NCDEX

Market Participants
o Issuers
o Investors
Retail
Institutional Investors
off market trade cleared & settled without the
participation of clearing corporation
Market Trade - settled through clearing agency
o Intermediaries/Trading Member pool account with NSDL, CDSL
o Stock Exchange
o Regulators
o Clearing Corporation
Clearing Banks
o Depository
Current Structure SEBI
Corporation Finance
Department(CFD)

Market Regulation
Department(MRD)

Investment Management
Department (IMD)

Special Enforcement Cell

(SEC)

Integrated Surveillance
Department(ISD)

Enforcement
Department(EFD)

Investigations
Department(IVD)

Market Intermediaries
Regulation and
Supervision
Department(MIRSD)

Enquiries and Adjudication

Department(EAD)

Office of Investor Assistance

and Education(OIAE)

Legal Affairs
Department(LAD)

Parliament Questions (PQ)

Cell

Department of Economic and

Policy Analysis (DEPA)

General Services
Department (GSD) , (FMD)
, Estb., (T&A) and (P&S)

RTI-Appellate Authority

Human Resources
Development Division (HRD)

Board Matters

Information Technology
Department(ITD)

Official Language Division

(OLD)
Office of International
Affairs(OIA)
Regional Offices(ROs)
FATF and KYC Related
matters

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Current Structure FMC

1) Market Division I
a. Policy Issues, Parliamentary Affairs, International Affairs
b. Governance of Exchanges, New application for recognition of
exchanges
c. Spot Exchanges
d. Warehousing
e. Margins
f. Settlement Guarantee Fund
2) Market Division II
a. New Contracts, Contract designs, Trading Permissions
b. Market Research, Surveys
3) Monitoring & Surveillance
a. Monitoring & Surveillance of trades
b. Inspection & Audit of exchanges
c. Complaints
d. Special Margins
4) Investor Protection Division
a. Complaints against intermediaries
b. Investor Protection Fund
5) Intermediary Division
a. Inspection & audit of exchange members
b. Intermediary registration
6) Planning & Coordination
a. Meeting with exchanges
b. Budget related matters
c. New projects, training programmes
d. Annual reports, bulletin, other reports
7) IT Division
8) Legal Affairs Division
a. Amendment to FCRA
9) Vigilance & Enforcement Division
10)
Administration Division
Market Regulator, Products, Settlement
Market
Money
Market
Bond
Market
FX Market
Commodity
Market
Stock
Market

Regulat
Products
or
RBI
T Bills, CPs, CDs

T+0, T+1, T+2

RBI

G Sec

T+2

RBI
FMC

Currency Futures
Agri Commodities,
Metals, Energy, Bullions
Stocks, IPO, FPO,
Preferred Shares

T+1
T+2

SEBI

Settlement

T+2

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Mutual
Funds
Pension
Funds
Insurance

SEBI

Fund Units

PFRDA
IRDA

FSLRC Financial Sector Legislative Reforms Commission

(2010-11)
o Constituted on 24.03.2011 to harmonise financial sector
legislations, rules and regulations
o To simplify the old rules and regulations which has become
complex over time due to many amendments. It aims to remove
ambiguity and regulatory gaps and bring financial sector reforms
RBI Act 1935 Banks, Debt, FX
SEBI Act 1992 Established in the year 1988, SEBI is a
regulator for the securities market in India and had been
given statutory powers through the SEBI Act, 1992.
Chairman
8 Members 1 Nominee each from MOF, MCA, RBI
PFRDA Act
FCRA Act
SCRA Act 1956
FEMA
Depositories Act 1996 NSDL & CDSL were formed
through depository participants
SEBI (Stock Broker and Sub-Brokers) Regulation 1992
FMC The Forward Markets Commission (FMC), established
in 1953 under the Forward Contracts (Regulation) Act, 1952
is the agency which regulates commodity derivatives
trading in India in the same way as SEBI does for securities
markets
o List of Exchanges 4 National, 6 Regional MCX, NCDEX, NMCE
(Ahmedabad), ICEL, ACE Derivatives & Commodity Exchange,
Universal Commodity Exchange
Convergence at the level of
o Brokerage Firms
o Policy Making
o Exchanges
o Regulators
Proposed Merger - The government has proposed to insert a new
section 28A in FCRA, which shall allow the recognized associations to
be recognized as stock exchanges under the Securities Contract
(Regulation) Act (SCRA). The government has also proposed to insert
new sections 29A and 29B, which shall deal in repealing the FCRA

