AGRICULTURAL

COMMODITY DERIVATIVES
Presented by
Gopika Sanjith
Keerthasna S Kumar
D. Bhagyasree
Sreelakshmi
COMMODITY DERIVATIVES
• Commodity derivatives are investment tools that allow investors to
make profit from certain commodities without possessing them.
• Commodity derivatives are financial instruments the value of which
is derived from the value of underlying asset.
• Assets are commodity, such as grains, energy or metals.
 Commodity Derivatives in India
• Organized commodity derivatives in India can be traced back to 1875 with the Cotton
Trade Association’s future trading. Over time the derivatives market developed in several
other commodities in India. Following cotton, derivatives trading started in oilseeds in
Bombay (1900), raw jute and jute goods in Calcutta (1912), wheat in Hapur (1913) and in
Bullion in Bombay (1920).
• After Independence, the Parliament passed Forward Contracts (Regulation) Act, 1952
which regulated forward contracts in commodities all over India. The Act applies to
goods, which are defined as any movable property other than security, currency and
actionable claims.
• The commodity derivatives markets face a major crunch when the Act prohibited options
trading in goods along with cash settlements of forward trades. Under the Act, only those
associations/exchanges, which are granted recognition by the Government, are allowed to
organize forward trading in regulated commodities..
• The Act envisages three-tier regulation:
(i) The Exchange which organizes forward trading in commodities can
regulate trading on a day-to-day basis;
(ii) the Forward Markets Commission provides regulatory oversight under
the powers delegated to it by the central Government, and
(iii) the Central Government – Department of Consumer Affairs, Ministry
of Consumer Affairs, Food and Public Distribution – is the ultimate
regulatory authority.
• The regulatory body was erstwhile Forward Markets Commission (FMC) which was set
up in 1953.
• As of September 2015 FMC was merged with the Securities and Exchange Board of India,
SEBI.
• Apart from numerous regional exchanges, India has Five national commodity exchanges
namely:
1. Multi Commodity Exchange (MCX)
2. National Commodity and Derivatives Exchange (NCDEX)
3. Indian Commodity Exchange (ICEX)
4. National Stock Exchange (NSE), and
5. Bombay Stock Exchange (BSE)
Multi Commodity Exchange (MCX)
• An independent commodity exchange based in India.
• It was established in 2003 and is based in Mumbai.
• It is India's largest commodity derivatives exchange where the clearance and settlements
of the exchange happen.
• Multi Commodity Exchange of India provides live feeds for all traded commodities.
• From 28 September 2015, MCX is being regulated by the Securities and Exchange Board
of India (SEBI). Earlier MCX was regulated by the Forward Markets Commission (FMC),
which got merged with the SEBI on 28 September 2015
Commodities traded include -
• Metal - Aluminium, Aluminium Mini, Copper, Copper Mini, Lead,
Lead Mini, Nickel, Nickel Mini, Zinc, Zinc Mini, Brass(futures)
• Bullion - Gold, Gold Mini, Gold Guinea, Gold Petal, Gold Petal (
New Delhi), Gold Global, Silver, Silver Mini, Silver Micro, Silver
1000.
• Agro Commodities - Cardamom, Cotton, Crude Palm Oil, Kapas,
Mentha Oil, Castor seed, RBD Palmolien, Black Pepper.
• Energy - Brent Crude Oil, Crude Oil, Crude Oil Mini, Natural Gas.
National Commodity and Derivatives Exchange (NCDEX)
• An online commodity exchange based in India.
• Provides a commodity exchange platform for market participants
to trade in commodity derivatives.
• It is a public limited company, incorporated on 23 April 2003
under the Companies Act, 1956 and obtained its Certificate for
Commencement of Business on 9 May 2003. It commenced
operations on 15 December 2003.
Products traded:

CEREALS AND PULSES

• BARLEY
• CHANA
• MAIZE KHARIF/ SOUTH
• MAIZE RABI
• WHEAT
• MOONG
• PADDY (BASMATI)

FIBRES
• KAPAS
• 29 MM COTTON
• GUAR COMPLEX
• GUAR SEED 10 MT
• GUAR GUM
• OIL AND OIL SEEDS
• CASTOR SEED
• COTTON SEED OILCAKE
• SOY BEAN
• REFINED SOY OIL
• MUSTARD SEED
• CRUDE PALM OIL
SOFT
• SUGAR M

SPICES
• PEPPER
• TURMERIC
• JEERA
• CORIANDER
Indian Commodity Exchange (ICEX)

