Commodities FAQ’s
Commodity Futures are contracts to buy specific quantity of a particular commodity at a future date. It is similar to the Index futures and Stock futures but the underlying happens to be commodities instead of Stocks and indices.
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. World-wide, commodity exchanges originated before the other financial exchanges. Infact most of the derivatives instruments had their birth in commodity exchanges.
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). However there are regional commodity exchanges functioning all over the country. Balaji Commodity Futures Ltd has got membership of the premier commodity exchanges i.e. MCX. 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:
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.
The two exchanges (NCDEX & MCX) have seen tremendous growth in less than two years. The daily average on these two exchanges put together has now grown to a healthy Rs.3700 Crores. It has been believed by experts that the volumes on these exchanges would overtake the stock market volumes in the days to come.
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.
Just as SEBI regulates the stock exchanges, commodity exchanges are regulated by Forwards Market Commission (FMC); Forwards Market Commission is under the purview of the Ministry of Food, Agriculture and Public Distribution.
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.
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.
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.
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.
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.
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.
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.
At NCDEX the contracts expire on 20 th day of each month. If 20 th happens to be a holiday the expiry day will be the previous working day. At MCX the expiry day is 15 th of every month. If 15 th 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.
At Present futures are available on the following commodities.
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.
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.