

Chairman Joseph I. Block.

1969

CBOT begins trade in first non-grain product, with a Silver futures contract.

On July 29, 1969, Carol J. Ovitz, Assistant Vice President of Mitchell Hutchins & Company,

becomes the first woman member of the Exchange.

1973

Members of the CBOT start Chicago Board Options Exchange (CBOE), the world's first stock options exchange.

The government establishes the Commodity Futures Trading Commission to regulate the futures

industry.


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1974

CBOT starts trade in 3 Kilo Gold futures on December 31.

1975

CBOT launches first interest rate futures contract, Government National Mortgage Association

futures; sets stage for a huge increase in trading volume, a new era of growth and trading

instruments for futures exchanges around the world.

1977

CBOT launches the U.S. Treasury Bond futures contract; becomes most actively traded contract

in the world.

October 1977, The Prince of Wales visits the CBOT.

1979

CBOT begins trade in 100 troy oz Gold futures on February 20.

1980

CBOT closes Jan 7-8 by CFTC order; to suspend trading after President Carter places embargoon grain shipments to Soviet Union.

1982

CBOT launches first options on futures contract, for U.S. Treasury Bond futures on October 1.

CBOT completes its annex to the original 1930 building, which houses a new agricultural trading

floor, then the world's largest at 32,000 sq. feet.Exchange launches 10-Year Treasury Note futures contracts on May 3.

1984

CBOT launches trading in Soybean futures-options.


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1986

The CBOT saluted Vietnam war veterans during their parade down LaSalle Street.

CBOT trade volume tops 100 million contracts for the first time, sets world record.

1987

CBOT markets remain open throughout October stock market crash. The CBOT is the only

major exchange in the world to operate without interruption during the financial crisis.

1988

Fed Fund futures begin trading May 3.

1991

CBOT welcomes President George Bush; first U.S. President to visit the Exchange.

Peggy A. Ogorek is the first woman elected CBOT Director.1992

CBOT closed April 13-14, due to the Chicago River tunnel flood.

Soviet President Mikhail Gorbachov visit the CBOT on May 7, 1992.

1993

CBOT administers first cash SO2 emission allowance auction for the Environmental Protection

Agency.

1994

CBOT launches Project A, its after-hours electronic trading system for futures and futures-

options.

1995

Members approve trading of agricultural products on Project A during off-exchange hours.

CBOT launches its Internet site.

1996 Vice President Gore is special guest at Exchange's Democratic Senatorial Campaign reception

during 1996 Democratic National Convention in Chicago.

1997

CBOT launches the CBOT Dow Jones Industrial Average Index futures and options on futures

contracts.


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CBOT opens the world's largest trading floor, 60,000 sq. ft. for financial futures and futures-

options on February 18, 1997.

1998

On April 3, the CBOT celebrates its 150th Anniversary.On September 28, the Board of Directors establishes side-by-side open outcry and electronic

trading for financial contracts, providing trading opportunity for those members and firms who

wished to trade on the CBOTs electronic trading system during the day.

2001

Chicago's four financial exchanges close on Wednesday, September 12 in recognition of the

tragic events of September 11.

CBOT launches 10-Year Interest Rate Swap futures.

2003

On November 25, 2003, the CBOT transitions to its new electronic trading platform, powered by

LIFFE Connect and its agreement with the Chicago Mercantile Exchange (CME) to provide

clearing and related services for all CBOT products

2005

On March 23, the CBOT successfully launched its Ethanol futures contract.

On April 14, the CBOT announced that an overwhelming 99 percent of the votes were cast in

favor of the CBOTs restructuring proposal, which includes the demutualization of the E xchange

into a for-profit, stock-based holding company and for-profit, membership exchange subsidiary.

On June 9, the CBOT celebrated the 75 th anniversary of the Exchanges landmark building;

CBOT rededicates two statues that once stood at the entrance of the original CBOT building

completed in 1885.

On October 19, CBOT Holdings, Inc. has its Class A common stock listed on the New York

Stock Exchange at a price of $54.00 per share.


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2006

The CBOT announced that the Exchange achieved the highest yearly total volume recorded in its

history, with more than 674 million contracts traded in 2005.

On January 6, 2006, U.S. President George W. Bush toured the CBOT agricultural trading floor,

becoming the second U.S. Chief Executive to visit the Exchange.

On April 26, 2006, the CBOT announced that it will increase global access to its benchmark

Agricultural products by offering trading of CBOT full-sized, physically delivered Agricultural

futures contracts on its electronic trading platform during daytime trading hours. Trading is

expected to begin on August 1, 2006.

August 1, 2006, marked the CBOT's historic launch of electronic agricultural futures tradingside-by-side with the open auction market during daytime trading hours.

On September 26, Singapore Exchange and Chicago Board of Trade commenced the first day of

trade for the Joint Asian Derivatives Exchange (JADE). JADE a market division of SGX

Derivatives Trading Ltd., launched its debut in commodities futures trading with TSR 20 Rubber

futures contract.

On October 17, 2006, the Chicago Mercantile Exchange Holdings Inc. and the CBOT Holdings,

Inc. announced that they signed a definitive agreement to merge the two organizations to create

the most extensive and diverse global derivatives exchange.

On November 7, 2006, the CBOT announced that it successfully launched open auction trading

of its options on Full-sized Gold (100 oz.) and Silver (5,000 oz.) futures contracts.

On December 18, 2006, the CBOT announced that it has successfully launched clearing services

for two new over-the-counter (OTC) Ethanol Calendar Swap contracts with the clearing of 60

contracts last week.

On December 21, 2006, CBOT Holdings and CME Holdings have filed a preliminary joint proxy

and registration statement on Forms S-4 with the U.S. Securities and Exchange Commission

relating to the proposed merger of the two companies.


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2007

On Janaury 2, 2007, the CBOT announced that it set a new record for annual trading volume,

with 805,884,413 contracts.

CBOT Holdings, Inc. announced its best year in company history, with revenue of $169.3

million for the fourth quarter 2006 on January 31, 2007.

