1.

1 Introduction To Derivatives
The origin of derivatives can be traced back to the need of farmers to protect themselves against
fluctuations in the price of their crop. From the time of sowing to the time of crop harvest,
farmers would face price uncertainty. Through the use of simple derivative products, it was
possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These
were simple contracts developed to meet the needs of farmers and were basically a means of
reducing risk.
A farmer who sowed his crop in June faced uncertainty over the price he would receive for his
harvest in September. In years of scarcity, he would probably obtain attractive prices. However,
during times of oversupply, he would have to dispose off his harvest at a very low price.
Clearly this meant that the farmer and his family were exposed to a high risk of price
uncertainty.
On the other hand, a merchant with an ongoing requirement of grains too would face a price risk
that of having to pay exorbitant prices during scarcity, although favorable prices could be
obtained during periods of oversupply. Under such circumstances, it clearly made sense for the
farmer and the merchant to come together and enter into a contract whereby the price of the
grain to be delivered in September could be decided earlier. What they would then negotiate
happened to be a futures-type contract, which would enable both parties to eliminate the price
risk.
In 1848, the Chicago Board of Trade (CBOT) was established to bring farmers and merchants
together. A group of traders got together and created the `to-arrive' contract that permitted
farmers to lock in to price upfront and deliver the grain later. These to-arrive contracts proved
useful as a device for hedging and speculation on price changes. These were eventually
standardized, and in 1925 the first futures clearing house came into existence.
Today, derivative contracts exist on a variety of commodities such as corn, pepper, cotton,
wheat, silver, etc. Besides commodities, derivatives contracts also exist on a lot of financial
underlying like stocks, interest rate, exchange rate, etc.
Derivates can be defined as, "A derivative is a product whose value is derived from the value of
one or more underlying variables or assets in a contractual manner." The underlying asset can be
equity, forex, commodity or any other asset. As earlier stated, we saw that wheat farmers may
wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date.

Such a transaction is an example of a derivative. The price of this derivative is driven by the spot
price of wheat which is the 'underlying' in this case.
The Forward Contracts (Regulation) Act, 1952, regulates the forward/ futures contracts in
commodities all over India. As per this Act, the Forward Markets Commission (FMC) continues
to have jurisdiction over commodity forward/ futures contracts. However, when derivatives
trading in securities was introduced in 2001, the term 'security' in the Securities Contracts
(Regulation) Act, 1956 (SC(R)A), was amended to include derivative contracts in securities.
Consequently, regulation of derivatives came under the purview of Securities Exchange Board of
India (SEBI). We thus have separate regulatory authorities for securities and commodity
derivative markets.
Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by
the regulatory framework under the SC(R)A. The Securities Contracts (Regulation) Act, 1956
defines 'derivative' to include 1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or any other form of security.
2. A contract which derives its value from the prices, or index of prices, of underlying
securities.
1.1.2 Products, Participants And Functions
Derivative contracts are of different types. The most common ones are forwards, futures, options
and swaps. Participants who trade in the derivatives market can be classified under the following
three broad categories: hedgers, speculators, and arbitragers.
1. Hedgers: The farmer's example that we discussed about was a case of hedging. Hedgers
face risk associated with the price of an asset. They use the futures or options markets to
reduce or eliminate this risk.
2. Speculators: Speculators are participants who wish to bet on future movements in the
price of an asset. Futures and options contracts can give them leverage; that is, by
putting in small amounts of money upfront, they can take large positions on the market.
As a result of this leveraged speculative position, they increase the potential for large
gains as well as large losses.

3. Arbitragers: Arbitragers work at making profits by taking advantage of discrepancy

between prices of the same product across different markets. If, for example, they see
the futures price of an asset getting out of line with the cash price, they would take
offsetting positions in the two markets to lock in the profit.

1.1.3 Economic functions performed with the help of derivative market:

Prices in an organized derivatives market reflect the perception of market participants
about the future and lead the prices of underlying to the perceived future level. The
prices of derivatives converge with the prices of the underlying at the expiration of the
derivative contract. Thus, derivatives help in discovery of future as well as current
prices.
The derivatives market helps to transfer risks from those who have them but may not like
them to those who have an appetite for them.
Derivatives, due to their inherent nature, are linked to the underlying cash markets.
With the introduction of derivatives the underlying market witnesses higher trading
volumes, because of participation by more players who would not otherwise participate
for lack of an arrangement to transfer risk.
Speculative traders shift to a more controlled environment of the derivatives market. In
the absence of an organized derivatives market, speculators trade in the underlying cash
markets. Margining, monitoring and surveillance of the activities of various participants
become extremely difficult in these kinds of mixed markets.
An important incidental benefit that flows from derivatives trading is that it acts as a
catalyst for new entrepreneurial activity. Derivatives have a history of attracting many
bright, creative, well-educated people with an entrepreneurial attitude. They often
energize others to create new businesses, new products and new employment
opportunities, the benefit of which are immense.
Derivatives markets help increase savings and investment in the long run. The transfer of
risk enables market participants to expand their volume of activity

1.1.4 Types of derivative markets

Derivatives markets can broadly be classified as commodity derivatives market and financial
derivatives markets. As the name suggest, commodity derivatives markets trade contracts are
those for which the underlying asset is a commodity. It can be an agricultural commodity like
wheat, soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc. or energy
products like crude oil, natural gas, coal, electricity etc. Financial derivatives markets trade
contracts have a financial asset or variable as the underlying. The more popular financial
derivatives are those which have equity, interest rates and exchange rates as the underlying. The
most commonly used derivatives contracts are forwards, futures and options.

Spot versus Forward Transaction

Every transaction has three components - trading, clearing and settlement. A buyer and seller
come together, negotiate and arrive at a price. This is trading. Clearing involves finding out the
net outstanding, that is exactly how much of goods and money the two should exchange. For
instance, A buys goods worth Rs.100 from B and sells goods worth Rs. 50 to B. On a net basis,
A has to pay Rs. 50 to B. Settlement is the actual process of exchanging money and goods.
Using the example of a forward contract, let us try to understand the difference between a spot
and derivatives contract.
In a spot transaction, the trading, clearing and settlement happens instantaneously, i.e. 'on the
spot'. Consider this example. On 1st January 2010, Aditya wants to buy some gold. The
goldsmith quotes Rs. 17,000 per 10 grams. They agree upon this price and Aditya buys 20 grams
of gold. He pays Rs.34,000, takes the gold and leaves. This is a spot transaction.
Now suppose, Aditya does not want to buy the gold on the 1st January, but wants to buy it a
month later. The goldsmith quotes Rs. 17,100 per 10 grams. They agree upon the 'forward' price
for 20 grams of gold that Aditya wants to buy and Aditya leaves. A month later, he pays the
goldsmith Rs. 34,200 and collects his gold. This is a forward contract, a contract by which two
parties irrevocably agree to settle a trade at a future date, for a stated price and quantity. No
money changes hands when the contract is signed. The exchange of money and the underlying
goods only happens at the future date as specified in the contract. In a forward contract, the
process of trading, clearing and settlement does not happen instantaneously. The trading happens
today, but the clearing and settlement happens at the end of the specified period.
A forward contract is the most basic derivative contract. We call it a derivative because it derives

