1. What is a commodity market?
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.
2. What are commodity futures?
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.
3. Is the concept of trading in commodity futures
new in India? Commodity futures
market has been in existence in India for centuries. The Government of India
banned futures trading in certain commodities in 70s.
However trading in commodity futures has been permitted again by the government
in order to help the Commodity producers, traders and investors.
Worldwide, commodity exchanges originated before the other financial exchanges.
In fact most of the derivatives instruments had their birth in commodity
exchanges.
4. What are the major commodity Exchanges?
There are 24 commodity exchanges in India. The
Government of India permitted establishment of National-level Multi-Commodity
exchanges in the year 2002 and accordingly three exchanges have come into
picture. They are –
-
Multi-Commodity Exchange of India Ltd, Mumbai (MCX).
-
National Commodity and Derivatives Exchange of India, Mumbai (NCDEX).
-
National Multi Commodity Exchange, Ahmedabad (NMCE).
At international level there are major commodity exchanges in USA, Japan and
UK. Some of the most popular exchanges around the world are given below along
with the major commodities traded:
|
EXCHANGE
|
MAJOR COMMODITIES TRADED
|
|
New York Mercantile Exchange (NYMEX)
|
Crude Oil, Heating Oil
|
|
Chicago Board of Trade
|
Soy Oil, Soy Beans, Corn
|
|
London Metals Exchange
|
Aluminium, Copper, Tin, Lead
|
|
Chicago Board Option Exchange
|
Options on Energy, Interest rate
|
|
Tokyo Commodity Exchange
|
Silver, Gold, Crude oil, Rubber
|
|
Malaysian Derivatives Exchange
|
Rubber, Soy Oil, Palm Oil
|
5. Commodity markets are small. Aren’t They?
This is the biggest myth about the commodities
market. Commodities (spot) Markets in India are about Rs.11 trillion worth per
annum. Internationally the futures market in commodities is 5 - 20 times that
of the spot market. Look at the table given below.
Even if we assume a 5 times multiple the commodity futures markets can grow up
to become Rs.55 trillion.
|
Market
|
Annual Physical trade (Rs. Cr.)
|
3 time multiple (Rs. in Cr.)
|
5 time multiple (Rs. in Cr.)
|
|
Bullion
|
40,000
|
1,20,000
|
2,00,000
|
|
Metals
|
60,000
|
1,80,000
|
3,00,000
|
|
Agriculture
|
5,00,000
|
15,00,000
|
25,00,000
|
|
Energy
|
5,00,000
|
15,00,000
|
25,00,000
|
|
Total
|
11,00,000
|
33,00,000
|
55,00,000
|
|
Per Day
|
4400
|
13200
|
22000
|
6. What are the working hours for the commodity
exchanges?
Commodity Exchanges (MCX and NCDEX) function from
10.00 AM to 11.55 PM with a break of 30 minutes between 5.00 PM and 5.30 PM.
However some specific commodities with strong international price linkages
(such as Gold, Silver, Soy oil, Crude Oil etc) are allowed to be traded after
8.00 PM.
7. Who regulates the commodity exchanges?
Forwards Market Commission (FMC) regulates commodity
exchanges; Forwards Market Commission is under the purview of the Ministry of
Consumer Affairs and Public Distribution.
8. Why invest in commodities?
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.
Hedging: 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.
Simple Economics: 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.
Seasonality Patterns: 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.
Wide Participation: 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.
Evolved Pricing: The rise in participation would decrease the risk of
cartelisation, ensuring a holistic view on the commodity. Hence, pricing would
be more practical and less irrational leading to Fair Price Discovery Mechanism.
9. Who benefits from dealing in commodity futures
and how?
Commodity futures are beneficial to a large section
of the society, be it farmer, businessmen, industrialist, importer, exporter,
consumer et all.
If you are an investor, commodities futures represent a good form of investment
because of the following reasons -
-
Diversification
– The returns from commodities market are free from the direct influence of the
equity and debt market, which means that they are capable of being used as
effective hedging instruments providing better diversification.
-
Less Manipulations
- Commodities markets, as international price movements govern them are less
prone to rigging or price manipulations by individuals.
-
High Leverage – The margins in the commodity futures market are less
than the F&O section of the equity market.