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and transfer of FMC to SEBI, respectively. All legal actions initiated by

FMC would be continued and enforced by SEBI.1
Behind the said merger is the unspoken intention of government is to
recuperate the lost market confidence after the NSEL payment crisis
which occurred in 2013 and affected the market including the small
investors. It was also in the September 2013 that the FMC was shifted
from the Consumer Affairs Ministry to the Finance Ministry for better
monitoring of the NSEL crises.
The merger will prevent the illicit off-market trades which is prevalent
in many parts of the country. Such off-market trade involves trading in
commodities and stocks which runs into thousands of crores. While the
efforts have been constantly made by various regulators and
enforcement agencies to restrain such practice, the proposed merger
will definitely help in curbing such practice with SEBI being given the
jurisdiction to regulate the commodity market in addition to its well
managed capital market with a good experience with investigation,
search, seizure and taking strict actions.
Initially, the FCRA (Forward Contracts Regulation Act) would be
repealed and the definition of securities under the Securities Contracts
(Regulation) Act and the SEBI Act would be amended to include
commodity derivatives.
UFA (Unified Financial Regulatory Agency) FSLRC proposal to merge
SEBI, IRDA, PFRDA, FMC into a single entity
Indian Financial Code (IFC), proposed by FSLRC
o Pros
o Economies of Scale
Using the infrastructure of equities in the commodities
Streamline Monitoring
Reduce the cost of transaction and compliance for brokers
o Economies of Scope
Common clearing corporation for all segments reduced
risk for clearing corporation from diversification, lower
collateral requirement
o Curb wild speculations increasing liquidity
o Can penetrate each others segment
o Possibility of introduction of new products
o Eliminate informal market
o Cons
Different State Taxes
Regulation of spot markets
Other Budget Proposals
o Financial Data Management Center
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o Financial Sector Appellate Tribunal

o Public Debt Management Agency
o The Resolution Corporation
Services Provided by Brokers
o Portfolio Management Services
o Margin Trading
o Depository Services
o IPO Applications
o Trading of Mutual Fund Units ARN (AMFI Registration Number)
Portfolio Management Services Portfolio advisory services were
earlier allowed in commodities, but were banned by FMC in 2007.
o SEBI Guidelines SEBI (Portfolio Managers) Regulations, 1993
Discretionary & Non-discretionary
Procedure for obtaining registration
Application Fee 1 lac
Registration Fee 10 lac
Validity 3 years
Renewal 5 lac
Net Worth 2 crores
Qualification
Agreement between Portfolio Manager & Investor
Investment Policy Statement
Minimum size 5 lakhs
No lock in period but exit fees allowed
o Foreign Portfolio Investor
FII
Sub Account
QFI (Qualified Foreign Investor)
o Products
o Alternative Investment Funds Commodities, Real Estate,
Private Equity (Equity Linked Instrument), Hedge Funds,
Infrastructure fund, SME, Social Venture
Category I SME, Social, Infrastructure
Category II
Category III HF
AIFs shall state investment strategy, investment purpose,
and its investment methodology
Alteration to be made by approval of 2/3rd of unit holders
Units may be listed on exchanges subject to a minimum
size of Rs. 1 cr
o Commodities
Not for retail investors
Minimum investment amount should be high (Ex 25 lacs
1 cr)
Net Worth should be high
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Managers should have a continuing interest of not less than

