o This project lists the numerous bottlenecks and hurdles in the way of a smoothly operating commodity markets. It covers Forward Contracts (Regulations) Act and its amendments in recent years, the role of Forward Market Commission in the market, various legal, regulatory, infrastructural challenges along with major initiatives taken in 2010-11

2.  Definition
 Commodity – As Asset Class
 Commodity – Uniqueness
 Classification of Commodities
 Indian Commodity Market Size
 Performance of Indian Commodity Market
 History of commodity 2
 Interventions by Govt.
 FC(R) A ,1952
 Evolution of FMC
 Kabra committee report
 Challenges faced by commodity markets presently
 Legal Challenges
 Regulatory challenges
 Infrastructural challenges
 Awareness amongst investors and farmers
 Other Challenges
 Suggested measures for smooth operations of commodity markets
1

3. Wheat in your bread
Petrol in your vehicle
Coffee on your table
Sugar in your sweets
Chana in your chhole
Gold in your necklace
……… and so on …….
Commodities are everywhere
2

4.  Characteristics
 Commodity is anything movable (a good) that has
following characteristics
 Fungible, i.e. the same no matter who produces it
 Derivatives, i.e. involves further processing into number
of products
 Economic cost, i.e. production of it involves some cost
3

5.  In financial parlance, assets are economic resources that is capable of being owned
or controlled to produce value
 Commodity too has gained importance currently as independent asset class
 Commodity, being the natural goods are independent of other asset classes

 Assets Classes
 Equities : Performer during economic expansion & an out performer
over very long term…
 Fixed Income : Performs at the later stage of recession…
 Real Estate : Performs during early expansion…
 Commodities : Performance spread evenly over the economic
cycle…
4

6. 1. Seasonality A major force in the commodities markets
2. Correlation Unlike other asset class, commodities are
positively and negatively correlated
within & outside the group which is
unique to commodities only
3. Weather No other asset class are so much
influenced by weather patterns
4. Hedge Provides natural hedge against war,
inflation, other asset portfolios, recession
etc. example -GOLD
5

7. Commodity – PerformanceReturns Over Different Asset Classes in 4 Yrs.
69.51
73.72 75.95
88.46
31.55
-1.44-10
0
10
20
30
40
50
60
70
80
90
100
SENSEX NIFTY CNX 500 NCDEX
AGRI INDEX
INR MCX
METAL
INDEXSource:Bloomberg,Way2Wealth Research
6

8. Various Asset Classes Performance
60
80
100
120
140
160
180
200
220
240
260
Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09
NCDEX Ag Index Nifty USDINR MCX Metal Index
7

9. Indian Share in Global Commodity Market
91%
9%
Global India
Global Vs. India
 Global commodity has relatively long history
 Size is 9 times larger than India
India
 Commodity futures, though active since 19th
century was banned later in 1970’s
 Commodity volumes shoots up significantly
after re-launch in 2003
 MCX emerged as world’s Sixth largest
exchange
 Volumes on Indian exchanges are increasing
at CAGR of 73.7 percent
2009 2008
Global 14831317 11712611
India 1469673 1067984
Commodity Trading ( Value in Million USD)
8

10. Agriculture
Grains
Pulses
Edible oils/seeds
Spices etc
Base Metals
Copper
Zinc
Aluminum
Nickel
Tin
Energy
Crude oil
Heating oil
Natural gas
Furnace oil
Etc.
Bullion
Gold
Silver
Palladium
etc
Commodities
9

11. 20 Other Regional Exchanges
NMCE
Commodity Exchanges
MCX
National Exchanges Regional Exchanges
FMC – The Regulator
NBOTNCDEX
Leadership position with >90% share
10

12. 0
100
200
300
400
500
600
700
2004 2005 2006 2007 2008 2009 2010
MCX NCDEX TOTAL
Source:FMC,Way2Wealth Research
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Bullion and other metals 31.5 36.1 57.9 64.6 56.7 40.8
Other than bullion metals
- - - -
- 23.2
Agriculture 68.2 55.3 35.8 23.1 11.9 15.7
Energy 0.3 8.4 6.3 12.3
-
20.3
Others 0.0 0.1 0.0 0.0 31.4 0.0
Source:FMC,Way2Wealth Research
Segment wise % Share of Commodities
* 2008-09 other segment includes energy& other metals
Significant rise in
volume since launch
of exchanges in 2003
MCX
Leader in Metals & Energy
NCDEX
Leader in Agri
> 65% CAGR Growth
Volume Growth in Indian Exchanges
11

13. India Commodity Wise Market Share in 2004
17%
15%
1%0%
67%
0%
Gold Silver Crdue oil Copper Total agri Others
India Commodity Wise Market Share in 2009
31%
15%
20%
13%
12%
9%
Gold Silver Crdue oil Copper Total agri Others
12

14. Returns Across Various Commodities in 5 Yrs.
92.86
62.54
3.83
-12.36
-45.21
9.25
87.12
22.25
4.96 9.65
51.16
142.80
94.21
485.86
23.60
-100
0
100
200
300
400
500
600 Gold
Silver
Crudeoil
Copper
Zinc
Aluminium
Lead
GuarSeed
GuarGum
SoyOil
Soybean
Pepper
Jeera
Turmeric
MenthaOil
Source:Bloomberg,Way2Wealth Research
 Almost 45 commodities are available for trading in both NCDEX & MCX
 Though few have been de-listed during high inflation times, re-listing also has happened
 Bullion, Base metals, energy & Agri are the major contributors in terms of volumes
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15. History of commodity
trading in India
14