On February 5, 2007, the CBOT launched the electronically-traded DJUSRE Index futures

contract designed to allow market participants to capitalize on changes in the real estate sector of

the stock market.

On February 26, 2007, CBOT Holdings, Inc. announces that it will hold special meetings for the

CME merger vote on April 4.

On March 1, 2007, CBOT Holdings, Inc. filed a brief challenging CBOE's attempt to terminate

Exercise Rights.

On March 15, 2007, CBOT Holdings, Inc. received unsolicited, non-binding proposal letter from

Intercontinental Exchange to merge with CBOT Holdings.

On March 19, 2007, CBOT Board of Directors authorized the company to begin discussions with

Intercontinental Exchange, Inc., relating to ICE's announced proposal.

On March 31, 2007, the CBOT postpones the Special Meeting for the CME merger to give

Board of Directors sufficient time to complete their review of ICE's proposal.

On May 1, 2007, CBOT Holdings, Inc., following its annual meeting of stockholders, announced

that Charles P. Carey was re-elected as a director and reappointed to serve a third two-year term

as Chairman of the Board.

On May 11, 2007, Chicago Mercantile Exchange Holdings Inc. (NYSE, NASDAQ: CME) and

CBOT Holdings, Inc. (NYSE: BOT) announced that they have revised the terms of their

definitive merger agreement and recommendation that CBOT Holdings shareholders vote in

favor of the merger agreement with CME.

On May 15, 2007, CBOT Holdings sets record date for Jul 9 meeting to vote on CME Merger.


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On June 11, 2007, CME and CBOT received Department of Justice Clearance to proceed with

merger.

On June 14, 2007, CBOT Holdings, Inc. (NYSE: BOT) announced that its Board of Directors

had carefully reviewed the revised proposal from IntercontinentalExchange, Inc. (ICE) and

concluded that it is not superior to the revised CME merger agreement.

On June 14, 2007, the CME, CBOT revised the merger agreement to provide increased value and

delivers one-time cash dividend to all CBOT shareholders and guarantee for holders of CBOE

exercise rights.

On July 9, 2007, the Chicago Mercantile Exchange Holdings Inc. (NYSE/Nasdaq: CME) and

Chicago Board of Trade Holdings, Inc. (NYSE: BOT) completed the merger of their companies,

creating the world's largest and most diverse exchange.

Organizational Profile:

The Chicago Board of Trade (CBOT ), established in 1848, is a leading futures and futures-

options exchange. More than 3,600 CBOT member/stockholders trade 50 different futures and

options products at the CBOT by open auction and electronically. Volume at the Exchange in

2006 surpassed 805 million contracts, the highest yearly total recorded in its history.

In its early history, the CBOT traded only agricultural commodities such as corn, wheat, oats and

soybeans. Futures contracts at the Exchange evolved over the years to include non-storable

agricultural commodities and non-agricultural products. In October 2005, the CBOT marked the

30th anniversary of the the Exchange's first financial futures contract, based on Government

National Mortgage Association mortgage-backed certificates. Since that introduction, futures

trading has been initiated in many financial instruments, including U.S. Treasury bonds and

notes, 30-Day Federal Funds, stock indexes, and swaps, to name but a few.

Another market innovation, options on futures, was introduced in 1982. The CBOT added a newcategory to its diverse product mix in 2001 with the launch of 100 percent electronic Gold and

Silver futures contracts. Additionally, South American Soybean futures and Ethanol futures, the

Exchanges newest products, were introduced in 2005 in response to shifting trends in the global

agricultural economy.

For decades, the primary method of trading at the CBOT was open auction, which involved


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traders meeting face-to-face in trading pits to buy and sell futures contracts. But to better meet

the needs of a growing global economy, the CBOT successfully launched its first electronic

trading system in 1994. During the last decade, as the use of electronic trading has become more

prevalent, the Exchange has upgraded its electronic trading system several times. Most recently,

on October 12, 2005, the CBOT successfully launched its newly enhanced electronic trading

platform, e-cbot, powered by LIFFE CONNECT , by introducing a major API upgrade.

Whether trading futures and options on futures through an electronic platform or open auction,

the CBOTs primary role is to provide transparent an d liquid contract markets for its

member/stockholders and customers to use for price discovery, risk management and investment

purposes. These futures markets also allow speculators throughout the world to interpret

economic data, news and other information and use that information to make decisions about

price and enter the futures markets as investors. Speculators bridge the gap between hedgersbids and offers, thereby making the market more liquid and cost effective.

Dalian Commodity Exchange:Link: www.dce.com.cn

Structure and function:

The exchange has the deepest liquidity pool among all Chinese Commodity Futures Exchanges.

According to the Futures Industry Association, the bourse has been the largest mainland futuresexchange by volume for eight years, half the domestic market share in 2007, and captures

roughly 2% of global futures market share (including financial futures). A near-tripling in

volumes of its benchmark corn future in 2006 saw the contract leapfrog the DCE soy complex to

become the single-largest product, with the 65m traded, trailing only Nymex WTI Crude in the

global commodity rankings. According to the Futures Industry Association, DCE is the second

largest agricultural futures bourse in the world, with a 29% market share. [1] In 2007, total

trading volume and turnover reached 371 million contracts and RMB 11.97 trillion (1.67 trillion

USD). As of November 2007, the exchange had 194 members including 180 brokers, with a

reach of more than 160,000 investors. Louis Dreyfus became the first foreign member in June

2006.


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At present, soybeans, soy meal,soy oil corn, palm oil, linear low density polyethene (LLDPE)

futures are traded on the DCE. The introduction of LLDPE in 2007 also marks the first

petrochemical futures contract in the country.

On August 20, 2007, China officially announced the Northeast Area Revitalization Plan(anational-level development strategy). In this Plan, the Dalian Commodities Exchange was named

as a key player in developing the fourth economic region in China. The northeast area is a

relatively untapped market space and is traditionally associated with an edge in natural resources

such as crude oil, agricultural land, electricity and coal mining. Shipbuilding, port logistics &

distribution networks, utilities and agriculture are the most notable sectors in the region.