value from the price of the asset underlying the contract, in this case- gold. If on the1st of
February, gold trades for Rs. 17,200 per 10 grams in the spot market, the contract becomes more
valuable to Aditya because it now enables him to buy gold at Rs.17,100 per 10 grams. If
however, the price of gold drops down to Rs. 16,900 per 10 grams he is worse off because as per
the terms of the contract, he is bound to pay Rs. 17,100 per 10 grams for the same gold. The
contract has now lost value from Adyta's point of view. Note that the value of the forward
contract to the goldsmith varies exactly in an opposite manner to its value for Aditya.
Exchange Traded Versus OTC Derivatives
Derivatives have probably been around for as long as people have been trading with one another.
Forward contracting dates back at least to the 12th century and may well have been around
before then. These contracts were typically OTC kind of contracts. Over the counter (OTC)
derivatives are privately negotiated contracts. Merchants entered into contracts with one another
for future delivery of specified amount of commodities at specified price. A primary motivation
for prearranging a buyer or seller for a stock of commodities in early forward contracts was to
lessen the possibility that large swings would inhibit marketing the commodity after a harvest
Later many of these contracts were standardized in terms of quantity and delivery dates and
began to trade on an exchange.
The OTC derivatives markets have the following features compared to exchange-traded
derivatives:
1. The management of counter-party (credit) risk is decentralized and located within
individual institutions.
2. There are no formal centralized limits on individual positions, leverage, or margining.
3. There are no formal rules for risk and burden-sharing.
4. There are no formal rules or mechanisms for ensuring market stability and integrity, and
for safeguarding the collective interests of market participants.
5. The OTC contracts are generally not regulated by a regulatory authority and the
exchange's self-regulatory organization, although they are affected indirectly by national
legal systems, banking supervision and market surveillance.

The derivatives markets have witnessed rather sharp growth over the last few years, which have
accompanied the modernization of commercial and investment banking and globalization of
financial activities. The recent developments in information technology have contributed to a
great extent to these developments. While both exchange-traded and OTC derivative contracts
offer many benefits, the former have rigid structures compared to the latter.
The largest OTC derivative market is the inter-bank foreign exchange market. Commodity
derivatives, the world over are typically exchange-traded and not OTC in nature.

1.1.5 Difference Between Commodity And Financial Derivatives

The basic concept of a derivative contract remains the same whether the underlying happens to
be a commodity or a financial asset. However, there are some features which are very peculiar to
commodity derivative markets. In the case of financial derivatives, most of these contracts are
cash settled. Since financial assets are not bulky, they do not need special facility for storage
even in case of physical settlement. On the other hand, due to the bulky nature of the underlying
assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly,
the concept of varying quality of asset does not really exist as far as financial underlying are
concerned. However, in the case of commodities, the quality of the asset underlying a contract
can vary largely. This becomes an important issue to be managed. We have a brief look at these
issues.
Physical Settlement
Physical settlement involves the physical delivery of the underlying commodity, typically at an
accredited warehouse. The seller intending to make delivery would have to take the commodities
to the designated warehouse and the buyer intending to take delivery would have to go to the
designated warehouse and pick up the commodity. This may sound simple, but the physical
settlement of commodities is a complex process. The issues faced in physical settlement are
enormous. There are limits on storage facilities in different states. There are restrictions on
interstate movement of commodities. Besides state level octroi and duties have an impact on the
cost of movement of goods across locations. The process of taking physical delivery in
commodities is quite different from the process of taking physical delivery in financial assets.

Delivery notice period

Unlike in the case of equity futures, typically a seller of commodity futures has the option to
give notice of delivery. This option is given during a period identified as `delivery notice period'.

Assignment
Whenever delivery notices are given by the seller, the clearing house of the Exchange identifies
the buyer to whom this notice may be assigned. Exchanges follow different practices for the
assignment process.

Delivery
The procedure for buyer and seller regarding the physical settlement for different types of
contracts is clearly specified by the Exchange. The period available for the buyer to take
physical delivery is stipulated by the Exchange. Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order. Proof
of physical delivery having been effected is forwarded by the seller to the clearing house and the
invoice amount is credited to the seller's account.
The clearing house decides on the delivery order rate at which delivery will be settled. Delivery
rate depends on the spot rate of the underlying adjusted for discount/ premium for quality and
freight costs. The discount/ premium for quality and freight costs are published by the clearing
house before introduction of the contract. The most active spot market is normally taken as the
benchmark for deciding spot prices.
Warehousing
One of the main differences between financial and commodity derivative is the need for
warehousing. In case of most exchange-traded financial derivatives, all the positions are cash
settled. Cash settlement involves paying up the difference in prices between the time the contract
was entered into and the time the contract was closed. For instance, if a trader buys futures on a
stock at Rs.100 and on the day of expiration, the futures on that stock close at Rs.120, he does

not really have to buy the underlying stock. All he does is take the difference of Rs.20 in cash.
Similarly, the person who sold this futures contract at Rs.100 does not have to deliver the
underlying stock. All he has to do is pay up the loss of Rs.20 in cash.
In case of commodity derivatives however, there is a possibility of physical settlement. It means
that if the seller chooses to hand over the commodity instead of the difference in cash,
the buyer must take physical delivery of the underlying asset. This requires the Exchange to
make an arrangement with warehouses to handle the settlements. The efficacy of the
commodities settlements depends on the warehousing system available. Such warehouses have
to perform the following functions:
Earmark separate storage areas as specified by the Exchange for storing commodities;
Ensure proper grading of commodities before they are stored;
Store commodities according to their grade specifications and validity period; and
Ensure that necessary steps and precautions are taken to ensure that the quantity and
grade of commodity, as certified in the warehouse receipt, are maintained during the
storage period. This receipt can also be used as collateral for financing.
In India, NCDEX has accredited over 775 delivery centers which meet the requirements for the
physical holding of goods that are to be delivered on the platform. As future trading is delivery
based, it is necessary to create the logistics support for the same.
1.1.6 Quality of Underlying Assets
A derivatives contract is written on a given underlying. Variance in quality is not an issue in case
of financial derivatives as the physical attribute is missing. When the underlying asset is a
commodity, the quality of the underlying asset is of prime importance. There may be quite some
variation in the quality of what is available in the marketplace. When the asset is specified, it is
therefore important that the Exchange stipulate the grade or grades of the commodity that are
acceptable. Commodity derivatives demand good standards and quality assurance/ certification
procedures. A good grading system allows commodities to be traded by specification.
Trading in commodity derivatives also requires quality assurance and certifications from
specialized agencies. In India, for example, the Bureau of Indian Standards (BIS) under the
Department of Consumer Affairs specifies standards for processed agricultural commodities.

AGMARK, another certifying body under the Department of Agriculture and Cooperation,
specifies standards for basic agricultural commodities.