2.5% of the corpus or Rs 5 cr whichever is less
Taxation
Commodity ETF - tracking
Common Features of Alternative Investment Funds:
Low Liquidity
Diversification
High Due Diligence Cost individual characteristics
Difficult to value
Access to Information
Rationale for investment in commodities:
Low correlation with stocks & bonds
Positive correlation with inflation mostly precious metals
and energy
Commodity Index Benchmarking: S&PCI (S&P Commodity Index),
DJ-UBSCI (Dow Jones-UBS Commodity Index)
Given the zero-sum nature of futures, the indices cannot
use a market-cap method of weighing
Arithmetic/Geometric averaging to calculate component
return
Two methods of weighing
World production of the underlying commodity
Importance
Only for commodities driven by international market (bullion,
base metal, energy) to avoid any influence by large domestic
player
Diversification Benefit The addition of commodity futures
pushes the efficient frontier up and to the left

o
o

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Organisation Structure
FMC-SEBI Mapping differences in structure
Differences in existing products/services
Short Selling
Settlement
Options
Margin Funding
Credit Rating
Agencies
Exchange Traded
Funds listing/nonlisting
Custodian Services
STP
Depository
Participants
WDRA
Appellate Tribunal

Equity
Yes
T+2
Yes
Yes
Yes

Commodtiy
No
T+2
No
No

Yes

No

NSDL, CDSL

NSDL, CDSL

No
Securities
Appellate
Tribunal

Yes

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Filing Requirements
Uniform
Transaction Cost,
Taxes
Research Analyst
Regulation
Audit of the brokers
Position Limits
Foreign
Investments (FIIs)
Clearing Agency

Securities
Transaction Tax

Commoditie
s
Transaction
Tax

Yes

No

NSCCL, BOISL,
MCX-SXCCL

NCCL

Bad Delivery
VAR Margin

Margin Trading trading with borrowed funds/securities. Client shall not

avail this facility from more than one broker at a time. Only for Group 1
securities. Cap on the margin trading.
New Products Introduction
o Combined Margin for equity & commodity (Initial, M2M, Extreme
Loss)
o Commodity Linked Notes
o Freight Indices
Freight Indices & Futures Committee
Baltic Index Index measures the demand of shipping
capacity
o Weather Derivatives
Catastrophe Bonds
Heating Degree Days (for Winter)
Cooling Degree Days (for Summer)
World Bank, CMRG 2003 Insurance for groundnut and
cotton farmers in Andhra Pradesh
Rainfall insurance
o Indices
Can be based on weights in the inflation index
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o
Warehouse development
o Lending against Warehouse Receipts

Free trade in many agricultural commodities items is restricted under

the Essential Commodities Act (ECA), 1955 and Agriculture Produce
Marketing Committees (APMC) Acts of various State Governments. The
forward and futures contracts were, till April 2003, limited to only a few
commodity items under the Forward Contracts (Regulation) Act (FCRA),
1952. However, in 2003, GOI removed all restrictions on commodities,
which could be traded on commodity exchanges.

Order to Trade Ratio The algorithmic orders entered and/or modified

within 1% of the last traded price (LTP) of the respective contract shall
not be included in the calculation of the Order-to-Trade ratio, prescribed
III. TO ESTABLISH FINANCIAL REDRESSAL AGENCY
It has been proposed to set up a Task Force to establish a 'sector-neutral'
Financial Redressal Agency (FRA) with a view to address grievances
against all financial service providers.
Also, the Indian Financial Code is likely to be introduced in the Parliament
soon, which is currently being reviewed by the Justice Srikrishna
Committee.
Index-based derivatives
As I have argued in one of my previous articles in these columns last year,
as also in a paper in Commodity Vision journal, India needs to have
trading in water futures and options. I have argued in the detailed paper
that water futures index can reduce the scarcity value of water, thereby
9

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helping in water conflict resolution. Such derivatives products cannot be