Development:

From the company news release, the leadership will launch the hog/pork belly futures within the

first half of the year 2008, and then, coking coal futures, rice futures within the year.

In addition, DCE intends to increase its support to industries and develop corporate and

institutional client group. As a Deputy to the 11th National People's Congress, Mr. Liu

Xingqiang was calling on the government to allow the establishment of commodity futures funds

in an attempt to draw more institutional investors balance into the country's burgeoning futures

market. Currently Only 5 percent of investors in China's commodity futures markets are

commodity producers and consumers, while the remaining 95 percent are private investors.

He also is encouraging the government to let companies use money they borrow from banks for

hedging in the future market, though not to allow those funds for speculation. DCE shall provide

assistance to members in technology upgrading so as so as to improve their technical trading

system.

The exchange shall intensify its efforts in following areas: a more efficient new commodity

futures approval mechanism, promote the integration of futures transaction and cash transaction;

increase the support of futures market to industries, and strengthen the link between futures


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market industries; conduct research on and develop option and commodity index futures

products to promote the integration of commodities and financial products.

History:

Dalian Commodity Exchange (DCE) was established on February 28, 1993. Since the

establishment, it has been an important player in the production and circulation of mainland

soybeans. Over the next decade of market ratification, DCE earned a reputation among investors

for its financial integrity with prudent risk management and great market functionality in

international price correlation, transparency and liquidity.

In the first few years after the introduction of commodity markets, new exchanges opened with

wild abandon, and speculative volume ballooned. Soon a directive titled The Notice of Firmly

Curbing the Blind Development of the Futures Market was launched.

In October 1994, the State Council rectified over 50 futures exchanges down to 15 futures

exchanges, delisted 20 futures contracts (leaving 35), began issuing licenses to futures

commission merchants for the first time while lopping their number by over 70%, restricted

trading on foreign futures exchanges, introduced new rules and regulations, and shifted the

control of the exchanges from local governments to regulatory authorities. DCE's market share

then ranked No. 9 in China with Dry kelp as a pilot product.[5] DCE traded soybeans and corn

back then.

Continued abuse in the market brought forth the Second Rectification in 1998, most of the

surviving 15 futures exchanges were restructured, and subsequently closed. Three national level

future exchanges emerged: Shanghai Metal Exchange, Dalian Commodity Exchange, Zhengzhou

Commodity Exchange. The number of futures contracts was cut back further to 12 from 35, and

more brokers were closed, leaving just 175 standing from the early 1990s peak of 1,000. Margins

were standardized and regulations further toughened. Trading on foreign futures exchanges wasfurther restricted to a small number of large, global entities. Soybeans, soy meal and beer barley

were traded at DCE.

The post-rectification Chinese futures exchanges are financially independent of any government

body. On the one hand, that means they have to make do without the public subsidies of the


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hyper-competitive pre-rectification days (in fact they had to pay back investments made by the

local governments), but on the other hand rising volumes and the more rationalized industry

structure has kept revenues quite healthy.

On July 17, 2000, DCE restarted trading soy meal, the first product listed since the lasttumultuous rectification of China's futures exchanges. Until 2004, soy meal futures had been one

of the most rapidly developing futures contract at China's futures market.

On March 15, 2002, DCE started trading No.1 soybeans futures (Non-GMO soybeans). It

quickly became the largest agricultural futures contract in China and the largest Non-GMO

soybeans futures contract in the world half a year later. According to the Futures Industry

Association, Dalian's soybean futures volume quickly became the second largest in the world. A

cointegration relationship exists for Dalian Commodity Exchange and Chicago Board of Trade(CBOT) soybean futures prices.

On September 22, 2004, DCE started trading corn futures. On December 22, DCE started trading

No.2 soybeans futures. According to FIA statistics of volume in 2004, DCE ranks No.8 among

international futures exchanges.

On January 9, 2006, DCE started trading soybean oil futures.

On July 31, 2007, linear low density polyethene (LLDPE) futures are traded on the DCE. Theintroduction of LLDPE in 2007 marks the first petrochemical futures contract in the country.

On October 29, 2007, RBD palm oil futures are launched on the DCE to complement the current

edible oil futures structure.

China's economy more than doubled in size in the past decade, turning the country into the

world's top user of commodities such as copper, soy and rice. Though the government says it

wants more financial instruments to help companies hedge risks, regulators aim to avoid a repeat

of the 1990s, when speculation caused prices to soar and some contracts to fail.

According to Wang Xue Qin, a noted expert on the Chinese futures market and also the vice

general economist of Zhengzhou Commodities Exchange, in theory, a new contract can be listed

upon approval by the CSRC. In practice, the CSRC wont approve a product unless a consensus


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has been formed by the State Council and almost any ministry or commission that has some

interest in the product. For some products that means over 10 ministries and commissions have

to weigh in before a new contract gets a green light.

Another aspect of the approval process that makes for cautious approval, if one were needed, isthat regulators and others with some tie to the product demand from the exchanges a virtual

guarantee of success. Unlike the western system where the exchanges are free to fail or look

foolish, failure could mean loss of face and career risk for too many parties in Chinas hybrid

system.

According to the management, there will be more new contracts, pending from the favorable

development in terms of types of products, market awareness and quality of participation over

the coming few years, as futures are a key risk hedging component to an economy that isbecoming more market-oriented and subject to global trade.

Realized Price and Predicted Price: Futures trading at work:

Commodity Futures form an advanced clearing function for the physical commodity clearing.

Each Futures contract would generate a particular pattern of cash flow and cash commitment at a

given price between the counterparties. In a Futures contract, payments are being made all along

the life of the contract, whenever the Futures price changes. This is called "mark to market".