1.2 INTRODUCTION TO COMMODITY MARKET

The study of Indian derivatives markets in Money & Finance
would be incomplete without an account of the commodity derivatives
market in the country. In this paper we attempt to bring forth the nature
of information flows between futures and spot prices in the market for
commodity derivatives in India, taking into consideration the history of
commodity derivatives globally, and the importance of and problems
associated with commodity markets particularly in less mature economies.
In our previous studies on the Indian stock and futures markets
we have seen that the characteristics exhibited by the price index/
returns in these markets are more or less in agreement with or at least
lean towards what should be expected in a mature or efficient market.
Here we make an attempt to see whether price movements in the Indian
commodity derivatives market exhibit similar trends or not, particularly
as this market is less developed compared to the financial derivatives
markets, being constrained by its chequered history with many
policy reversals.
What is Commodity?
Any product that can be used for commerce or an article of commerce which is traded on an
authorized commodity exchange is known as commodity. The article should be movable of
value, something which is bought or sold and which is produced or used as the subject or barter
or sale. In short commodity includes all kinds of goods. Indian Forward Contracts (Regulation)

Act (FCRA), 1952 defines goods as every kind of movable property other than actionable
claims, money and securities.
In current situation, all goods and products of agricultural (including plantation), mineral and
fossil origin are allowed for commodity trading recognized under the FCRA. The national
commodity exchanges, recognized by the Central Government, permits commodities which
include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and unginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur, potatoes and
onions, coffee and tea, rubber and spices. Etc.
What is a commodity exchange?
A commodity exchange is an association or a company or any other body corporate organizing
futures trading in commodities for which license has been granted by regulating authority.
What is Commodity Future
A Commodity futures is an agreement between two parties to buy or sell a specified and
standardized quantity of a commodity at a certain time in future at a price agreed upon at the
time of entering into the contract on the commodity futures exchange. The need for a futures
market arises mainly due to the hedging function that it can perform. Commodity markets, like
any other financial instrument, involve risk associated with frequent price volatility. The loss due
to price volatility can be attributed to the following reasons:
Consumer Preferences: - In the short-term, their influence on price volatility is small since it is
a slow process permitting manufacturers, dealers and wholesalers to adjust their inventory in
advance.
Changes in supply: - They are abrupt and unpredictable bringing about wild fluctuations in
prices. This can especially noticed in agricultural commodities where the weather plays a major
role in affecting the fortunes of people involved in this industry. The futures market has evolved
to neutralize such risks through a mechanism; namely hedging.
The objectives of Commodity futures:

Hedging with the objective of transferring risk related to the possession of physical assets
through any adverse moments in price. Liquidity and Price discovery to ensure base
minimum volume in trading of a commodity through market information and demand
supply factors that facilitates a regular and authentic price discovery mechanism.

Maintaining buffer stock and better allocation of resources as it augments reduction in

inventory requirement and thus the exposure to risks related with price fluctuation
declines. Resources can thus be diversified for investments.

Price stabilization along with balancing demand and supply position. Futures trading
leads to predictability in assessing the domestic prices, which maintains stability, thus
safeguarding against any short term adverse price movements. Liquidity in Contracts of
the commodities traded also ensures in maintaining the equilibrium between demand and
supply.

Flexibility, certainty and transparency in purchasing commodities facilitate bank

financing. Predictability in prices of commodity would lead to stability, which in turn
would eliminate the risks associated with running the business of trading commodities.
This would make funding easier and less stringent for banks to commodity market
players.
Benefits of Commodity Futures Markets:-

The primary objectives of any futures exchange are authentic price discovery and an efficient
price risk management. The beneficiaries include those who trade in the commodities being
offered in the exchange as well as those who have nothing to do with futures trading. It is
because of price discovery and risk management through the existence of futures exchanges that
a lot of businesses and services are able to function smoothly.
1. Price Discovery:-Based on inputs regarding specific market information, the demand
and supply equilibrium, weather forecasts, expert views and comments, inflation rates,
Government policies, market dynamics, hopes and fears, buyers and sellers conduct
trading at futures exchanges. This transforms in to continuous price discovery
mechanism. The execution of trade between buyers and sellers leads to assessment of fair
value of a particular commodity that is immediately disseminated on the trading terminal.
2.

Price Risk Management: - Hedging is the most common method of price risk
management. It is strategy of offering price risk that is inherent in spot market by taking
an equal but opposite position in the futures market. Futures markets are used as a mode
by hedgers to protect their business from adverse price change. This could dent the
profitability of their business. Hedging benefits who are involved in trading of

commodities like farmers, processors, merchandisers, manufacturers, exporters,

importers etc.
3.

Import- Export competitiveness: - The exporters can hedge their price risk and
improve their competitiveness by making use of futures market. A majority of traders
which are involved in physical trade internationally intend to buy forwards. The
purchases made from the physical market might expose them to the risk of price risk
resulting to losses. The existence of futures market would allow the exporters to hedge
their proposed purchase by temporarily substituting for actual purchase till the time is
ripe to buy in physical market. In the absence of futures market it will be meticulous,
time consuming and costly physical transactions.

4. Predictable Pricing: - The demand for certain commodities is highly price elastic. The
manufacturers have to ensure that the prices should be stable in order to protect their
market share with the free entry of imports. Futures contracts will enable predictability in
domestic prices. The manufacturers can, as a result, smooth out the influence of changes
in their input prices very easily. With no futures market, the manufacturer can be caught
between severe short-term price movements of oils and necessity to maintain price
stability, which could only be possible through sufficient financial reserves that could
otherwise be utilized for making other profitable investments.
5. Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on farmers
in the absence of futures market. There would be no need to have large reserves to cover
against unfavorable price fluctuations. This would reduce the risk premiums associated
with the marketing or processing margins enabling more returns on produce. Storing
more and being more active in the markets. The price information accessible to the
farmers determines the extent to which traders/processors increase price to them. Since
one of the objectives of futures exchange is to make available these prices as far as
possible, it is very likely to benefit the farmers. Also, due to the time lag between
planning and production, the market-determined price information disseminated by
futures exchanges would be crucial for their production decisions.

6. Credit accessibility: - The absence of proper risk management tools would attract the
marketing and processing of commodities to high-risk exposure making it risky business
activity to fund. Even a small movement in prices can eat up a huge proportion of capital
owned by traders, at times making it virtually impossible to pay back the loan. There is a
high degree of reluctance among banks to fund commodity traders, especially those who
do not manage price risks. If in case they do, the interest rate is likely to be high and
terms and conditions very stringent. This posses a huge obstacle in the smooth
functioning and competition of commodities market. Hedging, which is possible through
futures markets, would cut down the discount rate in commodity lending.
7. Improved product quality: - The existence of warehouses for facilitating delivery with
grading facilities along with other related benefits provides a very strong reason to
upgrade and enhance the quality of the commodity to grade that is acceptable by the
exchange. It ensures uniform standardization of commodity trade, including the terms of
quality standard: the quality certificates that are issued by the exchange-certified
warehouses have the potential to become the norm for physical trade.
History of Evolution of commodity markets
Commodities future trading was evolved from need of assured continuous supply of seasonal
agricultural crops. The concept of organized trading in commodities evolved in Chicago, in
1848. But one can trace its roots in Japan. In Japan merchants used to store Rice in warehouses
for future use. To raise cash warehouse holders sold receipts against the stored rice. These were
known as rice tickets. Eventually, these rice tickets become accepted as a kind of commercial
currency. Latter on rules came in to being, to standardize the trading in rice tickets. In 19 th
century Chicago in United States had emerged as a major commercial hub. So that wheat
producers from Mid-west attracted here to sell their produce to dealers & distributors. Due to
lack of organized storage facilities, absence of uniform weighing & grading mechanisms
producers often confined to the mercy of dealers discretion. These situations lead to need of
establishing a common meeting place for farmers and dealers to transact in spot grain to deliver
wheat and receive cash in return.
Gradually sellers & buyers started making commitments to exchange the produce for cash in
future and thus contract for futures trading evolved. Whereby the producer would agree to sell

