General

What are Derivatives ?

The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, livestock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities.

A forward contract is an agreement to buy or sell an asset at a certain future time for a certain price. It is traded over the counter market- usually between two financial institutions or between a financial institution and its clients. They are commonly used to hedge foreign currency risk. (Source: Options, Futures and Other Derivatives by John C.Hull) 

Forward contract is very valuable in hedging and speculation. It can help a farmer to hedge himself against any unfavorable movement of the prices of his crop by forward selling his harvest at a known price. Incase of a speculator, if he has information, which forecast an upturn in a price, then he can go long on the forward market instead of the cash market. The speculator would go long on the forward, wait for the price to rise and then take a reversing transaction. The use of forward market here supplied the leverage to the speculator. (Source: Options, Futures and Other Derivatives by John C.Hull)

A future contract is an agreement between two parties to buy or sell an asset at a certain time in the future for a certain price. They are normally traded on the exchange. The exchange specifies certain standardized features of the contract. As the two parties do not necessarily know each other, the exchange also provides a mechanism that give the two parties a guarantee that the contract will be honored.

Some of the basic differences between the futures and forward contracts are as follows:
1) While futures contracts are traded on the exchange, forwards contracts are traded over-the-counter market.
2)  Incase of futures contracts the exchange specifies the standardized features of the contract, while no pre determined standards are there in the forward contracts.
3)  Exchange provides the mechanism that gives the two parties a guarantee that the contract will be honored whereas there is no surety/guarantee of the trade settlement in case of forward contract.

There are three types of traders in the Derivative market namely                                                     
Hedgers: They are in the position where they face risk associated with the price of an asset. They use derivatives to reduce or eliminate risk. For example, a farmer may use futures or options to establish the price for his crop long before he harvests it. Various factors affect the supply and demand for that crop, causing prices to rise and fall over the growing season. The farmer can watch the prices discovered in trading at the CBOT and, when they reflect the price he wants, will sell futures contracts to assure him of a fixed price for his crop.
Speculators: Speculators wish to bet on the future movement in the price of an asset. They use derivatives to get extra leverage. A speculator will buy and sell in anticipation of future price movements, but has no desire to actually own the physical commodity.   Arbitrators: They are in the business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the future prices of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. (Source: Options, Futures and Other Derivatives by John C.Hull)

A short position involves selling futures contracts while a long position involves buying futures contracts or owning the cash commodity

The basic difference between the commodity exchange and stock exchange is that while in commodity exchange non-financial commodities i.e. agro products such as castor, groundnut, sesame etc. and non agro products such as aluminum, zinc, nickel etc. are traded. However in a stock exchange all financial products are traded such as stocks, indexes, interest rate, government securities etc. are traded.

What kind of economic indicators do traders watch in the agro and the financial markets ?

In any market, the forces of supply and demand directly influence price. Buyers want to acquire a product at the lowest possible price sellers want to sell it at the highest price possible.

What is a "bullish" market and "bearish" market ?

A bullish market is a period of rising market prices while a bearish market is a period of declining market prices.

Earlier, all the sellers and buyers of a commodity used to come to a common market place for the trade. Buyer could judge the amount of produce that year while the seller could judge the amount of demand of the commodity. Thus they could dictate their terms and hence the counter party was left with no choice. Thus, in order to hedge from this unfavorable price movement, need of the commodity exchange was felt.

India has a large number of commodity exchanges, the oldest of which dates from the 19^th Century. Forward Market Commission regulates all these exchanges. After a 30 years ban, Government permitted future trades in 54 commodities. Commodities market regulator, Forward Market Commission allowed four exchanges to commence trading in all these items. Till now the state control over supply and, hence, price, has not allowed commodities trading to grow to its potential. Now the government is retreating and allows market players to takeover the commodities market.

India’s farmers, and downstream industrial users of agricultural output are exposed to extremely high risks. The creation of commodities derivatives markets will provide them with the choice of hedging themselves against price fluctuations. It will improve the liquidity and price discovery in the underlying spot markets. Once futures markets exist, the private sector will maintain buffer stock which will reduce spot price volatility and the private sector will do this far more efficiently than government sponsored efforts at maintaining buffer stocks.

One serious weakness in India lies in the way individual commodities futures markets are an outgrowth of trading on individual spot markets. The cotton trading community will create a cotton futures market; the jute trading community will create a jute futures market, etc. This is inefficient insofar as it does not foster the growth of specialized skills, which are common to all futures markets and not specific to one commodity. For a well functioning derivatives exchange, sepcialised skills are required on the part of exchange and clearinghouse staff and on the part of trading members. These skills are primarily in the derivatives area, and they are easily transferable from one commodity to another. 

Prices discovered in the markets at the commodity exchange will have an impact on the cost of doing business for the companies supplying the grocery store, however, this rarely translates into a price change at the grocery.

It is estimated that typically four percent or less is actually delivered. A contract may be bought and sold many times before the delivery date as businesses attempt to manage their risk. This is what accounts for the large volume traded, though relatively little is delivered, since the basic purpose of a futures contract is to provide price-change protection.

Incase of physical delivery, how the goods are delivered to the buyer ?  

A warehouse receipt is issued in favor of the buyer, which is transferable. On producing this receipt the buyer can take the commodity from the warehouse.

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Membership

What is NMCEIL and who are the promoters of NMCEIL ?