Concretely, these payments involve additions and subtractions from "margin accounts" held at

the Futures clearinghouse. It is significant that both the long and short side have to put up

margin, because at the moment the contract is entered, both are in a sense equally likely to lose

and so equally likely to have to make a payment to the other side. By means of Margin Calls,

Commodity Futures shifts future imbalances between cash inflows and outflows into the present.

Financial crisis in the present can also arise when these future imbalances get so large that they

disrupt the present.

At any moment, a particular pattern of cash flows and cash commitments resolves itself into a

particular pattern of clearing and settlement. Deficit Agents in the trade will need to borrow cash

from banks today to delay settlement of that Commodity Futures. Of course, banks will not hold

this risk unless they are compensated by an expectation of profit. But by means of credit, current

imbalances are pushed into the future where, hopefully, they can be offset against a pattern of


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imbalances going the other way. And the elastic availability of such promises to pay are the

essential source of elasticity in the payment system. In some sense, the futures market works just

the opposite from the credit market. The credit market operates to postpone settlement until a

future date or dates, while the futures market operates to accelerate settlement to a present date

or dates.

It is important to emphasize that Futures contracts, like debt contracts, are in zero net supply in

the aggregate economy. One person's long contract is another person's short contract. Further, the

quantity of outstanding contracts, called the open interest, has no tight relation to the quantity of

the underlying. It's an approximate measure of the elasticity of uncertainty relative to the

convergence of price.

NYSE EURONEXT:Link: http://www.nyse.com/about/1088808971270.htmlOverview

NYSE completed its acquisition of Archipelago Holdings via reverse takeover on March 7, 2006

in a 10 billion USD deal to create the NYSE Group. The NYSE Group became a for-profit

corporation and began trading publicly on its own stock exchange on March 8, 2006 under theNYX ticker. Owners of the 1,366 NYSE seats received 80,177 shares of NYSE Group stock plus

US$300,000 in cash and US$70,571 in dividends. NYSE Group merged with Euronext on April

4, 2007 to form the first global equities exchange.

Merger of EURONEXT and NYSE Group:

Due to apparent moves by NASDAQ to acquire the London Stock Exchange, NYSE Groupoffered 8 billion euros in cash and shares for Euronext on May 22, 2006, outbidding a rival offer

for the European Stock exchange operator from Germany's Deutsche Brse, the German stock

market.[1] Contrary to statements that it would not raise its bid, on May 23, 2006, Deutsche

Brse unveiled a merger bid for Euronext, valuing the pan-European exchange at US$11 billion


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(8.6bn), 600 million over NYSE Group's initia l bid. [2] Despite this, NYSE Group and

Euronext penned a merger agreement, subject to shareholder vote and regulatory approval. The

initial regulatory response by SEC chief Christopher Cox (who was coordinating heavily with

European counterparts) was positive, with an expected approval by the end of 2007.[3] The new

firm, tentatively dubbed NYSE Euronext, would be headquartered in New York City, with

European operations and its trading platform run out of Paris. NYSE CEO John Thain, who

would head NYSE Euronext, intends to use the combination to form the world's first global stock

market, with continuous trading of stocks and derivatives over a 21-hour time span. In addition,

the two exchanges hoped to add Borsa Italiana (the Milan stock exchange) into the grouping. On

June 23, 2007, the Borsa Italiana was however sold to the London Stock Exchange.

Deutsche Brse dropped out of the bidding for Euronext on November 15, 2006, removing the

last major hurdle for the NYSE Euronext transaction. A run-up of NYSE Group's stock price in

late 2006 made the offering far more attractive to Euronext's shareholders. On December 19,

2006, Euronext shareholders approved the transaction by a 98.2% margin. The remainder voted

in favor of the Deutsche Brse offer. Jean-Francois Theodore, the Chief Executive Officer of

Euronext, stated that they expected the transaction to close within three or four months.[6] Some

of the regulatory agencies with jurisdiction over the merger had already given approval. NYSE

Group shareholders gave their approval on December 20, 2006. The NYSE consummated its

US$11 billion takeover of Paris-based exchange operator Euronext NV at ceremonies in the U.S.

and Europe on April 4, 2007.

Locations:

Below is a list of major NYSE Euronext locations:

Brussels, Belgium Euronext Brussels

Paris, France Euronext Paris

Amsterdam, Netherlands Euronext Amsterdam


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Lisbon, Portugal Euronext Lisbon

London, United Kingdom Euronext.liffe

Chicago, Illinois, United States of America NYSE Arca (formerly Archipelago)

New York City, New York, United States of America NYSE, Headquarters

New York City, New York, United States of America AMEX (To be relocated to

NYSE headquarters)

San Francisco, California, United States of America NYSE Arca (formerly Pacific

Exchange)

Belfast, Northern Ireland part of the NYSE EURONEXT Technologies branch followingthe acquisition of Wombat Financial Software which had a Centre of Excellence based in the

City.

NYSE EURONEXT also owns 25% of the Doha Securities Market.

NCDEX:

Profile:

National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed

on-line multi commodity exchange. The shareholders are:

Promoter shareholders: Life Insurance Corporation of India (LIC), National Bank for Agriculture

and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE) .

Other shareholders: Canara Bank, CRISIL Limited (formerly the Credit Rating Information

Services of India Limited), Goldman Sachs, Intercontinental Exchange (ICE), Indian FarmersFertiliser Cooperative Limited (IFFCO) and Punjab National Bank (PNB).

NCDEX is the only commodity exchange in the country promoted by national level institutions.

This unique parentage enables it to offer a bouquet of benefits, which are currently in short

supply in the commodity markets. The institutional promoters and shareholders of NCDEX are


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prominent players in their respective fields and bring with them institutional building experience,

trust, nationwide reach, technology and risk management skills.

NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act,

1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It commencedits operations on December 15, 2003.

NCDEX is a nation-level, technology driven de-mutualised on-line commodity exchange with an

independent Board of Directors and professional management - both not having any vested

interest in commodity markets. It is committed to provide a world-class commodity exchange

platform for market participants to trade in a wide spectrum of commodity derivatives driven by

best global practices, professionalism and transparency.