his produce to the buyer at a future delivery date at an agreed upon price. In this way producer
was aware of what price he would fetch for his produce and dealer would know about his cost
involved, in advance. This kind of agreement proved beneficial to both of them. As if dealer is
not interested in taking delivery of the produce, he could sell his contract to someone who needs
the same. Similarly producer who not intended to deliver his produce to dealer could pass on the
same responsibility to someone else. The price of such contract would dependent on the price
movements in the wheat market. Latter on by making some modifications these contracts
transformed in to an instrument to protect involved parties against adverse factors such as
unexpected price movements and unfavorable climatic factors. This promoted traders entry in
futures market, which had no intentions to buy or sell wheat but would purely speculate on price
movements in market to earn profit.
Trading of wheat in futures became very profitable which encouraged the entry of other
commodities in futures market. This created a platform for establishment of a body to regulate
and supervise these contracts. Thats why Chicago Board of Trade (CBOT) was established in
1848. In 1870 and 1880s the New York Coffee, Cotton and Produce Exchanges were born.
Agricultural commodities were mostly traded but as long as there are buyers and sellers, any
commodity can be traded. In 1872, a group of Manhattan dairy merchants got together to bring
chaotic condition in New York market to a system in terms of storage, pricing, and transfer of
agricultural products. In 1933, during the Great Depression, the Commodity Exchange, Inc. was
established in New York through the merger of four small exchanges the National Metal
Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New
York Hide Exchange.
The largest commodity exchange in USA is Chicago Board of Trade, The Chicago Mercantile
Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and New
York Coffee, sugar and cocoa Exchange. Worldwide there are major futures trading exchanges in
over twenty countries including Canada, England, India, France, Singapore, Japan, Australia and
New Zealand.

History of Commodity Market in India:The Commodity Futures market in India dates back to more than a century. The first organized
futures market was established in 1875, under the name of Bombay Cotton Trade Association

to trade in cotton derivative contracts. This was followed by institutions for futures trading in
oilseeds, food grains, etc. The futures market in India underwent rapid growth between the
period of First and Second World War. As a result, before the outbreak of the Second World War,
a large number of commodity exchanges trading futures contracts in several commodities like
cotton, groundnut, groundnut oil, raw jute, jute goods, castor seed, wheat, rice, sugar, precious
metals like gold and silver were flourishing throughout the country. In view of the delicate
supply situation of major commodities in the backdrop of war efforts mobilization, futures
trading came to be prohibited during the Second World War under the Defence of India Act.
After Independence, especially in the second half of the 1950s and first half of 1960s, the
commodity futures trading again picked up and there were thriving commodity markets.
However, in mid-1960s, commodity futures trading in most of the commodities was banned and
futures trading continued in two minor commodities, viz, pepper and turmeric.
The history of organized commodity derivatives in India goes back to the nineteenth century
when Cotton Trade Association started futures trading in 1875, about a decade after they started
in Chicago. Over the time datives market developed in several commodities in India. Following
Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in
Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920).
However many feared that derivatives fuelled unnecessary speculation and were detrimental to
the healthy functioning of the market for the underlying commodities, resulting in to banning of
commodity options trading and cash settlement of commodities futures after independence in
1952. The parliament passed the Forward Contracts (Regulation) Act, 1952, which regulated
contracts in Commodities all over the India. The act prohibited options trading in Goods along
with cash settlement of forward trades, rendering a crushing blow to the commodity derivatives
market. Under the act only those associations/exchanges, which are granted reorganization from
the Government, are allowed to organize forward trading in regulated commodities. The act
envisages three tire regulations: (i) Exchange which organizes forward trading in commodities
can regulate trading on day-to-day basis; (ii) Forward Markets Commission provides regulatory
oversight under the powers delegated to it by the central Government. (iii) The Central
Government- Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public
Distribution- is the ultimate regulatory authority.

The commodities future market remained dismantled and remained dormant for about four
decades until the new millennium when the Government, in a complete change in a policy,
started actively encouraging commodity market. After Liberalization and Globalization in 1990,
the Government set up a committee (1993) to examine the role of futures trading. The
Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17
commodity groups. It also recommended strengthening Forward Markets Commission, and
certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option
trading in goods and registration of brokers with Forward Markets Commission.

The

Government accepted most of these recommendations and futures trading was permitted in all
recommended commodities. It is timely decision since internationally the commodity cycle is on
upswing and the next decade being touched as the decade of Commodities.
Commodity exchange in India plays an important role where the prices of any commodity are
not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market
judged upon the prices. Others never had a say.
Today, commodity exchanges are purely speculative in nature. Before discovering the price,
they reach to the producers, end-users, and even the retail investors, at a grassroots level. It
brings a price transparency and risk management in the vital market. A big difference between a
typical auction, where a single auctioneer announces the bids and the Exchange is that people
are not only competing to buy but also to sell. By Exchange rules and by law, no one can bid
under a higher bid, and no one can offer to sell higher than someone elses lower offer. That
keeps the market as efficient as possible, and keeps the traders on their toes to make sure no one
gets the purchase or sale before they do. Since 2002, the commodities future market in India has
experienced an unexpected boom in terms of modern exchanges, number of commodities
allowed for derivatives trading as well as the value of futures trading in commodities, which
crossed $ 1 trillion mark in 2006. Since 1952 till 2002 commodity datives market was virtually
non- existent, except some negligible activities on OTC basis.
In India there are 25 recognized future exchanges, of which there are three national level multicommodity exchanges. After a gap of almost three decades, Government of India has allowed

forward transactions in commodities through Online Commodity Exchanges, a modification of

traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and
delivery of commodities. The three exchanges are: National Commodity & Derivatives
Exchange Limited (NCDEX) Mumbai, Multi Commodity Exchange of India Limited (MCX)
Mumbai

and

National

Multi-Commodity

Exchange

of

India

Limited

(NMCEIL)

Ahmedabad.There are other regional commodity exchanges situated in different parts of India.

1875

Bombay Cotton Trade Association

Between 1st and 2nd World war

Rapid growth of futures markets

During 2nd World War

Defence of India Act- Prohibited Futures trading in

major Commodities owing to short supply.

1950s to mid-1960s

Thriving Commodity futures markets

Mid 1960s to 1970s

Banned Commodity Futures trading in most of the

Commodities except two minor Commodities
- Pepper and Turmeric.

1980s

Revival of Futures trading in Potato, Castor

Seed and Gur (Jaggery).

1992

Futures trading in Hessian permitted.

1999

Futures trading in various edible oilseeds

complexes permitted.

2000

The National Agricultural Policy-recognized the

positive role of forward and futures markets in
price discovery and price risk management.

2001

Futures trading in Sugar permitted.

2003

Lifted prohibition on futures trading in all

Commodities
Recognition to 3 National Commodity Electronic
Exchanges MCX, NCDEX and NMCE.

2008

Commission issued guidelines on setting up of

New National Multi Commodity Exchanges.

2009

Recognition to ICEX as 4th National Exchange

2010

Recognition to ACE as 5th National Exchange.

Notified Iron Ore under section 15 of the FCRA,

1952.
2012

Recognition to UCX as 6th National Exchange.

Legal framework for regulating commodity futures in India:The commodity futures traded in commodity exchanges are regulated by the Government under
the Forward Contracts Regulations Act, 1952 and the Rules framed there under. The regulator
for the commodities trading is the Forward Markets Commission, situated at Mumbai, which
comes under the Ministry of Consumer Affairs Food and Public Distribution
Forward Markets Commission (FMC):It is statutory institution set up in 1953 under Forward Contracts (Regulation) Act, 1952.
Commission consists of minimum two and maximum four members appointed by Central Govt.
Out of these members there is one nominated chairman. All the exchanges have been set up
under overall control of Forward Market Commission (FMC) of Government of India.
There are 21 Commodity Exchanges (15 Regional and 6 National Exchanges) regulating futures
trading in commodities under the purview of the Forward Markets Commission (FMC).
Forward Markets Commission (FMC) headquartered at Mumbai, is a regulatory authority for
commodity futures market in India. It is a statutory body set up under Forward Contracts
(Regulation) Act 1952.