If you are an importer or an exporter, commodities futures can help you in the
following ways…
-
Hedge against price fluctuations – Wide fluctuations in the prices of
import or export products can directly affect your bottom-line as the price at
which you import/export is fixed before-hand. Commodity futures help you to
procure or sell the commodities at a price decided months before the actual
transaction, thereby ironing out any fluctuation in prices that happen
subsequently.
If you are a producer of a commodity, futures can help you as follows:
-
Lock-in the price for your produce
– If you are a farmer, there is every chance that the price of your produce may
come down drastically at the time of harvest. By taking positions in commodity
futures you can effectively lock-in the price at which you wish to sell your
produce.
-
Assured demand
– Any glut in the market can make you wait unendingly for a buyer. Selling
commodity futures contract can give you assured demand at the time of harvest.
-
Increase in holding power – You can store the underlying commodity in
exchange approved warehouse and sell in the futures to realize the future value
of the commodity.
If you are a large-scale consumer of a product, here is how this market can
help you:
-
Control your cost
– If you are an industrialist, the raw material cost dictates the final price
of your output. Any sudden rise in the price of raw materials can compel you to
pass on the hike to your customers and make your products unattractive in the
market. By buying commodity futures, you can fix the price of your raw
material.
-
Ensure continuous supply – Any shortfall in the supply of raw materials
can stall your production and make you default on your sale obligations. You
can avoid this risk by buying a commodity futures contract by which you are
assured of supply of a fixed quantity of materials at a pre-decided price at
the appointed time.
10. Who invests in commodities?
-
Investors
-
Producers / Farmers.
-
Importers / Exporters.
-
Commodity financers.
-
Agricultural credit providing agencies.
-
Hedgers, speculators, arbitrageurs.
-
Large scale consumers. For e.g. refiners, jewelers, textile mills.
-
Corporates having risk exposure in commodities.
11. How risky are these markets compared to
stock & bond markets?
Commodity prices are generally less volatile than
the stocks and this has been statistically proven. Therefore it's relatively
safer to trade in commodities.
Also the regulatory authorities ensure through continuous vigil that the
commodity prices are market-driven and free from manipulations.
However all investments are subject to market risk and depends on the
individual decision. There is risk of loss while trading in commodity futures
like any other financial instruments.
12. Give the Comparison between Commodities and
Equities?
|
|
Commodity Futures
|
Equity Futures
|
|
Regulator
|
FMC
|
SEBI
|
|
Exchanges
|
NCDEX, MCX
|
BSE, NSE
|
|
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)
|
10 am - 3.30 pm
|
13. Are the trades/ settlement guaranteed by the
exchanges?
YES, the commodity exchanges have got some of the
most high profile corporate as their promoters.
Multi Commodity exchange of India, promoted by Financial Technologies Ltd has
got on board institutions such as SBI, HDFC Bank, Canara Bank, Corporation
Bank, Bank of India, Union Bank of India, Bank of Baroda.
The National Commodity and Derivatives Exchange (NCDEX) has got NSE, ICICI,
NABARD, CRISIL, LIC, PNB, Canara Bank as the major share-holders.
Such a high profile share-holding provides these exchanges valuable experience,
knowledge and also high standards of operations. Also the exchange guarantees
the settlement of trades and so eliminates the counter-party risk in the
transactions. The exchange for this purpose maintains a Settlement – Guarantee
fund akin to the stock exchanges.
14. How will the clearing and settlement take
place?
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.
15. What is the settlement date?
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.
16. How do I know which quality is being traded in
futures as Commodities have many qualities?
The quality specification of each commodity is
mentioned in the contract. Each participant will be trading in that particular
quality only.
17. Are there physical deliveries in commodity
futures exchanges?
YES, 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
price of futures and spot prices coincide during the settlement so that the
arbitrage opportunities do not exist.
18. How the deliveries are made possible?
The exchange has enlisted certain cities for
specific commodities as the delivery centres. The seller of commodity futures,
upon expiry of the contract may choose to deliver physical stock instead of
settling the positions by cash, in which case he would be required to deliver
the stocks to the specified warehouses. The buyer of the commodity futures, if
he is interested in physical delivery would be matched with a seller and would
be required to take delivery of the specified quantity of stock from the
designated warehouse. World-wide commodity futures are generally used for
hedging and speculation and hence physical deliveries are negligible. However
the possibility of physical delivery has made these markets more attractive in
India. Both NCDEX and MCX have successfully completed physical delivery in
bullions and various agro-commodities.
