A commodity market facilitates trading in various commodities. It may be a spot or a derivatives market. In spot market, commodities are bought and sold for immediate delivery, whereas in derivatives market, various financial instruments based on commodities are traded. These financial instruments such as ‘futures’ are traded in exchanges.
A commodity futures contract is an agreement between two parties to buy or sell the commodity at a future date at today’s future price. Futures contracts differ from forward contracts in the sense that they are standardized and exchange traded. In other words, the parties to the contracts do not decide the terms of futures contracts; but they merely accept terms standardized by the Exchange.
Commodity futures market was very much there in earlier times in India. In fact it was one the most vibrant markets till the early 70s. But due to numerous restrictions the market could not develop further. Now that most of these restrictions have been removed, there is enormous scope for the development and growth of the commodity futures market in the country.
SEBI regulates commodity market.
There are 24 commodity exchanges in India. There are three national level commodity exchanges to trade in all permitted commodities. They are:
Multi Commodity Exchange Of India Ltd, Mumbai (MCX)
MCX is an independent and de-mutualised multi commodity exchange. MCX features amongst the world’s top three bullion exchanges and top four energy exchanges. Its key shareholders are Financial Technologies (I) Ltd., State Bank of India and it’s associates, National Bank for Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund (Mauritius) Ltd. – an affiliate of Fidelity International, Corporation Bank, Union Bank of India, Canara Bank, Bank of India, Bank of Baroda, HDFC Bank and SBI Life Insurance Co. Ltd.
National Commodity And Derivative Exchange, Mumbai (NCDEX)
A consortium of institutions promotes NCDEX. These include the ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE).
National Multi Commodity Exchange Of India Ltd, Ahmedabad (NMCE)
It is the first de-mutualised electronic multi-commodity Exchange of India. Some of its key promoters are Central Warehousing Corporation (CWC), National Agricultural Co Operative Marketing Federation of India Limited (NAFED), Gujarat Agro Industries Corporation Limited (GAIC) and Punjab National Bank (PNB).
Transparency and Fair Price Discovery: Trading in commodity futures is transparent and a process of fair price discovery is ensured through large-scale participation. The large participation also reflects views and expectations of a wider section of people concerned with that commodity.
Online Platform: Producers, traders and processors, exporters/importers get an online platform through MCX / NCDEX for price risk management.
It provides a platform for producers to hedge their positions according to their exposure in physical commodity.
No Insider Trading
Dealing in commodities is free from the evils of insider trading. Besides, there are no company specific risks as those seen in stock markets.
Commodity trading is about the simple economics of demand and supply. More the demand for a commodity higher is its price and vice versa.
Trade On Low Margin
Commodity Futures traders are required to deposit low margins, roughly 5 to 10% of the total value of the contract, much lower compared to other asset classes. The low margin, which again varies across exchanges and commodities, facilitates the taking of large positions at lower capital.
Quite often provide clue to both short and long term players.
No Counter Party Risk
Much like the exchanges in the equity market, Commodity Futures market have Clearing Houses, which guarantee that the terms of the contracts are fulfilled, thereby eliminating the counter party risk.
The emergence of online trading would enable growth in the commodity market, much akin to the one seen in the equity market. It would also ensure bringing the market closer to both, the user and the trader.
The rise in participation would decrease the risk of cartelization, ensuring a holistic view on the commodity. Hence, pricing would be more practical and less irrational leading to Fair Price Discovery Mechanism.
- Producers / Farmers.
- Importers / Exporters.
- Commodity financers.
- Agricultural credit providing agencies.
- Hedgers, speculators, arbitrageurs.