NCDEX is regulated by Forward Markets Commission. NCDEX is subjected to various laws of

the land like the Forward Contracts (Regulation) Act, Companies Act, Stamp Act, Contract Act

and various other legislations.

NCDEX is located in Mumbai and offers facilities to its members about 550 centres throughout

India. The reach will gradually be expanded to more centres.

NCDEX currently facilitates trading of 57 commodities -

Agriculture:

Barley, Cashew, Castor Seed, Chana, Chilli, Coffee - Arabica, Coffee - Robusta, Crude Palm

Oil, Cotton Seed Oilcake, Expeller Mustard Oil, Groundnut (in shell), Groundnut Expeller Oil,

Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Indian Parboiled Rice, Indian Pusa

Basmati Rice, Indian Traditional Basmati Rice, Indian Raw Rice, Indian 28.5 mm Cotton, Indian

31 mm Cotton, Masoor Grain Bold, Medium Staple Cotton, Mentha Oil, Mulberry Green

Cocoons, Mulberry Raw Silk, Mustard Seed, Pepper, Potato, Raw Jute, Rapeseed-Mustard Seed

Oilcake, RBD Palmolein, Refined Soy Oil, Rubber, Sesame Seeds, Soybean, Sugar, Yellow

Soybean Meal, Tur, Turmeric, Urad, V-797 Kapas, Wheat, Yellow Peas, Yellow Red Maize.


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Metals:

Aluminum, Electrolytic Copper Cathode, Gold, Mild Steel Ingots, Nickel Cathode, Silver,

Sponge Iron, Zinc Ingot.

Energy:

Brent Crude Oil, Furnace Oil. At subsequent phases trading in more commodities would be

facilitated.

MCX:Overview

Headquartered in the financial capital of India, Mumbai, MCX (www.mcxindia.com ) is a

demutualised nationwide electronic multi commodity futures exchange set up by Financial

Technologies with permanent recognition from Government of India for facilitating online

trading, clearing & settlement operations for futures market across the country. The exchange

started operations in November 2003.

Apart from being accredited with ISO 9001:2000 for quality standards, MCX offers futures

trading in 55 commodities as on December 31, 2007, defined in terms of the type of contracts

offered, from various market segments including bullion, energy, ferrous and non-ferrous metals,

oils and oil seeds, cereals, pulses, plantations, spices, plastics and fibres. The exchange strives to

be at the forefront of developments in the commodities futures industry and has forged ten

strategic alliances across the world, including with Tokyo Commodity Exchange, Chicago

Climate Exchange, London Metal Exchange, New York Mercantile Exchange, New York Board

of Trade and Bursa Malaysia Derivatives, Berhad.

Key shareholders:

The Key shareholders in MCX are: State Bank of India and its associates (SBI), National Bank

for Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd.

(NSE), SBI Life Insurance Co. Ltd., Bank of India (BoI) , Bank of Baroda ( BoB ), Union Bank
http://www.mcxindia.com/http://www.mcxindia.com/http://www.mcxindia.com/http://www.mcxindia.com/


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of India, Corporation Bank, Canara Bank, HDFC Bank,Benett Coleman & Company Limited ,

Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, ICICI Trusteeship Service

Limited, IL&FS Trust Company Limited, Kotak group, Citibank Strategic Holdings Mauritius

Limited, Merrill Lynch Holdings (Mauritius) and Financial Technologies of India Ltd

Trading:

MCX employs state-of-the-art, new generation integrated trading platform that permits faster and

efficient operations in a cost effective manner. The Exchange Central System is located in

Mumbai, and maintains the Central Order Book, which matches the trades on a pre-defined

matching algorithm, and confirms the execution of trades to the members on an online real-t ime

basis. It has an integrated Surveillance and Settlement System. Exchange members located

across the country are connected to the central system through VSAT, Leased line, Internet orany other mode of communication as permitted by the Exchange. The Exchange also has a

Disaster Recovery Site

Risk Management:

The central objective of MCX's Risk Management System is to assess and manage the risk of the

market in an expeditious manner to ensure smooth and timely pay-in/ pay-out process of the

Exchange. Some of the basic functions of Risk Management are as follows

Real-time Margining System at client level

Monitoring of position limits (Quantity)

Capital adequacy norms

Daily price limits

Initial margins

Special margins


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Marked-to-market margin

Delivery period margin

Clearing and Settlement:

The Clearing and Settlement System of the Exchange is system driven and rule based. The

Exchange has its own in-house clearing house, which undertakes to clear each and every trade

and is counter-party for all trades; thus offering novation (zero counter-party risk) to each and

every trade executed on the Exchange

Clearing Bank Interface:

Exchange maintains electronic interface with its Clearing Banks. All members of the exchange

have their Settlement and Client Accounts for exchange operations with the Clearing Bank. All

debits and credits are conducted electronically through Settlement account only.

Delivery and Final Settlement:

All contracts on maturity are for delivery. MCX specifies tender and delivery periods. For

example, such periods can be from the 8th working day till the 15th day of the month - where

15th is the last trading day of the contract month - as tender and/ or delivery period. A seller or a

short open position holder in that contract may tender documents to the exchange expressing his

intention to deliver the underlying commodity. The exchange would then select the buyer from

the long open position holder for the tendered quantity. Once the buyer is identified, seller has to

initiate the delivery process and the buyer has to take delivery according to the delivery schedule

prescribed by the exchange.

COMMODITY MARKET:The gradual evolution of commodity market in India has been of great significance for our

country's economic prosperity. In the Indian commodity market there are so many verities of

products including agricultural products like rice, wheat, cattle etc; energy products like coal,


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petroleum, kerosene, gasoline; metals like copper, gold, silver, aluminum and many more. There

are some delicate commodities also such as sugar, cocoa, and coffee, which is perishable, so

cannot be put in stock for long time. The commodity futures exchanges were evolved in 1800

with the sole objective of meeting the demand of exchangeable contracts for trading agricultural

commodities. Nowadays a wide range of agricultural products, energy products, delicate

commodities and metals can be sold under standardized contracts on exchanges prevailing across

the globe. Commodities have gained importance with the development of commodity futures

indexes along with the mobilization of more resources in the commodity market.