delivery-based, but should be index-based.
Delivery is a costly affair, and completely defeats the purpose for which
such a product is conceived. Many of these sustainability-related products
such as weather derivatives, which can also be linked to crop insurance
products floated by banks in the markets are index-based, are nondeliverable.
In the previous regulatory regime governed by the FCRA 1952, such
products were not allowed to be traded, as the statute governing
commodity markets mandates every derivative product to be deliverybased.
Carbon credit derivatives that were floated in India also failed, and
there were two reasons for that: the improper timing of product launch as
carbon markets were moving down from 2009 onwards, and it proved
unattractive for speculators due to the delivery clause.
Risk products for agriculture commodities
In the face of climate change and with increasing frequency of extreme
events, there are various risk management products that are needed for
the country's agriculture. Worldwide, there are various risk management
instruments such as crop-yield insurance (linked to the
productivity), crop-hail insurance (covers against hailstorm in
US), multi-peril crop insurance (covers against multiple extreme
events like floods, droughts, hail, etc), crop-revenue insurance,
etc. Further even, weather derivatives products such as heating degree
day and cooling degree days are also in vogue. While insurance
companies or banking institutions worldwide have conceived of such
products, globally these institutions access futures or derivatives markets
for their own risk management.
However, the statute does not allow access to the commodity derivatives
market in India. Even the Banking Act 1948 prohibits institutional access
to commodity markets, though banks can access stock markets. One of
the reasons often cited is that commodity markets regulator was not
autonomous and did not have enough teeth to regulate such products and
institutions.
Issue Pricing
Portfolio Management Services Guidelines
A portfolio manager advises or undertakes on behalf of his client to
manage a portfolio of securities or the funds of the client.
He may either be a discretionary portfolio manager or a nondiscretionary portfolio manager. A discretionary portfolio manager
10

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individually and independently manages the funds of each client in

accordance with the needs of the client, whereas a non-discretionary
portfolio manager manages the funds in accordance with the directions of
the client.

The applicant has to be a body corporate and must have necessary

infrastructure like adequate office space, equipment and the manpower to
effectively discharge the activities of a portfolio manager. The principal
officer of the applicant should have professional qualifications in finance,
law, and accountancy or business management from an institution
recognised by the Government.
The applicant should have in its employment a minimum of two persons
who, between them, have at least five years of experience as portfolio
managers, stock brokers, investment managers, or in areas related to
fund management. The applicant also has to fulfil the capital adequacy
requirements etc. The portfolio manager is required to have a minimum
net worth of Rs 50 lakhs. The certificate of registration by SEBI remains
valid for three years.
The portfolio manager, before taking up an assignment of management of
funds or portfolio of securities on behalf of the client, enters into an
agreement in writing with the client. It should clearly define the
relationship and set out their mutual rights, liabilities and obligations
relating to the management of funds or portfolio of securities. It should
contain the details as specified in Schedule IV of the SEBI (portfolio
managers) Regulations 1993. The regulations have not prescribed any
scale of fee to be charged by the portfolio manager to its clients.
However, the regulations provide that the portfolio manager will charge a
fee as per the agreement with the client for rendering portfolio
management services. The fee may be a fixed amount or a return-based
fee or a combination of both.
A portfolio manager is permitted to invest in derivatives, including
transactions for the purpose of hedging and portfolio rebalancing, through
a recognised stock exchange. However, leveraging of portfolio is not
permitted in respect of investment in derivatives. The total exposure of
the client in derivatives should not exceed his portfolio funds placed with
the portfolio manager and the portfolio manager should basically invest
and not borrow on behalf of his client.
He should provide to the client a disclosure document at least two days
prior to entering into an agreement with the client. The document , inter
alia, contains the quantum and manner of payment of fees payable by the
client for each activity for which service is rendered by the portfolio
manager directly or indirectly, portfolio risks, complete disclosures in
respect of transactions with related parties as per the accounting
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standards specified by the Institute of Chartered Accountants of India in

this regard, the performance of the portfolio manager and the audited
financial statements of the portfolio manager for the immediately
preceding three years.
o As was first noted by John Maynard Keynes in 1930, commodity
futures prices tend to be priced at a discount to spot prices in order
to induce speculators to provide price insurance to commodity
inventory holders. Investors in commodity futures essentially earn a
risk premium for bearing the volatile commodity price risk that
inventory holders and producers wish to lay off.
o The other factor driving commodity returns is the continuation of
just-in-time inventory policies, which cause temporary shortages in
individual commodities, leading to temporary spot commodity price
spikes. By continuously investing in front-month futures contracts,
one captures these returns.
o Roll-yield when a commodity is in Backwardation
Risks
o
o
o
o

in Commodity Funds
General Market Risk country/region
Regulation Risk taxes, restrictions
Commodity Specific Risk
Derivatives Risk positions more volatile than normal spot
market position
Baltic Dry Index