- Large scale consumers. For e.g. refiners, jewelers, textile mills
- Corporate having risk exposure in commodities
|Commodity Futures||Equity Futures|
|Exchanges||NCDEX, MCX||BSE, NSE, MSEI|
|Assets||Metals, Energy & Agro Commodities||Stocks|
|Sales Tax||Applicable||Not Applicable|
|Delivery||Physical / Cash Settlement||Cash Settlement|
|Quality Applicable||Not Applicable||Applicable|
|Working Days||Mon to Sat||Mon to Fri|
|Timing||10 am – 11.55 pm
10 am – 2.00 pm (SAT)
|9.15 am – 3.30 pm|
|Bullion||Gold and Silver|
|Oil & Oilseeds||Castor Seeds, Soy Seeds, Castor Oil, Refined Soy Oil, Soy meal, Crude Palm Oil, Groundnut Oil, Mustard Seed, Mustard Seed Oil, Cottonseed Oilcake, Cottonseed|
|Spices||Pepper, Red Chilli, Jeera, Turmeric, Cardamom|
|Metals||Steel Long, Steel Flat, Copper, Nickel, Tin, Steel, Aluminium Zinc ingots|
|Fibre||Kapas, Long Staple Cotton, Medium Staple Cotton|
|Pulses||Chana, Urad, Yellow Peas, Tur, Yellow Peas|
|Grains||Rice, Basmati Rice, Wheat, Maize, Sarbati Rice, Jeera|
|Energy||Crude Oil, Natural Gas, Brent Crude|
|Others||Rubber, Guar Seed, Guar gum, Cashew, Cashew Kernel, Sugar, Gur, Coffee, Silk, Sugar.|
The exchanges, in order to maintain the futures prices in line with the spot market, have made available provisions of settlement of contracts by physical delivery. They also make sure that the futures and spot prices coincide during the settlement so that the fair price discovery mechanism is in place.
It’s not mandatory. However there is always a provision for delivery in commodity futures trading to ensure that the future prices are in conformity with the underlying. The right for delivery is normally with the seller; the buyer/seller has to express his intention for delivery about five to seven days before the expiry. However provisions vary from exchange to exchange and commodity to commodity. The market lot for delivery is different for few commodities (higher than the trading lot). The contracts that are not assigned for delivery will be settled in cash.
Normally, at the NCDEX three consecutive calendar month contracts will be available. The MCX is providing different number of contracts for different commodities. For example, in gold there are six contracts in a year (February, April, June, August, October and December) but at a time only three contracts are open for trading.
The clearing and settlement will take place through institutions/banks arranged by the exchanges. NCDEX has tied up with NSCCL for clearing purpose. The clearing banks are Canara Bank, HDFC, ICICI and UTI Bank. MCX has tied up with HDFC Bank, BOI, UTI Bank, UBI and IndusInd Bank for providing clearing and settlement facilities
MTM will be cash-settled by exchange on T+1 basis i.e., next working day after the trading day. However in case of delivery, the settlement date may be five to seven days after the expiry as per contract specifications and exchange rules. The settlement procedure is also available on the related exchange site.
The quality specification of each commodity is mentioned in the contract. Each participant will be trading in that particular quality only.
If the trade is squared off sales tax is not applicable. The sales tax is applicable only if a trade results into delivery for the seller. Normally it’s the seller’s responsibility to collect and pay the sales tax. The sales tax is applicable at the place of delivery.
Those who want to give (seller) physical delivery need to have sales tax registration number.
Options in goods are presently prohibited under Forward Contracts (Regulation) Act, 1952. No exchange or person can organize or enter into or make or perform options in goods. However the market expects the government to permit options trading in commodities soon.
Moneylicous Capital & Advisory Services Private Limited has been providing commodity trading facilities and related products and services. Besides access to the best of research in the form of Daily Fundamentals & Technical Reports on highly traded commodities, our clients also get access to our exclusive Customized Trading Advice.
Trading Through Moneylicious: An Enriching Experience
Client at Moneylicious gets access to the best of research in the form of Daily Fundamental and Technical Research Reports on extensively traded commodities.
One Stop Shop:
Moneylicious provides end-to-end advice for all the commodities to all our prestigious individual investors. Privileged customers also get exclusive & customized advice.
Moneylicious has membership to MCX and NCDEX Exchanges that gives the clients to take advantage of the dual exchange trading facility provided by us.
We provide personalized service through dedicated relationship managers for quick and efficient execution of transactions and for regular follow-ups.