The Commission functioned under the administrative control of the Ministry of Consumer Affairs,
Food & Public Distribution, Department of Consumer Affairs, Government of India till 5th
September. Thereafter the Commission has been functioning under the Ministry of Finance,
Department of Economic Affairs, Government of India.
The Act provides that the Commission shall consist of not less than two but not exceeding four
members appointed by the Central Government, out of them one being nominated by the Central
Government to be the Chairman of the Commission. Currently the Commission comprises of three
members among whom Shri. Ramesh Abhishek, IAS is the Chairman, Dr. M. Mathisekaran, IES
and Shri Nagendraa Parakh are the Members of the Commission.

Functions

The functions of the Forward Markets Commission are as follows:

(a) 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;
(b) 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;
(c) 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;
(d) To make recommendations generally with a view to improving the organization and
working of forward markets;
(e) To undertake the inspection of the books of accounts and other documents of any
recognized association or registered association or any member of such association
whenever it considers it necessary.

The country's commodity futures exchanges are divided majorly into two categories:
National exchanges
Regional exchanges
The six exchanges operating at the national level (as on ) are:
i) National Commodity and Derivatives Exchange of India Ltd. (NCDEX)
ii) National Multi Commodity Exchange of India Ltd. (NMCE)
iii) Multi Commodity Exchange of India Ltd. (MCX)
iv)Indian Commodity Exchange Ltd. (ICEX) which started trading operations on November
27, 2009
v) ACE Derivatives and Commodity Exchange

The leading regional exchange is the National Board of Trade (NBOT) located at Indore. There
are more than 15 regional commodity exchanges in India.
National Commodities & Derivatives Exchange Limited (NCDEX)
National Commodities & Derivatives Exchange Limited (NCDEX) promoted by ICICI Bank
Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank of Agriculture
and Rural Development (NABARD) and National Stock Exchange of India Limited (NSC).
Punjab National Bank (PNB), Credit Rating Information Service of India Limited (CRISIL),
Indian Farmers Fertilizer Cooperative Limited (IFFCO), Canara Bank and Goldman Sachs by
subscribing to the equity shares have joined the promoters as a share holder of exchange.
NCDEX is the only Commodity Exchange in the country promoted by national level institutions.
NCDEX is a public limited company incorporated on 23 April 2003. NCDEX is a national level
technology driven on line Commodity Exchange with an independent Board of Directors and
professionals not having any vested interest in Commodity Markets.
It is committed to provide a world class commodity exchange platform for market participants to
trade in a wide spectrum of commodity derivatives driven by best global practices,
professionalism and transparency.
NCDEX is regulated by Forward Markets Commission (FMC). NCDEX is also subjected to the
various laws of land like the Companies Act, Stamp Act, Contracts Act, Forward Contracts
Regulation Act and various other legislations.
NCDEX is located in Mumbai and offers facilities to its members in more than 550 centers
throughout India. NCDEX currently facilitates trading of 57 commodities.
Multi Commodity Exchange of India Limited (MCX)
Multi Commodity Exchange of India Limited (MCX) is an independent and de-mutulized
exchange with permanent reorganization from Government of India, having Head Quarter in
Mumbai. Key share holders of MCX are Financial Technologies (India) Limited, State Bank of
India, Union Bank of India, Corporation Bank of India, Bank of India and Canara Bank. MCX
facilitates online trading, clearing and settlement operations for commodity futures market
across the country. MCX started of trade in Nov 2003 and has built strategic alliance with

Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors Association of India,
pulses Importers Association and Shetkari Sanghatana.MCX deals with about 100 commodities.
National Multi Commodity Exchange of India Limited (NMCEIL)
National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-mutualised
Electronic Multi Commodity Exchange in India. On 25 th July 2001 it was granted approval by
Government to organize trading in edible oil complex. It is being supported by Central
warehousing Corporation Limited, Gujarat State Agricultural Marketing Board and Neptune
Overseas Limited. It got reorganization in Oct 2002. NMCEIL Head Quarter is at Ahmedabad.
Some of the features of national and regional exchanges are listed below:
National Exchanges
Compulsory online trading
Transparent trading
Exchanges to be de-mutualised
Exchange recognized on permanent basis
Multi commodity exchange
Large expanding volumes
Regional Exchanges
Online trading not compulsory
De-mutualisation not mandatory
Recognition given for fixed period after which it could be given for re regulation
Generally, these are single commodity exchanges. Exchanges have to apply for trading
each commodity.
Low volumes in niche markets
No
1.

2.

3.
4.

Exchanges

Main Commodities

Multi Commodity Exchange Of India

Ltd,Mumbai.

Zinc,Nickel,Aluminum, cotton, Lead, Gold,

Natural Gas, Copper , Silver, Crude Oil, Other
Commodities

National Commodity & Derivatives

Exchange Ltd, Mumbai

Turmeric,Jeera, Soya Oil, Kapas Khali,

Mustard Seed, Dhaniya, Soya been, Rape
Mustard seed, Chana.

National Multi Commodity Exchange

Of india Ltd, Ahmedabad

Raw jute, Castor Seed, Rape/mustard Seed,

Chana, Coffee Red bulk.
Mustard Seed, Natural Gas, Silver,

Indian commodity Exchange Ltd, New

Delhi

Soyabeen,Iron ores

5.

Ace Derivatives and Commodity

Exchange Ltd,Mumbai.

CPO, Castor, Cotton, Soya been, Resoyoil,

Universal commodity Exchange Ltd,

Navi Mumbai.

Channa, Turmeric, Soyabeen, Rape Mustard

Seed,

6.

How Commodity market works?

There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash
and carries away the goods. The second is futures trade. The underpinning for futures is the
warehouse receipt. A person deposits certain amount of say, good X in a ware house and gets a
warehouse receipt. Which allows him to ask for physical delivery of the good from the
warehouse. But someone trading in commodity futures need not necessarily posses such a
receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on
his expectation of where the price will go. Futures have something called an expiry date, by
when the buyer or seller either closes (square off) his account or give/take delivery of the
commodity. The broker maintains an account of all dealing parties in which the daily profit or
loss due to changes in the futures price is recorded. Squiring off is done by taking an opposite
contract so that the net outstanding is nil.
For commodity futures to work, the seller should be able to deposit the commodity at
warehouse nearest to him and collect the warehouse receipt. The buyer should be able to take
physical delivery at a location of his choice on presenting the warehouse receipt. But at present
in India very few warehouses provide delivery for specific commodities.
Figure 1.2 Following diagram gives a fair idea about working of the Commodity
market.

Today Commodity trading system is fully computerized. Traders need not visit a commodity
market to speculate. With online commodity trading they could sit in the confines of their home
or office and call the shots.

The commodity trading system consists of certain prescribed steps or stages as follows:
I. Trading: - At this stage the following is the system implemented-

Order receiving

Execution

Matching

Reporting

Surveillance

Price limits

Position limits

II. Clearing: - This stage has following system in place-

Matching

Registration

Clearing

Clearing limits

Notation

Margining

Price limits

Position limits

Clearing house.

III. Settlement: - This stage has following system followed as follows-

Marking to market

Receipts and payments

Reporting

Delivery upon expiration or maturity.

How to invest in a Commodity Market?

With whom investor can transact a business?

An investor can transact a business with the approved clearing member of previously
mentioned Commodity Exchanges. The investor can ask for the details from the Commodity
Exchanges about the list of approved members.

What is Identity Proof?