Commodity Futures Markets in India:

Agriculture sector in India has always been a major field of government intervention since long

back. Government tries to protect the interests of the poor Indian farmers by procuring crops atremunerative prices directly from the farmers without involving middlemen in between. This

way Government maintains sufficient buffer stocks and at the same time provides the farmers

safeguard against the fluctuating food crop prices. But government at the same time has

restricted this traditional sector by fixing prices of crops at a particular level and also by

imposing several other restrictions on export and import of agricultural commodities. All these

restrictions prevented this sector to move out its traditional features. So according to many

economists liberalization of this traditional agricultural sector could have been of great benefit to

our economy. But questions will naturally come up about the maintenance of buffer stocks and

provisions of remunerative prices to the farmers. In absence of government's intervention

farmers will not be getting any prior information about the future markets of their products.

Naturally a sudden price crash of food crops will have devastating effects on farmers. Here

comes the significant role of futures market. If the buyers in the commodity market anticipate

shortage of a particular crop in the coming season, future price of that crop will increase now and

this will act as a signal to the farmers who will accordingly plan their seeding decisions for the

next season. In the same way, an increase in future demand of food crops will be reflected in the

today's price in futures market. In this way the system of futures market can be of great help to

the Indian farmers preventing them from being directly exposed to the unexpected price changes

all of a sudden. It also helps towards evolving a better cropping pattern in our country.


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If the peasants are farming some crop now and are very much concerned that price will crash by

the time the crop comes in, then if there is futures market, they will have the option to sell their

products in it. Price in the future markets being fixed; by selling products in future markets they

get rid of their worries about the about the unexpected price fall. This helps them to take the risk

of innovations, by using new high yielding varieties of seeds, fertilizers and new techniques of

cultivation. Futures Market will act as a smoothing agent between the present and future

commodity market. If the price, which is going to prevail in future, is high compared to what is it

now, then the arbitragers would like to buy the commodities now to sell those in future. The

reverse process is also true. So the existence of a futures market is always good for any

economy. It opens up a new opportunity to people to protect themselves from unexpected risks.

Derivatives Market in India:

Derivative markets can broadly be classified as commodity derivative market and financial

derivatives markets. As the name suggest, commodity derivatives markets trade contracts for

which the underlying asset is a commodity. It can be an agricultural commodity like wheat,

soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc. Financial derivatives

markets trade contracts that have a financial asset or variable as the underlying. The most

popular financial derivatives are those, which have equity, interest rates and exchange rates as

the underlying. Financial derivatives are used to hedge the exposure to market risk. The

commodity derivatives differ from the financial derivatives mainly in the following two aspects:

Firstly, due to the bulky nature of the underlying assets, physical settlement in commodity

derivatives creates the need for warehousing. Secondly, in the case of commodities, the quality

of the asset underlying a contract can vary largely.

Some of the major market players in commodities market are: -

Hedgers, Speculators, Investors, Arbitragers

Producers - Farmers

Consumers - refiners, food processing companies, jewelers, textile mills, exporters & importers


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Commodities Market in India:

India has a long history of futures trading in commodities. In India, trading in commodity futures

has been in existence from the nineteenth century with organised trading in cotton, through the

establishment of Bombay Cotton Trade Association Ltd. in 1875. Over a period of time, othercommodities were permitted to be traded in futures exchanges. Spot trading in India occurs

mostly in regional mandis and unorganised markets, which are fragmented and isolated.

There were booming activities in this market and at one time as many as 110 exchanges were

conducting forward trade in various commodities in the country. The securities market was a

poor cousin of this market as there were not many papers to be traded at that time.

The era of widespread shortages in many essential commodities resulting in inflationary

pressures and the tilt towards socialist policy, in which the role of market forces for resource

allocation got diminished, saw the decline of this market since the mid-1960s. This coupled with

the regulatory constraints in 1960s, resulted in virtual dismantling of the commodities future

markets. It is only in the last decade that commodity future exchanges have been actively

encouraged. However, the markets have been thin with poor liquidity and have not grown to any

significant level.

Indian Policy makers have traditionally coped with the uncertainty and risks associated with

price volatility by resorting to policy instruments which attempted to minimize or eliminate price

volatility - a virtually closed external trade regime, price control, pervasive government controls

on private sector activities extensive market interventions and crop insurance.

Liberalization of Indian economy since 1991 recognised the role of market and private initiative

for the development of the economy. The much maligned market instruments such as the futures

trading were also given due recognition. After some halting efforts since 1994 when Prof. Kabra

Committee submitted its report, the late 1990s spilling into the new millennium, saw some boldinitiatives in the commodity market.

A three-pronged approach has been adopted to revive and revitalise this market. Firstly, on

policy front many legal and administrative hurdles in the functioning of the market have been

removed. Forward trading was permitted in cotton and jute goods in 1998, followed by some


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oilseeds and their derivatives, such as groundnut, mustard seed, sesame, cottonseed etc. in 1999.

A statement in the first ever National Agriculture Policy, issued in July, 2000 by the government

that futures trading will be encouraged in increasing number of agricultural commodities was

indicative of welcome change in the government policy towards forward trading. Secondly,

strengthening of infrastructure and institutional capabilities of the regulator and the existing

exchanges received priority. Thirdly, as the existing exchanges are slow to adopt reforms due to

legacy or lack of resources, new promoters with resources and professional approach were being

attracted with a clear mandate to set up demutualised, technology driven exchanges with

nationwide reach and adopting best international practices.

The year 2003 marked the real turning point in the policy framework for commodity market

when the government issued notifications for withdrawing all prohibitions and opening up

forward trading in all the commodities. This period also witnessed other reforms, such as,

amendments to the Essential Commodities Act, Securities (Contract) Rules, which have reduced

bottlenecks in the development and growth of commodity markets. Of the country's total GDP,

commodities related (and dependent) industries constitute about roughly 50-60 %, which itself

cannot be ignored.