Chartering Chartering is an activity within the shipping

industry. In some cases a charterer may own cargo and
employ a shipbroker to find a ship to deliver the cargo for a
certain price, called freight rate.
A time charter is the hiring of a vessel for a specific period
of time; the owner still manages the vessel but the
charterer selects the ports and directs the vessel where to
go. The charterer pays for all fuel the vessel consumes, port
charges, commissions, and a daily hire to the owner of the
vessel
Shipbroking Shipbroking is a financial service, which forms
part of the global shipping industry. Shipbrokers are
specialist intermediaries/negotiators (i.e. brokers) between
shipowners and charterers who use ships to transport cargo,
or between buyers and sellers of ships.
The BDI contains route assessments based only on timecharter hire rates "USD paid per day per Metric Ton". Fuel
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(="Bunkers") is the largest voyage dependent cost and

moves with the crude oil price. In periods where bunker
costs fluctuate significantly, the BDI will move more than
the shipowners' realised earnings
Most directly, the index measures the demand for shipping
capacity versus the supply of dry bulk carriers. The demand
for shipping varies with the amount of cargo that is being
traded or moved in various markets
The supply of cargo ships is generally both tight and
inelasticit takes two years to build a new ship, and the
cost of laying up a ship is too high to take out of trade for
short intervals,[6] the way you might park a car safely over
the winter. So, marginal increases in demand can push the
index higher quickly, and marginal demand decreases can
cause the index to fall rapidly. e.g. "if you have 100 ships
competing for 99 cargoes, rates go down, whereas if you've
99 ships competing for 100 cargoes, rates go up. In other
words, small fleet changes and logistical matters can crash
rates..."[7] The index indirectly measures global supply and
demand for the commodities shipped aboard dry bulk
carriers, such as building materials, coal, metallic ores, and
grains.
The BDI is termed a leading economic indicator because it
predicts future economic activity.[8]
Major bulk carrier size
categories
Size
Use
New
in Ship Traf
d
Name
pric
[19]
[20]
DWT s
c
pric
e[21]
[18]
e[22]
Handy 10,0 34%
size
00 to
35,0
00
$25
18%
$20M
M
Handy 35,0 37%
max
00 to
59,0
00
Panam 60,0 19% 20% $35 $25M
ax
00 to
M
80,0
00
Capesi 80,0 10% 62% $58 $54M
ze
00
M
and
over
13

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Routes selection representative of the bulk cargo trades,

Geographical balance, Liquidity (not seasonal routes),
Standard terms,
Baltic Exchange Dry Index
The Baltic Dry Index (BDI) is the successor to the Baltic
Freight Index (BFI) and came into operation on 1 November
1999. Since 1 July 2009, the index has been a composite of
the Dry Bulk Timecharter Averages.
The following formula is used to calculate the BDI:
(Capesize5TCavg + PanamaxTCavg+ SupramaxTCavg +
HandysizeTCavg)/ 4) * 0.110345333
TCavg = Time charter average
Deadweight tonnage is a measure of how much weight a
ship can safely carry.
How Baltic market information is produced
The index model used by the Baltic Exchange was
established in 1985 with the launch of the Baltic Freight
Index (todays Baltic Dry Index) and used to settle trades on
the worlds first freight futures exchange, BIFFEX. Although
there have been a few minor modifications along the way,
the model has essentially remained unchanged since its
introduction and relies on panels of independent shipbrokers
around the world giving their professional judgement as to
the prevailing level of the open market within the
parameters of the route they have been asked to assess.
The numbers produced by the Baltic Exchange are based on
an underlying understanding of what is actually happening
in the freight markets.
The routes reported are as representative as possible of the
worlds principal bulk cargo trades and reflect trades within
the Pacific and the Atlantic, as well as trades between the
oceans, maintaining a balance between front haul and
backhaul routes.
All the routes reported have a steady and significant
turnover of fixtures, while trades subject to seasonal
closures such as the Great Lakes or Goa are avoided. Trades
dominated by a limited number of charterers are also
avoided and voyage routes where business is largely
concluded on standard terms are favoured.