When investor approaches Clearing Member, the member will ask for identity proof. For
which Xerox copy of any one of the following can be given
a)
b)
c)
d)

PAN card Number

Driving License
Vote ID
Passport

What statements should be given for Bank Proof?

The front page of Bank Pass Book and a canceled cheque of a concerned bank. Otherwise
the Bank Statement containing details can be given.

What are the particulars to be given for address proof?

In order to ascertain the address of investor, the clearing member will insist on Xerox copy
of Ration card or the Pass Book/ Bank Statement where the address of investor is given.

What are the other forms to be signed by the investor?

The clearing member will ask the client to sign
a) Know your client form
b) Risk Discloser Document
The above things are only procedure in character and the risk involved and only after
understanding the business, he wants to transact business.

What aspects should be considered while selecting a commodity broker?

While selecting a commodity broker investor should ideally keep certain aspects in mind
to ensure that they are not being missed in any which way. These factors include

Net worth of the broker of brokerage firm.

The clientele.
The number of franchises/branches.
The market credibility.
The references.
The kind of service provided- back office functioning being most important.
Credit facility.
The research team.
These are amongst the most important factors to calculate the credibility of
commodity broker.

Broker:The Broker is essentially a person of firm that liaisons between individual traders and the
commodity exchange. In other words the Commodity Broker is the member of Commodity
Exchange, having direct connection with the exchange to carry out all trades legally. He is also
known as the authorized dealer.

How to become a Commodity Trader/Broker of Commodity Exchange?

To become a commodity trader one needs to complete certain legal and binding
obligations. There is routine process followed, which is stated by a unit of Government that lays
down the laws and acts with regards to commodity trading. A broker of Commodities is also
required to meet certain obligations to gain such a membership in exchange.
To become a member of Commodity Exchange the broker of brokerage firm should have
net worth amounting to Rs. 50 Lakh. This sum has been determined by Multi Commodity
Exchange.

How to become a Member of Commodity Exchange?

To become member of Commodity Exchange the person should comply with the
following Eligibility Criteria.
1.
2.
3.
4.
5.

He should be Citizen of India.

He should have completed 21 years of his age.
He should be Graduate or having equivalent qualification.
He should not be bankrupt.
He has not been debarred from trading in Commodities by statutory/regulatory authority,
There are following three types of Memberships of Commodity Exchanges.

Trading-cum-Clearing Member (TCM):A TCM is entitled to trade on his own account as well as on account of his clients, and clear
and settle trades himself. A sole proprietor, Partnership firm, a joint Hindu Undivided Family
(HUF), a corporate entity, a cooperative society, a public sector organization or any other
Government or non-Government entity can become a TCM.
There are two types of TCM, TCM-1 and TCM-2. TCM-1 refers to transferable nondeposit based membership and TCM-2 refers to non-transferable deposit based membership.
A person desired to register as TCM is required to submit an application as per the
format prescribed under the business rules, along with all enclosures, fee and other documents
specified therein. He is required to go through interview by Membership Admission Committee
and committee is also empowered to frame rules or criteria relating to selection or rejection of a
member.

Institutional Trading-cum-clearing Member (ITCM):Only an Institution/ Corporate can be admitted by the Exchange as a member, conferring
upon them the right to trade and clear through the clearing house of exchange as an Institutional

Trading-cum-clearing Member (ITCM). The member may be allowed to make deals for himself
as well as on behalf of his clients and clear and settle such deals. ITCMs can also appoint subbrokers, authorized persons and Trading Members who would be registered as trading members.

Professional Clearing Member (PCM):A PCM entitled to clear and settle trades executed by other members of the exchange. A
corporate entity and an institution only can apply for PCM. The member would be allowed to
clear and settle trades of such members of the Exchange who choose to clear and settle their
trades through such PCM.

Current Scenario in Indian Commodity Market

Need of Commodity Derivatives for India:India is among top 5 producers of most of the Commodities, in addition to being a major
consumer of bullion and energy products. Agriculture contributes about 22% GDP of Indian
economy. It employees around 57% of the labor force on total of 163 million hectors of land
Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates
that India can be promoted as a major centre for trading of commodity derivatives.
INITIATIVES OF THE COMMISSION IN 2013-14

Y Settlement Guarantee Fund: The Commission had issued guidelines regarding setting up
of Settlement Guarantee Fund (SGF) in 2007. The SGF was operationalized in 2013
and the exchanges transferred 460.13 cr to SGF corpus as on 31/3/2014. This is a
very important risk management initiative which has inspired much confidence
among the market participants.
Y Corporate Governance: To strengthen corporate governance of the National
Commodity Exchanges the Commission issued revised Guidelines to have a broad-based
representation of all classes of shareholders on the Board of Directors of the Exchanges.
This will improve Corporate Governance at the Exchanges and make Board of Directors
more responsive and broad based, eliminating the dominance of non-institutional
shareholders.

Y Strengthening of warehousing facilities: The Commission decided that all the

existing warehouses accredited by the Exchanges shall be registered with Warehousing
Development and Regulatory Authority (WDRA) in a time-bound manner. This will
strengthen the warehousing facility in the Commodity Futures market.
Y Risk Management Group: A Risk Management Group (RMG) was constituted to assist
the Commission in formulating risk management policies and guidelines for
Commodities Derivatives Market. RMG is chaired by Prof. J. R. Verma, IIM,
Ahmedabad.
Y Incentives to hedgers: To reduce the cost of hedging, the Exchanges were directed
to exempt the market participants, who have deposited certified goods against all the
relevant futures contracts sold and earmarked for delivery, to the Exchange accredited
warehouse, from paying initial, additional and special margins. Such participants will
continue to remain exempted from payment of delivery margins. Besides, the
Commission also permitted spread margin benefits to those having different month
contracts of the same underlying commodity and to those having two contract variants
having the same underlying commodity.
Y Margin Reporting: In order to regularly monitor the collection of margins by members
and also provide a reasonable time to members for collection of margins from their
clients, the Commission on 14th March, 2014 revised its earlier instructions on shortcollection/ non- collection of margins, so that the members will have time till T+2
working days to collect margins (except initial margins) from their clients and the
Member shall report to the Exchange on T + 5 day the actual short collection/non
collection of all margins from clients.
Y Approval of futures contracts on continuous basis: The Commission decided to grant
continuous approval for trading in the futures contracts instead of the practice of
giving permission for trading in futures contracts on yearly basis.
Y

Consumer Protection- As a part of implementation of non-legislative

recommendations of FSLRC, FMC adopted enhanced consumer protection measures
which include requirement of professional diligence on the part of members and
protection of consumers from unfair terms in financial contracts.
REGULATORY REFORMS UNDERTAKEN BY THE COMMISSION

1.1

Grant of Recognition / Renewal of Recognition to the association / recognized

exchanges and grant of registration / renewal of registration to the recognized

exchanges.
a) Renewal of Recognition to the Recognized Exchanges.
On recommendations of the Forward Markets Commission, the Government of India
renewed the recognition of the following Associations / Exchanges:
Sr.
Period of renewal of Recognition Date of issue of
Name of the Exchange
No.
and the Commodities permitted
Notification
st
st
1
Vijai Beopar Chamber Ltd, 1 April, 2013 to 31 March,2014
21st March ,2013
Muzaffarnagar
(Gur)
2
First Commodity Exchange 1st June,2013 to 31st May, 2014
13th June, 2013
of India Ltd (FCEI), Kochi
(Coconut Oil and Copra)
a) Details of Grant/Renewal of Registration to the Recognized Exchanges.
The Commission, in exercise of the powers conferred under Section 14(B) of the
Forward Contracts (Regulation) Act, 1952, extended the period of registration of the
following Associations / Exchanges, analogous to the period of recognition of the
exchange:
Sr.
Name of the
Period of renewal of Registration
Date of Issue
No.
Exchange
and the Commodities permitted
of Registration
1
Vijai Beopar Chamber Ltd,
1st April, 2013 to 31st March,
10th April, 2013
Muzaffarnagar
2014(Gur)
2
Bikaner Commodity
1st April 2013 to 31st March, 2014
15th May, 2013
Exchange Ltd, Bikaner
(Guar Seed)
3