National Multi-Commodity Exchange of India Limited (NMCEIL) is the first de-mutualised electronic multi-commodity exchange  set-up in India. Recognizing the need of the agricultural sector in India in the changing environment, NMCEIL was incorporated as a limited company on 20^th December 2001 with equity participation by the public sector and autonomous institutions, which play diverse roles in the agro-produce-supply chain. The promoter institutions include Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India Limited (NAFED), Gujarat Agro Industries Corporation Limited (GAIC), National Institute of Agricultural Marketing (NIAM), Gujarat State Agricultural Marketing Board (GSAMB), Punjab National Bank (PNB) and Neptune Overseas Limited.

How can I become a member of the Exchange?

National Multi-Commodity Exchange of India Limited gives membership on the basis of the financial soundness, corporate structure, track record, education, experience etc of the applicants. The Exchange strives to reflect a conscious effort to improve the membership standards so as to further strengthen trader/investor confidence in the commodity markets.
Any applicant entity who wish to become member of the exchange can send us a duly filled in application form available on the site along with other required documents and fees as specified in the application form.
Individuals interested in becoming a member of the NMCE should contact on 91-79-6576632

What is the minimum networth requirement for becoming a member of the Exchange ?

Minimum prescribed net worth for an applicant is Rs. 50 lakh.
Net worth certificate should be computed for this purpose by following a definition of net worth adopted by practising Chartered Accountants for finalisation of accounts.  Existing fund based asset , if any should be excluded for calculation of net worth.
In case, the company is a member of any Commodity  Exchange(s), it should satisfy the combined minimum Net Worth requirements of all these Exchanges including NMCEIL.

What are the annual subscription charges of the Exchange ?

Rs. 20,000/- is the annual subscription charges of the Exchange payable by the members of the exchange.

What are the deposits to be maintained with the Exchange on becoming member of the Exchange ?

* Minimum "Lock in" Period of 3 years.

Is there any designated bank acting as clearing and settlement bank ?

Presently, HDFC bank has been appointed as the clearing and settlement bank where all the members have to maintain a clearing and settlement account.

Is there any daily margin collection system followed ?

Yes, the margins applicable as per standard Value at Risk (VAR) on the basis of exposure sought will require to be deposited with NMCEIL.. 

Are the rates available on the NMCEIL website on the basis of which trading is to be done? Can we get the detailed position of rates for a particular period- like opening, high, low, close rates ?

The current trade information has been directly integrated with this website. Rates for the basis on which trading is to be done are available on real-time basis on the Traders Workstation touchline screen as well as on this website. Intra-day opening, high, low, last traded and closing rates are available on the TWS Screen as well as on this website.

From where can we get the details of turnover- daily basis, etc. ?

Detail of turnover of the Exchange has been integrated on website under Market Summary.

Can we get the list of products and contracts traded on NMCEIL?

You can find the list of products and contacts traded on the NMCEIL.
Click Here to See

Whether we can appoint sub-brokers? If yes, what are the rules for the same?

The Scheme and Rules related to sub-brokers is under consideration, it shall be informed once finalized.

How is the customer's investment protected ?

Protecting the interests of all participants in the futures market is the responsibility of all exchange and industry members, as well as FMC regulators. Working in concert, they work to maintain an honest, open trading environment for all market participants.
Rules and regulations of the NMCE are extensive and are designed to support competitive, efficient, liquid markets. These rules and regulations are scrutinized continuously by the NMCE, and are periodically amended to reflect the needs of market users.
Making sure that these trading rules and regulations are observed is the responsibility of the NMCE. NMCE Surveillance staff members work to prevent trading irregularities and investigate possible violations of exchange rules and regulations. Their activities also include daily surveillance of trading activity, continuous monitoring with state-of-the-art technology of member firms' risk exposure, and auditing member firms' financial conditions, as well as reviewing firms' trading and customer complaints.

Member will get a exposure of maximum 25 times on the cash margin depending upon the VAR margin and commodity.

If a buyer who is based in Calcutta buys a certain item and the seller is based in say Mumbai or other place outside Calcutta. How will delivery be made to us? Whether the goods will be physically delivered from Mumbai to Calcutta? Who is going to bear the transportation cost?

The prices quoted on touch screen will be based on the basis FAQ/Agmark quality and basis a particular location (say Ahmedabad for Castor seed, Rapeseed/Mustard Seed, Cottonseed and Sesame seed their oils and oilcakes and Cochin for Copra, Coconut Oil and Coconut Oilcake). There will be various notified centers specific to the above commodities. Depending on the cost of transportation and other costs, the parities between the basis and the centers will also be notified. Buyer will have to arrange its own arrangements for transportation or buyer may also request CWC Warehouseman to arrange transportation on behalf of the buyer. Calcutta and Mumbai are consuming centers; therefore it is unlikely that delivery could be tendered from Mumbai or Calcutta. If the seller in says Mumbai tenders the goods from a centre in Hyderabad. The difference in parity between Ahmedabad and Hyderabad is taken care of by the Exchange Clearing House as per notification and the cost of Hyderabad to Calcutta will have to be born by the Calcutta based buyer since buyer has bought the goods basis Ahmedabad delivery. It raises another question about delivery in which scenario of the market.
 It is generally seen and also desirable that the prices of expiry month and spot converge and therefore there is no justification for buyers or sellers to hold the position of expiring contract, if the spot market is the same. 

In case the seller does not have the materials sold by him in his possession, how will settlement take place ? What will be the penalty imposed on the seller by the Exchange ? 

First of all we have to see the conditions under which the question of making delivery arises. If the price of an expiry month contract gets converged to the spot price, why should seller or buyer hold the position, they would square off. However if the price of expiring contract is lower than spot market, seller must arrange to procure material to tender during expiring month. If sellers fails, then the exchange will fix due date, rate on the basis of spot price of last 3 days of the month and the seller will have to pay the difference between due date rate and contract rate plus penalty prescribed by the exchange for failing to deliver.