In case of NCDEX it is mandatory to open a Demat account with an approved DP by
the buyer and seller if they wish to take/ give delivery of goods.
Please note the delivery and settlement procedure differs for each exchange and
commodity. Read the delivery / settlement procedure carefully or contact us
before deciding to give/ take physical delivery.
19. Is delivery mandatory in commodity futures
contract trading?
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.
20. How many months contract will be available for
futures trading?
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.
21. Do I need to pay sales tax on all trades? Is
registration mandatory?
NO. If the trade is squared off no sales tax is
applicable. The sales tax is applicable only in case of trade resulting into
delivery. Normally its seller's responsibility to collect and pay the sales
tax. The sales tax is applicable at the place of delivery. Those who are
willing to opt for physical delivery need to have sales tax registration
number.
22. Are any transaction duty charges imposed on
commodity futures contracts, as in case of stocks?
Although FMC does not levy any transaction charges
as of now, the respective commodity exchanges levy transaction charges.
Transaction charges are in the range of Rs. 4 to Rs. 6 per lakh/per contract,
which may differ for each commodity / exchange.
23. What is the date of expiry?
At NCDEX the contracts expire on 20th day
of each month. If 20th happens to be a holiday the expiry day will
be the previous working day.
At MCX the expiry day is 15th of every month. If 15th happens
to be a holiday the expiry day will be the previous working day. The expiry day
also differs for different commodities in both the exchanges.
24. What are the commodities on which futures
trading take place?
At Present futures are available on the following
commodities.
|
Bullion
|
Gold and Silver
|
|
Oil & Oilseeds
|
Castor Seeds, Soy Seeds, Castor Oil, Refined Soy Oil, Soymeal, RBD Palmolein,
Crude Palm Oil, Groundnut Oil, Mustard Seed, Mustard Seed Oil,
Cottonseed Oilcake, Cottonseed
|
|
Spices
|
Pepper, Red Chilli, Jeera, Turmeric
|
|
Metals
|
Steel Long, Steel Flat, Copper, Nickel, Tin, Steel ingots
|
|
Fibre
|
Kapas, Long Staple Cotton, Medium Staple Cotton
|
|
Pulses
|
Chana, Urad, Yellow Peas, Tur, Yellow Peas
|
| Cereals
|
Rice, Basmati Rice, Wheat, Maize, Sarbati Rice,
Jeera
|
| Energy
|
Crude Oil
|
|
Others
|
Rubber, Guar Seed, Guargum, Cashew, Cashew Kernel, Sugar, Gur, Coffee, Silk
|
25. How much are the margins on these Commodity
futures?
Generally commodity futures require an initial
margin between 5 -10% of the contract value. The exchanges levy higher
additional margin in case of excess volatility. The margin amount varies
between exchanges and commodities. Therefore they provide great benefits of
leverage in comparison to the stock and index futures trade on the stock
exchanges. The exchange also requires the daily profits and losses to be paid
in/out on open positions (Mark to Market or MTM) so that the buyers and sellers
do not carry a risk of not more than one day.