First Commodities Exchange

of India Ltd., Kochi

1st June, 2013 to 31st May, 2014

(Coconut Oil and Copra)

28th June, 2013

a) The Commission also recommended to the Ministry to renew the recognition of the
following exchanges:
Sr. No.
1

Name of the Exchange

Surendranagar Cotton Oil & Oilseeds
Association Ltd, Surendranagar

Commodities

Period of Recognition

Kapas

1.04.2014 to 31.03.2019

a) Grant of permission for futures trading in Commodities:

During the year, from 1st April 2013 to 31st March 2014, trading permission was granted to
Multi Commodity Exchange of India (MCX), National Commodity Derivatives Exchange of

India, Mumbai (NCDEX), National Multi Commodity Exchange of India Ahmedabad,

(NMCE), Indian Commodity Exchange Ltd., Mumbai (ICEX), ACE Commodity Exchange
Ltd., Mumbai, (ACE) and Universal Commodity Exchange Ltd (UCX), Navi Mumbai as well
as commodity specific Exchanges (Regional Exchanges). The Commodities vis-a-vis
contracts permitted and the dates on which permission was issued are detailed in the
Annexure-III and IV.
1.2

Revisions in margins

The Commission after reviewing the price volatility, volumes and open interest of Sugar
and Wheat contracts, reduced the initial margin on Sugar and Wheat from 10% to 5% of
the value of the contract or VaR based margin whichever is higher, with effect from 13th
May, 2013.

The Commission reviewed the price volatility, volumes and open interest in Chana,
R/Mustard seed, Soybean and Refined Soya oil and reduced the initial margins in the
aforesaid commodities from 10% to 5% of the value of the contract or VaR based margin
whichever is higher with effect from 3rd July 2013.

In view of the current price volatility in the prices of Gold, Silver, Brent Crude Oil, Crude
Oil and Natural Gas contracts, the Commission on 29th August, 2013 increased initial
margin in respect of all the Gold contracts from existing level of 5% to 10% or VaR based
margin whichever is higher. The Commission also imposed additional margin of 5% on all
the Gold, Silver, Brent Crude Oil, Crude Oil and Natural Gas contracts. These margins
were made effective from 2nd September, 2013.

As the price volatility in the contracts of Gold, Silver, Crude Oil, Brent Crude Oil, Natural
gas, Aluminium, Copper, Lead, Nickel and Zinc subdued, the Commission on 4th
November, 2013 removed the additional margin of 5% on the said contracts.

The Commission on 12th February, 2014 conveyed its approval to the NCDEX Mumbai for
withdrawal of the additional margin of 5% on long side and short side imposed by the
Exchange on Castor seed contracts w.e.f. 14th February, 2014 due to subdued volatility in
the prices.

In view of price volatility and other trading developments in the potato contracts at MCX ,
the Commission approved the proposal of MCX to impose an additional margin of 20% in
March 2014 contract and 10% in April 2014 contract with effect from 13th February 2014.

Table 1.2 Commodity Futures Trade in India (Rs Lakhs Crores)

Category
Total
Bullion
Agro
Metals
Energy

for April to MarchFY2013-14

10144794.98
4308937.82
1602401.96
1761359.89
2472095.31

According to Forward Markets Commission (FMC), the value of commodities traded from April
to march, 2013-14 was recorded at Rs 10144794.98 lakh crore in comparison to the value of
commodities traded from April to march FY 2012-13 was recorded at Rs 17046840.09 lakh
crore, suggesting decline in trading activity in 2013-14.
1 During 2009-10, forward trading was regulated in 109 commodities at 21 recognized
exchanges. The break up of the total value of commodities traded stood as under Bullion - Rs.31.64 lakh crore. (40.75%)
Base metals - Rs.18.02 lakh crore. (23.20%).
Energy products - Rs.15.78 lakh crore (20.32%)
Agricultural commodities-Rs.12.18 lakh crore (15.69%).
Out of 21 recognized exchanges, Multi Commodity Exchange (MCX), Mumbai, National
Commodity and Derivatives Exchange (NCDEX), Mumbai, National Multi Commodities
Exchange, (NMCE), Ahmedabad, Indian Commodity Exchange, Ltd., Gurgon, National Board of
Trade (NBOT), Indore, contributed 99.62% of the total value of the commodities traded during the
year.
Volume of Trading and Value of Trade during the year 2009-10 at
Major
CommoditiesVolume of Trading In lakh tonne
Value - In Rs. Crore
Sr.No
Name of the Commodity
2009-10
Volume
Value
A
Bullion
i
Gold
0.126
1997801.0961
ii
Silver
4.600
1165728.5591
iii
Platinum
0.000
622.5880
Total for A
4.73
3164152.24
B
Metals other than Bullion
i
ii
iii
iv

Aluminium
Copper
Lead
Nickel

57.38
325.81
244.50
33.79

53904.46
942590.17
240268.62
284601.94

v
vi
vii
viii

Sponge Iron
Steel
Tin
Zinc

0.00
35.94
0.02
284.48
981.92

0.00
8813.97
132.84
271324.32
1801636.31

Total for B
C

Agricultural commodities

i
ii
iii
iv
v
vi
vii
viii
ix

Chana/Gram
Urad
Tur
Wheat
Rice
Maize
Soy Oil
Mentha Oil
Guarseed

x
xi
xii
xiii
xiv
xv
xvi
xvii

Guar Gum
Potato
Chillis
Jeera(Cuminseed)
Cordmom
Pepper
Rubber
other agri

530.42
0.00
0.00
31.77
0.00
8.41
500.62
2.31
1226.69
59.46
61.63
3.68
26.50
0.28
19.61
5.81
1514.02

127950.47
0.00
0.00
4015.01
0.00
790.56
235605.92
13173.04
283431.09
29593.86
4575.74
1998.17
33720.04
2503.69
27705.73
7123.20
445762.51

Volume of Trading and Value of Trade during the year 2009-10 at

Major
CommoditiesVolume of Trading In lakh tonne
Value - In Rs. Crore
Sr.No

Name of the Commodity

Total for C

Volume
3991.21

2009-10
Value
1217949.04

D
E
F

Energy
5162.95
1577882.06
Plastic
0.00
0.00
Other
2.12
3134.40
Grand Total (A+B+C+D+E+F)
10142.93
7764754.05
Note: Natural Gas, Electricity & Heating Oil Volumes are not included in the Total
Volume because Volumes in Natural Gas in mmBtu, Electricity in MW & Heating
Oil in USGLN at MCX, Mumbai.

. The Indian Commodity Futures Markets continued to grow, despite the suspension of
futures trading in a few agricultural commodities. During the year, 113 commodities were
regulated under the auspices of the recognized Exchanges. During 2010-11, 21 recognized
exchanges were functioning. Out of the 113 commodities, regulated by the FMC, in terms
of value of trade, Silver, Gold, Copper, Nickel, Zinc, Lead, Soy Oil, Guarseed, Chana,
Pepper, and Jeera were the prominently traded commodities.
The table below indicates the group-wise and Commodity-wise volume and value of trade in
the Commodity market during the year.