Most of the existing Indian commodity exchanges are single commodity platforms; are regional

in nature, run mainly by entities which trade on them resulting in substantial conflict of interests,

opaque in their functioning and have not used technology to scale up their operations and reach

to bring down their costs. But with the strong emergence of: National Multi-commodity

Exchange Ltd., Ahmedabad (NMCE), Multi Commodity Exchange Ltd., Mumbai (MCX),

National Commodities and Derivatives Exchange, Mumbai (NCDEX), and National Board of

Trade, Indore (NBOT), all these shortcomings will be addressed rapidly. These exchanges are

expected to be role model to other exchanges and are likely to compete for trade not only among

themselves but also with the existing exchanges.

The recent policy changes and upbeat sentiments about the economy, particularly agriculture,

have created lot of interest and euphoria about the commodity markets. Even though a large

number of the traditional exchanges are showing flat volume, this has not weakened excitement

among new participants. Many of these exchanges have been permitted with a view to extend the


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culture and tradition of forward trading to new areas and commodities and also to introduce new

technology and practices.

The current mindset of the people in India is that the Commodity exchanges are speculative (due

to non delivery) and are not meant for actual users. One major reason being that the awareness islacking amongst actual users. In India, Interest rate risks, exchange rate risks are actively

managed, but the same does not hold true for the commodity risks. Some additional impediments

are centered around the safety, transparency and taxation issues.

Which Commodities are suitable for Future Trading?

The following are some of the key factors, which decide the suitability of the commodities for

future trading:

The commodity should be competitive, i.e., there should be large demand for and supply of the

commodity - no individual or group of persons acting in concert should be in a position to

influence the demand or supply, and consequently the price substantially.

There should be fluctuations in price.

The market for the commodity should be free from substantial government control.

The commodity should have long shelf life and be capable of standardization and gradation.

Need For Futures Trading In Commodities:

Commodity Futures, which forms an essential component of Commodity Exchange, can be

broadly classified into precious metals, agriculture, energy and other metals. Current futures

volumes are miniscule compared to underlying spot market volumes and thus have a tremendous

potential in the near future.

Futures trading in commodities results in transparent and fair price discovery on account of

large-scale participations of entities associated with different value chains. It reflects views and

expectations of a wider section of people related to a particular commodity. It also provides

effective platform for price risk management for all segments of players ranging from producers,

traders and processors to exporters/importers and end-users of a commodity.


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It also helps in improving the cropping pattern for the farmers, thus minimizing the losses to the

farmers. It acts as a smart investment choice by providing hedging, trading and arbitrage

opportunities to market players. Historically, pricing in commodities futures has been less

volatile compared with equity and bonds, thus providing an efficient portfolio diversification

option.

Raw materials form the most key element of most of the industries. The significance of raw

materials can further be strengthened by the fact that the "increase in raw material cost means

reduction in share prices". In other words "Share prices mimic the commodity price movements".

Industry in India today runs the raw material price risk; hence going forward the industry can

hedge this risk by trading in the commodities market.

Regulatory Body:

The Forward Markets Commission (FMC) is the regulatory body for commodity futures/forward

trade in India. The commission was set up under the Forward Contracts (Regulation) Act of

1952. It is responsible for regulating and promoting futures/forward trade in commodities. The

FMC is headquartered in Mumbai while its regional office is located in Kolkata. Curbing the

illegal activities of the diehard traders who continued to trade illegally is the major role of the

Forward Markets Commission.

Why Commodities Market?

India has very large agriculture production in number of agri-commodities, which needs use of

futures and derivatives as price-risk management system.

Fundamentally price you pay for goods and services depend greatly on how well business handle

risk. By using effectively futures and derivatives, businesses can minimize risks, thus lowering

cost of doing business.

Commodity players use it as a hedge mechanism as well as a means of making money. For e.g.

in the bullion markets, players hedge their risks by using futures Euro-Dollar fluctuations and the

international prices affecting it.


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For an agricultural country like India, with plethora of mandis, trading in over 100 crops, the

issues in price dissemination, standards, certification and warehousing are bound to occur.

Commodity Market will serve as a suitable alternative to tackle all these problems efficiently.

Problems faced by Commodities Markets in India:

Institutional issues have resulted in very few deliveries so far. Currently, there are a lot of hassles

such as octroi duty, logistics. If there is a broker in Mumbai and a broker in Kolkata,

transportation costs, octroi duty, logistical problems prevent trading to take place. Exchanges are

used only to hedge price risk on spot transactions carried out in the local markets. Also multiple

restrictions exist on inter-state movement and warehousing of commodities.

Risks associated with Commodities Markets:

No risk can be eliminated, but the same can be transferred to someone who can handle it better

or to someone who has the appetite for risk. Commodity enterprises primarily face the following

classes of risks, namely: the price risk, the quantity risk, the yield/output risk and the political

risk. Talking about the nationwide commodity exchanges, the risk of the counter party (trading

member, client, vendors etc) not fulfilling his obligations on due date or at any time thereafter is

the most common risk.

This risk is mitigated by collection of the following margins: -

Initial Margins

Exposure margins

Market to market of positions on a daily basis

Position Limits and Intra-day price limits

Surveillance

Commodity price risks include: -

Increase in purchase cost vis--vis commitment on sales price


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Change in value of inventory

Counter party risk translating into commodity price risk

Key Factors For Success Of Commodities Market:

The following are some of the key factors for the success of the commodities markets: -

How one can make the business grow?

How many products are covered?

How many people participate on the platform?

Strategy, method of execution, background of promoters, credibility of the institution,

transparency of platforms, scalable technology, robustness of settlement structures, wider

participation of Hedgers, Speculators and Arbitrageurs, acceptable clearing mechanism, financial

soundness and capability, covering a wide range of commodities, size of the trade guarantee

fund, reach of the organisation and adding value on the ground. In addition to this, if the Indian

Commodity Exchange needs to be competitive in the Global Market, then it should be backed

with proper "Capital Account Convertibility".