26.Following is a table showing the details #
regarding major commodities traded on MCX & NCDEX
|
MCX
|
|
Commodity
|
Initial Margin
|
Quotation
|
Lot Size
|
Delivery Centre
|
Available months
|
|
Gold
|
3.5%
|
10 Gms
|
1 Kg
|
Mumbai, Ahmedabad
|
Feb, Apr, Jun, Aug, Oct, Dec
|
|
Silver
|
5%
|
1 KG
|
30 KG
|
Ahmedabad
|
Mar, May, Jul, Sep, Dec
|
|
Crude Oil
|
5%
|
1 bbl
|
100 bbls
|
Mumbai
|
All months
|
|
Soy Oil
|
3%
|
10 KG
|
10 MT
|
Indore
|
All months
|
|
Pepper
|
8%
|
10 KG
|
100 KG
|
Kochi
|
All months
|
|
Soy Seed
|
4%
|
1 MT
|
10 MT
|
Indore
|
All months
|
|
NCDEX
|
|
Commodity
|
Initial Margin*
|
Quotation
|
Lot Size
|
Delivery Centre
|
Available months
|
|
Guar Seed
|
5 -10 %
|
100 KG
|
10 MT
|
Jodhpur
|
All months
|
|
Soy Oil
|
5 -10 %
|
100 KG
|
10 MT
|
Indore
|
All months
|
|
Sugar M
|
5 -10 %
|
100 KG
|
10 MT
|
Muzaffarnagar
|
All months
|
Gold
(Sona)
|
5 -10 %
|
10 Gms
|
1 Kg
|
Mumbai
|
Feb, Apr, Jun, Aug, Oct, Dec
|
|
Silver (Chandi)
|
5 -10 %
|
1 KG
|
30 KG
|
New Delhi
|
Mar, May, Jul, Sep, Dec
|
|
Wheat
|
5 -10 %
|
100 KG
|
10 MT
|
Delhi
|
All months
|
|
Pepper
|
5 -10 %
|
100 KG
|
1 MT
|
Kochi
|
All months
|
|
Chana
|
5 -10 %
|
100 KG
|
10 MT
|
Delhi
|
All months
|
|
Urad
|
5 -10 %
|
100 KG
|
10 MT
|
Mumbai
|
All months
|
|
Soy Bean
|
5 -10 %
|
100 KG
|
1 MT
|
Indore, Nagpur, Kota
|
All months
|
* MCX Initial margins are shown above. NCDEX follows SPAN margins, which could
be between 5 -10% depending on volatility.
# The specifications are subject to change by the exchanges / FMC
The list given above covers only the popular commodities and not exhaustive.
27. Are options also allowed in commodity
derivatives?
No. Options in goods are presently prohibited under
Section 19 of the Forward Contracts (Regulation) Act, 1952. No exchange or
person can organise or enter into or make or perform options in goods. However
the market expects the government to permit options trading in commodities
soon.
28. Somebody says that the commodity markets are
smaller in size than equity markets.
In the present condition, it is true. But world over
the commodity markets are multiple times bigger than equities markets. In
India, most of the commodity derivatives were introduced only from December
‘03. However the Government is contemplating various measures to make these
markets bigger and lucrative. The MCX traded value was to the tune of Rs.8587.55
Crores on 20th January 2006 and NCDEX also clocked a record traded
value of Rs.7197 Crores on 22nd August 2005. There are efforts going on
to allow mutual funds to invest in commodities. Such steps will bring in
tremendous liquidity to the market.
29. Which commodities are available for trading in
derivative markets?
Yes. In case of delivery, the margin during the
delivery period increases to 20-25% of the contract value.
30. How is it possible to sell, when one doesn’t
own a commodity?
One doesn't need to have commodity physically or to
own a contract for the commodity to enter into a sale contract in the futures
market. The contract is simply an agreement to sell the physical commodity at a
later date or sell it short. It is possible to repurchase the contract before
the maturity, thereby dispensing with delivery of goods.
31. Commodities have many qualities, how do I know
which quality is being traded in futures?
The specification of each commodity will be given
and mentioned in the contract. Each participant will be trading in that
particular quality only.
32. Is there any notice period if someone wants to
take or give delivery?
The specification of each commodity will be given
and mentioned in the contract. Each participant will be trading in that
particular quality only.
33. How much margin is applicable in the
commodities market? How is it arrived at?
As in stocks, in commodities also the margin is
calculated by VaR system. Normally it is between 4-10% of the contract value.
The margin is different for each commodity. Just like in equities, in
commodities also there is a system of initial margin and mark-to market (MTM)
margin. The margin keeps changing depending on the change in price and
volatility
34. Will there be separate trading
terminals/systems for commodity futures?
Yes. Since the exchanges are separate, the VSATs,
trading terminals, risk management systems; contract notes etc all will be
independent of those for equity futures.
35. How to Start trading in Commodities?
To trade in commodities, you need to contact a
reliable broker and complete the account opening formalities by signing KYC
form and submitting necessary documents.
36. What are the criteria’s one should look into
before selecting a Broker?
To Select a Broker the below mentioned points must
be taken into account:
-
Number of years the broker has been into the Market
-
Availability of evening shift dealing
-
Research Desk and calls through SMS
-
Online trading facility
-
Relationship based services
You can contact us at
commodity@mangalkeshav.com
Also call us at 022 30687965 /30687945 / 30687946
|