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The Baltic Exchanges indices are widely used and

completely trusted by ship owners, charterers and freight
derivative traders as an honest, independent assessment of
the market. They are not only used to settle multi-million
dollar FFA trades but are also the basis for index linked
affreightment contracts and period charters

Neither ship owners nor charterers are allowed to make assessments and
all the brokers providing assessments are audited to ensure they are fully
active on the trades they are assessing. No shipbrokers will have "money
in the market."
The assessment is not reporting the last done fixture but takes into
consideration a professionals view of the market based on the cargoes
and tonnage currently available as well as recent fixtures.
Governance Overall responsibility for the administration of the Baltic
Exchange's benchmarks belongs to the Board of Baltic Exchange
Information Services Ltd (BEISL). This Board currently comprises a
number of directors who also serve on the Board of the Baltic Exchange
Ltd (BEL).
The BEISL Board meets at least once a quarter to review matters
related to the benchmarks and to make any necessary decisions,
conduct reviews of the accuracy and suitability of the benchmarks, and
will review annually the independent auditors' reports on compliance
with the rules for index production.
The Board receives advice from staff of BEISL and BEL and invited
representatives from the marketplace. BEISL and BEL staff, together
with the market representatives, attend in an advisory role.
At this time those representatives are the Chairmen of the Freight
Market Information Users Group (FMIUG) (dry) and the FMIUG (wet) as
well as the Chairman of the Forward Freight Agreement Brokers
Association (FFABA) for each of the dry and wet markets and the
Chairmen of the Panellist Working Group.
These groups are informally constituted bodies which seek to represent
the views and interests of market participants
Warehouse Capacity

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NABCONS maintains a directory of all warehouses.

II. PROPOSAL TO SET UP PUBLIC DEBT MANAGEMENT AGENCY

Considering the fast developing Indian equity market, the need of an hour
requires to a well-developed Bond market to serve the funding needs of
infrastructure sectors. With intent to promote investment in India and
deepening the Indian Bond market, the Budget has come up with a
proposal to set up a Public Debt Management Agency (PDMA) to bring
India's external borrowing and domestic debt under one roof. However, all
eyes will be on the functioning of this Agency along with the impact which
it might likely have on the bond market.
The move to set up a separate PDMA to manage market government
borrowings and public debt may cause reduction in the powers of the
Central Bank, the same is in line with the trend which most of the
Countries follow.
Setting up a separate PDMA will definitely help the RBI focusing on its core
functions along with deepening the bond market and facilitating better
planning and management of domestic and foreign market borrowings. All
in all it will be a win win situation for both the authorities.

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IV. PROPOSED OPTIONS TO EMPLOYEES FOR EPF

The budget has come up with something called employee-friendly since
Finance Minister has proposed changes under Employees Provident Fund
(EPF) and Employees State Insurance (ESI). Under the EPF, it has been
proposed to make the employees share contribution towards the Provident
Fund an option for the employees having monthly income below certain
threshold although the employer will continue to contribute his share of
the PF irrespective of the employee opting not to pay his contribution.
Furthermore, employees will be given an option to choose between EPF
and the New Pension Scheme (NPS).
Under the current structure, all employees are mandatorily required to
contribute 12 % of their basic wages including basic salary and DA as
contribution towards PF. The employers also make contribution at the
same rate, with 8.33% going towards pension, 0.5% towards Employees
Deposit Linked Insurance (EDLI) scheme and remaining towards PF.
With respect to ESI, it has been proposed that the employee should be
given an option of choosing between ESI and Health Insurance product as
recognized by the Insurance Regulatory Development Authority (IRDA).
The above mentioned step is surely a welcome step and will be beneficial
for the low paid workers who suffer deductions greater than high paid
workers.
Catastrophe Bonds It is usually issued by insurance companies to
reduce their risk. Insurance companies issue bonds which usually have
maturities less than 3 years. If no catastrophe occurs then company
pays coupon and at the maturity pay principal to the investors. On the
other hand if a catastrophe occurred then principal would be forgiven
and insurance company would pay money to their clients.
General Insurance Corporation
http://articles.economictimes.indiatimes.com/2014-0502/news/49578470_1_catastrophe-bonds-cat-bonds-gic-re
http://www.artemis.bm/blog/2014/05/02/indias-gic-re-making-progresson-potential-catastrophe-bond-issue/
Insurance Agriculture Insurance Company of India
o Weather Insurance (RABI)

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18