16. 1875- Establishment of Bombay Cotton Trade Association
1893- Establishment of Bombay Cotton Exchange Ltd.
1912-Future trading in raw jute and jute goods began in Calcutta
1913-Wheat markets in Hapur began functioning
1919-Calcutta Hessian Exchange
1926- Seed Traders Association Ltd started in Bombay
1927- East Indian Jute Association
Amalgamation of Calcutta Hessian Exchange and East Indian Jute
Association
1936- Commodity Exchange Act was passed
1939-Ban on markets due to WWII
1964- Futures trading in raw jute suspended
1974- Amendment in Commodity Exchange Act
2003- Reintroducing future trading by government
2008- Ban on four commodities
15

17. The criteria to assess the success or failure of any
government intervention:-
Objective of intervention
Alternative tools available for achieving the objectives
Success of the intervention in achieving the objective
Cost (risks, unintended side effects) of intervention
16

18.  Development was constrained
 Ban on cotton, food grains, spices and sugar
 Wagons only used for military transport as a
result it caused shortages in essential
commodities
 Rampant hoarding
 Futures trading was halted
 Food grains, jute and oilseeds were banned
under Defence of India rules.
17

19. Enables the authority to take appropriate actions that may be considered
desirable.
The act prohibits option trading in all commodities.
Empowers the govt to ban forward contracts in a particular contracts in a
particular commodity by a notification.
Non-transferable specific delivery contracts are ordinarily exempted from
regulation.
Empowers the central govt to call for periodical returns,annual returns of any
other information.
Provides penalties against persons who contravene the provisions of the act
and the qualifications thereof.
Provides for the regulation of the Forwards markets through the governing
bodies of recognized associations.
Empowers the central government to supersede the governing body of
recognized associations and the order it to suspect its business.
Empowers the central government to appoint not more than four members on
the governing bodies who may act against public interest in the form of FMC.
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20. The parliament passed Forward Contracts (Regulation) Act,1952
The Act envisages 3-tier regulation
o The exchange which organizes forward trading in commodities can
regulate trading on a day-to-day basis.
o The Forward Market Commission provides regulatory oversight under
the powers delegated to it by the central government and
o The central government, Department of consumer affairs, Food and
Public distribution is the ultimate regulatory authority.
In 1960's following severe draughts that forced many farmers to default on
forward contracts and even caused some suicides. Forward trading was
banned in many commodities considered primary or essential.
19

21.  Government set up a committee in 1993 to
examine the role of future trading.
 The Kabra committee recommended allowing
futures trading in 17 commodities groups
 The committee recommended certain
amendments to forward contracts (Regulations)
Act 1952, particularly allowing option trading in
goods and registration of brokers with FMC.
20

22.  The government accepted most of these
recommendations and futures trading was
permitted in all recommended commodities
 Derivatives do perform a role in risk management
led the government to change its stance.
 Liberalization facilitates market forces to act freely
 The next decade is being touted as the decade of
commodities
21

23.  Potential market growth loss due to regulatory
uncertainty
 Loss of turnover for brokerage houses and
hedgers
 Absence of information future price for govt to
plan procurement
 price volatility
22

24.  Transforms the role of FMC to an independent regulator (similar to SEBI).
 Allows trading in all commodity derivatives and also options on goods and
commodity derivatives.
 Makes a provision for corporatisation and demutualisation of all recognised
associations to be approved by the FMC.
 At present ready delivery contracts need to be delivered and paid for immediately or
within 11 days. The bill extends this period to 30 days.
 The number of members of the FMC has been increased from 4 to 9 including one
chairman and 3 whole time members.
 the bill vests powers in the FMC to impose penalties in cases of failure to furnish
information or comply with the directions of the commissions indulging in insider
trading or fraudulent and unfair trade practices and in case of contravention of the
provisions of the FCRA 1952.
 The bill makes a provision for the transfer of duties and functions presently
performed by a clearing house to a clearing corporation.
 The Central Government would have the power to issue direction to the FMC on
matters of policy and to supersede it in certain cases.
23

25. Legal challenges
Regulatory challenges
Infrastructural challenges
Awareness among investors and producers
Other challenges regarding trading
24

26. Amendment in FCRA
Amendment in Banking regulations act
Essential commodities act
25

27. Inadequate regulation by FMC
Analyzing the adequacy of powers of FMC
Deficiencies in the existing pattern
• Organizational
• Functional
• Operational
26

28. The FMC needs to operate under a regulatory
framework that enables it to:
 Protect market integrity.
 To preserve the economic functions of the
commodity markets to shift commercial price risk
and aid in price discovery.
 Ensure market fairness.
 Ensure financial safety and soundness by
guarding against systemic risk.
27

29.  Warehousing and standardization facilities
 Physical deliveries need back up
 Cah versus physical settlement
 Clearing house
 Modern trading rings
28

30.  Lack of awareness among investors and farmers
lead to losses to them for which seminars and
mock trading sessions should be arranged
29

31. Size of contracts too big for small traders and
producers
Mutual funds and FIIs should be allowed to trade
on exchanges
Farmers not beneficiaries in price rise
Lack of economies of scale
Indoctrination is ineffective
Issues on warehouse receipts
30

32.  Commodity exchanges and brokerage houses should be
hosting seminar on commodity market awareness.
 Conducting mock trading, to providing commodity-
specific training on the functioning of the exchange.
 Commodity market education should be provided
through other media such as educational CDs and
cartoon books in order to reach out to more people.
 Size of contracts should be split.
 Introduction of modern warehouse and clearing house
infrastructure.
 Giving the FMC the status and power similar to SEBI by
passing the FC (R) A Amendment bill.
31