The interests of Indian consumers, households and producers are most important, as these are the

people who are exposed to risk and price fluctuations.

Key Expectations of Commodities Exchanges:

The following are some of the key expe ctations of the investors trading in any commodity

exchange: -

To get in place the right regulatory structure to even out the differences that may exist in various

fields.

Proper Product Conceptualization and Design.


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Fair and Transparent Price Discovery & Dissemination.

Robust Trading & Settlement systems.

Effective Management of Counter party Credit Risk.

Self-Regulation to ensure: Overview of Trading and Surveillance, Audit and review of Members,

Enforcement of Exchange rules.

Future Prospects:

With the gradual withdrawal of the government from various sectors in the post-liberalization

era, the need has been felt that various operators in the commodities market be provided with a

mechanism to hedge and transfer their risks. India's obligation under WTO to open agriculture

sector to world trade would require futures trade in a wide variety of primary commodities and

their products to enable diverse market functionaries to cope with the price volatility prevailing

in the world markets. Government subsidy may go down as a result of WTO. The MSP

programme will not be sustainable in such a scenario. The farmer will have to look at ways of

being in a position to trade on commodity exchanges in future. Also, corporates will feel the

pressure to hedge their price risk once the frontiers open up for free trade.

Indian markets have recently thrown open a new avenue for retail investors and traders to

participate: commodity derivatives. For those who want to diversify their portfolios beyond

shares, bonds and real estate, commodity is the best option.

Following are some of the applications, which can utilize the power of the commodity markets

and create a win-win situation for all the involved parties: -

Regulatory Approval / Permission to FII's for trading in the Commodity Markets

FII's are currently not allowed nor disallowed under any law. As, they have added depth to the

equity markets; they will add depth to the commodities markets, since they globally know the

commodities.

Active Involvement of Mutual Fund Industry in India


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Currently Mutual Funds are prohibited from not using derivatives apart from hedging. Mutual

Funds as investors can invest in gold and get returns as they get from debt instruments, equity

markets. AMFI & SEBI need to collectively work towards the same. Launch of the "Commodity

Funds", by the Mutual Funds in India, can serve as a newer investment avenue for investors.

Permission to Banks for acting as Aggregators and Traders

If institutions join this market, confidence of the investor increases. If a bank like SBI decides to

invest in the market, the confidence of investors in the markets goes up. Banks can on behalf of

the farmer's hedge their risks, and get a fee income. Banks can have limits, which can be set up

by the RBI. This requires a change in the Banking Regulation Act, which will take a long time.

This way it can be a win-win-win situation for the market, the banks, and the farmers.

Active Involvement of Small Regional Stock Exchanges

The existing regional stock exchanges (RSE), which have good trading infrastructure in place but

are having tough time due to tiny volumes, should be used for trading commodities. The skills

and infrastructure of these RSE's will be very useful to get a jump ahead in terms of market

development at low cost.

Newer Avenues for trading in Foreign Derivatives Exchanges

Millions of people in India use gold as a financial asset and are constantly exposed to

fluctuations in the price of gold. Hence from the viewpoint of India's securities industry, it would

be great to trade gold futures globally on foreign derivative exchanges - it would yield higher

revenues as well as raise sophistication.

Steady Transition towards Electronic Warehouse Receipts

Commodity Exchanges in India are expected to contribute significantly in strengthening Indian

Economy to face the challenges of globalisation.

Indian markets are poised to witness further development in the areas of "Electronic Warehouse

Receipts" (similar to Demat Shares), which would facilitate seamless nationwide spot market for

commodities.


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Impact of WTO Regime:

India being a signatory to WTO may open up the agricultural and other commodity markets

more to the global competition. India's uniqueness as a major consumption market is an

invitation to the world to explore the Indian market. Indian producers and traders too would havethe opportunity to explore the global markets. Price risk management and quality consciousness

are two important factors to succeed in the global competition. Indian companies are allowed to

participate in the international commodity exchanges to hedge their price risk, resultant from

export and import activities of such companies. But due to the compliance issues and

international exchange rules, 90 % of the commodity traders and producers are not in a position

to participate in the international exchanges.

Convergence of Various Markets

In the near future the integration of the international equity, commodities, forex and debt would

enhance the business opportunities. It will also create specialized treasuries and fund houses that

would offer a gamut of services, thus providing comprehensive risk management solutions to

India's corporate and trade community.

Amendments in the Commodities Act and Implementation of VAT

Amendments to Essential Commodities Act and implementation of Value-Added-tax wouldenable movement of across states and more unified tax regime, which would facilitate easier

trading in commodities.

Introduction of Options Contract

Options contracts in commodities are being considered and this would again boost the

commodity risk management markets in the country.

Thus, Commodity derivatives as an industry is poised to take-off, which may provide the

numerous investors in this country with another opportunity to invest and diversify their

portfolio.

Strong Emergence of the Yellow Metal - GOLD


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Interestingly, gold turned out to be the strongest major currency last fiscal (2002-03) as it

outperformed the other major currencies by between 9 and 25 % over the year. The yellow metal

outperformed the major stock indices too. Over the course of the year, gold outperformed the

dollar by 25 %, the yen by 14 % and the pound sterling by 13 %, the euro by 9 %and the Swiss

franc by 7 %.

India being the largest buyer of Gold in International market can be the market leader in respect

of Price discovery and Price formation in International market, if a transparent Gold Exchange at

national level is set up with widespread participation.

Structured Commodity Financing: (Asset-backed Financing)

In Structured Finance, collateral is assigned and an automatic reimbursement procedure is

devised. It can be made available as receivable-backed financing and inventory financing. The

clients retain the economic benefits and risks of ownership by transacting a swap. For successful

implementation of Structured financing in India, the rural banking infrastructure should be made

strong, the government should come across with strong policies and lastly there should be

increased awareness and training

Groundnut in Indian Commodity Markets

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