• Indian Commodity Exchange Limited (ICEX) is SEBI

regulated online Commodity Derivative Exchange.
• Headquartered at Mumbai, the Exchange provide
nationwide trading platform through its appointed
brokers.
Following types of entities are eligible to become
members of ICEX:
• Individual / Proprietorship Firm
• Registered partnership Firm
• Hindu Undivided Family (HUF)
• Private Limited Company
• Public Limited Company
• Co-operative Societies
The following commodities will be permitted for trading on
the exchange in the initial phase:
• Gold
• Silver
• Copper
• Zinc
• Nickel
• Crude Oil
• Natural Gas
• Refine Soya Oil (RSO)
• RM Seed or Mustard Seed
• Guar Seed
• Turmeric
• Soyabean
National Stock Exchange (NSE)
• The leading stock exchange of India, located
in Mumbai.
• The NSE was established in 1992 as the first
dematerialized electronic exchange in the country.
• NSE was the first exchange in the country to provide a
modern, fully automated screen-based electronic
trading system which offered easy trading facility to
the investors spread across the country.
NSE offers trading and investment in the following segments
Equity
• Equities
• Indices
• Mutual Funds
• Exchange Traded Funds
• Initial Public Offerings
• Security Lending and Borrowing Scheme etc.
Debt
• Corporate Bonds
Derivatives
• Equity Derivatives (including Global Indices like CNX 500,
Dow Jones and FTSE )
• Currency Derivatives
• Commodity Derivatives
• Interest Rate Futures
Derivatives Trading on NIFTY 50 Index:
• Futures and Options trading on NIFTY 50 Index
• Trading in NIFTY 50 Index Futures on Singapore Stock
Exchange(SGX)
• Trading in NIFTY 50 Index Futures on Chicago Mercantile
Exchange(CME)
Bombay Stock Exchange (BSE)
• Established in 1875, the BSE
• Asia's first stock exchange
• Commodities traded:
i. Chana
ii. Cotton
iii. Gold
iv. Soyabean
v. Guar seeds
vi. Castor seeds
Regulatory framework of
commodity future
• The Forward Market Commission (FMC) was the chief regulator of the
commodity futures markets in India.
• As of July 2014, it regulated Rs 17 trillion worth commodity trade in
India.
• The Commission allowed commodity trading in 22 exchanges in India,
of which 6 are national.
• On 28th September 2015 the FMC was merged with the Securities
and Exchange Board of India (SEBI).
• The Ministry of Finance – Government of India, is the apex regulatory
body governing all commodity trade in India.
• FMC was set up in 1953 to provide regulatory advices to Government
and to have closer regulatory interaction with the commodity
exchanges.
• FORWARD CONTRACTS (REGULATION) ACT, 1952.- An act to provide
for the regulation of certain matters relating to forward contracts,
the prohibition of options in goods and for matters connected
therewith.
Power of FMC
• Summoning and enforcing the attendance of any person and
examining him on oath.
• Requiring the discovery and production of any document.
• Receiving evidence of affidavits.
• Requisitioning any public record or copy thereof from any office.
• Any other matters which may be prescribed.
Regulatory measures/Responsibilities of FMC
• To advise the Central Government in respect of the recognition or the
withdrawal of recognition from any association or in respect of any other
matter arising out of the administration of the Forward Contracts
(Regulation) Act 1952.
• To keep forward markets under observation and to take such action in
relation to them, as it may consider necessary, in exercise of the powers
assigned to it by or under the Act.
• To collect and whenever the Commission thinks it necessary, to publish
information regarding the trading conditions in respect of goods to which
any of the provisions of the act is made applicable, including information
regarding supply, demand and prices, and to submit to the Central
Government, periodical reports on the working of forward markets relating
to such goods;
• To make recommendations generally with a view to improving the
organization and working of forward markets;
• To undertake the inspection of the accounts and other documents of
any recognized association or registered association or any member
of such association whenever it considers it necessary.

It allows futures trading in 23 fibers and manufacturers, 15 spices, 44

edible oils, 6 pulses, 4 energy products, single vegetable, 20 metal
futures and 33 other futures.
ROLE OF SEBI AND RBI
The Forward Market Commission
• It was a statutory body set up under the Forward Contracts (Regulation)
Act, 1952.
• The commission regulated the commodity derivative market in India
• FUNCTIONS:
to monitor, regulate and supervise the futures trading on commodity exchanges
on a daily basis.
It has the power to take regulatory measures.
It can also inspect the accounts of the exchanges and their members.
All terms and conditions of a futures contract have to be approved by the FMC
before it can be launched on commodity futures exchanges.
Securities & Exchange Board of India (SEBI)

• The Securities & Exchange Board of India (SEBI) Act, 1992

• SEBI is the apex body governing the Indian stock exchanges.

• Basic function:
(a) protecting the interests of investors in securities
(b) promoting the development of the securities market and
(c) regulating the securities market.
Merge of FMC with SEBI
• Creation of a separate Commodity Derivatives Market Regulation
Department for the regulation of commodity derivatives.
• Amended
 Securities Contracts (Regulation) (Stock Exchanges and Clearing
Corporations) Regulations, 2012 (SECC Regulations) and
 SEBI (Stock Broker and Sub-Broker) Regulations, 1992 and SEBI
(Regulatory Fee on Stock Exchanges)
• Enables functioning of the commodities derivatives
exchanges
Role of SEBI
• Ensuring proper risk management so as to avoid any major instance
of misconduct.

• Ensuring non-disruptive transitions of the Exchanges as well as

brokers to the new regulatory regime.

• Improving the surveillance of the market – integration of markets

with integrated surveillance system of SEBI.
• Putting in place an adequate mechanism for grievance redressal and
arbitration.

• Building capacity within and outside the Regulator.

• Strengthening of delivery infrastructure

New Developments
• SEBI has allowed trading in options.

• Improving the issues:

improving hedgers participation
improving liquidity of the contracts,
having objective criteria for introducing new commodities to futures
trading,
bringing new participants, institutional as well as non-institutional, to the
market
ROLE OF RBI
• Approval to allow foreign institutional investors(FIIs) and banks to
participate in commodity markets.
• Given initiative not only to be institutional investors but also architect
and mediator for inception and growth of commodity market in India
• Advisor to Customers
• Intermediaries for smaller parties
• Commodity Risk Management (CRM)
• Counterparty for Traders
The Kabra committee report
The Kabra committee report
• The Government of India appointed a committee in June 1993
• Under the chairmanship of Prof. K.N Kabra

THE RECOMMENTATIONS OF THE COMMITTEE

The Forward Markets Commission (FMC) and the Forward contracts
(Regulation) Act, 1952, would need to be strengthened
Objectives
• To assess the working of the commodity exchange
• To review
• Promoting exports
• Suggest measures
Commodities
• Basmati rice
• Cotton and kappa's
• Raw jute and jute goods
• Rice bran oil
• Castor oil and its oilcake
• Linseed, Silver, Onions