Volume of Trading and Value of Trade during the year 2010-11

in
Major Commodities
Volume of Trading In lakh tonne
Sr.No

Name of the Commodity

A
i
ii
iii

Bullion
Gold
Silver
Platinum

Total for A
Metals other than
Bullion
Aluminum

ii
iii
iv
v
Vi
Vii
viii

Copper
Lead
Nickel
Steel
Tin
Zinc
Iron
Total for B

C
i
ii
iii
iv
v
vi
vii
viii

Agricultura
l
Chana/Gram
Wheat
Maize
Soy Oil
Mentha Oil
Guarseed
Guar Gum
Potato

Value - In ` Crore
2010-11
Volume
Value
0.14
7.24
0.0000002
7.38

2700607.00
2793280.23
4.89
5493892.12

110.17

114081.70

335.36
356.88
44.83
86.66
0.002
463.25
12.56
1409.72

1239261.20
366422.24
478789.31
22759.03
18.35
465375.27
965.89
2687672.99

523.59
26.78
16.36
617.15
6.21
1056.04
83.15
269.22

126158.29
3316.88
1730.06
345286.26
60527.10
254690.88
49942.57
14428.17

Volume of Trading and Value of Trade during the year 2010-11

in
Major Commodities
Volume of Trading In lakh tonne
Sr.No

Name of the Commodity

ix
x
xi
xii
xiii

Chillis
Jeera(Cuminseed)
Cordmom
Pepper
Rubber

xiv

other agri
Total for C

Value - In ` Crore
2010-11
Volume
Value
11.31
8493.79
42.53
60864.48
0.77
10882.04
42.25
84786.09
11.78
23846.92
1461.21
4168.35

411436i.10
1456389.62

7220.12 2310958.58
Energy
0.00
29.04
Other
Grand Total (A+B+C+D+E)
12805.57 11948942.35
Note: Natural Gas, Heating Oil & Gasoline Volumes are not included in
the Total Volume.
D
E

The table below indicates the group-wise and Commodity-wise volume and value of trade in
the Commodity market during the year.

Volume of Trading and Value of Trade during the year 2011-12 in Major
Commodities
Volume of Trading In lakh tonne/ Value - In ` Crore
Name of the
Commodity

Sr. No

2011-12
Volume

Bullion
i

Gold

0.17

4355098.64

ii

Silver

10.11

5826848.58

iii

Platinum

0.0000004
Total for A

10.00

10.27

10181957.22

Metals other than Bullion

B
i

Aluminum

131.73

145898.50

ii

Copper

386.46

1565984.17

iii

Lead

336.10

364264.87

iv

Nickel

42.76

427336.21

Steel

37.23

11510.97

vi

Tin

0.0002

vii

Zinc

372.85

viii

Iron

80.72
Total for
B

Value

Agricultural Commodities

1387.85

2.70
375692.69
6030.61
2896720.73

Chana/Gram

ii

Wheat

947.98

306411.78

22.43

2661.42

Volume of Trading and Value of Trade during the year 2011-12 in Major
Commodities
Volume of Trading In lakh tonne/ Value - In ` Crore
Name of the
Commodity

Sr. No

2011-12
Volume

iii

Maize

iv

Soy Oil

Mentha Oil

vi

19.01

Value
2294.48

802.85

538383.46

7.11

101410.51

Guar seed

733.10

338216.19

vii

Guar Gum

69.02

100515.47

viii

Potato

229.11

14156.71

ix

Chilli

14.07

11611.26

Jeera(Cumin seed)

37.38

55982.69

xi

Cardamom

1.91

16373.87

xii

Pepper

24.64

79518.79

xiii

Rubber

7.86

16697.51

xiv

Other Agri. Commodities

2025.61

611915.37

Total for C

4942.09

2196149.50
2851268.52

Energy

7685.52

Plastic

0.01

Other
Grand Total (A+B+C+D+E+F)

6.45
1.35

14025.74

18126103.78

Note: Natural Gas, Heating Oil & Gasoline Volumes are not included in the Total
Volume.

The table below indicates the group-wise and Commodity-wise volume and value of trade in
the Commodity market during the year.
Volume of Trading and Value of Trade during the year 2012-13 in Major
Commodities
Volume of Trading In lakh tonne/ Value - In Crore
Sr. No
Name of the Commodity
2012-13
Volume
Value
A
Bullion
i
Gold
0.12
3746697.03
ii
Silver
7.16
4115981.63
Total for A
7.28
7862678.65
B
Metals other than Bullion
i
Aluminum
225.32
244432.17
ii
Copper
346.49
1487822.25
iii
Lead
541.81
637722.04
iv
Nickel
48.13
445839.56
v
Steel
13.16
4211.11
Vi
Tin
0.0002
2.06
Vii
Zinc
399.40
427739.82
viii
Iron
168.45
12281.76
Total for B
1742.76
3260050.77
C
Agricultural commodities
i
Chana/Gram
389.36
165039.10
ii
Wheat
37.50
5406.46
iii
Maize
78.21
10938.34
iv
Soy Oil
970.81
708315.97
v
Mentha Oil
7.57
102399.93
vi
Potato
59.54
5843.42
vii
Chillies
19.92
11752.80
viii
Jeera(Cumin seed)
45.45
65955.88
ix
Cardamom
2.23
24139.38
x
Pepper
8.80
34742.45
xi
Rubber
5.62
9939.76
xii
Other Agri
2773.10
1011226.92
Total for C
4398.11
2155700.42
D
Energy
8361.92
3768408.97
E
Other
0.01
1.28
Grand Total (A+B+C+D+E)
14510.08
17046840.09
Note: Natural Gas & Gasoline Volumes are not included in the Total Volume.

The table below indicates the group-wise and Commodity-wise volume and value of trade in
the Commodity market during the year.
Volume of Trading and Value of Trade during the year 2013-14 in Major
Commodities
Volume of Trading - In lakh tonne, Value - In crore
Sr. No
Name of the Commodity
2013-14
Volume
Value
A
Bullion
i
Gold
0.09
2513697.33
ii
Silver
3.94
1795240.49
4.03
4308937.82
Total for A
B
i
ii
iii
iv
v
vi
vii
C
i
ii
iii
iv
v
vi
vii
viii
ix
x
xi
xii
xiii
xiv
D

Metals other than Bullion

Aluminum
Copper
Lead
Nickel
Steel
Zinc
Iron
Total for B
Agricultural commodities
Chana/Gram
Wheat
Maize
Soy Oil
Mentha Oil
Guar Seed
Guar Gum
Potato
Chillies
Jeera(Cumin seed)
Cardamom
Pepper
Rubber
Other Agri
Total for C
Energy
Grand Total (A+B+C+D)

129.07
185.83
326.49
22.05
1.72
206.80
106.42
978.37

137609.82
785562.21
406971.56
190796.34
483.71
231896.17
8040.08
1761359.89

525.73
10.47
47.30
417.69
4.60
45.73
8.09
66.90
12.53
22.48
1.47
0.42
6.43
2442.21
3612.03
4238.33
8832.76

164754.94
1637.22
6168.26
290044.79
41798.11
24719.80
12237.77
4239.66
7537.48
28917.50
11310.62
1600.70
10514.94
996920.17
1602401.96
2472095.31
10144794.98

Note: Natural Gas Volumes are not included in the Total Volume.

Trends in volume contribution on the National Exchanges:Major volume contributors: - Majority of trade has been concentrated in few commodities that
are
Non Agricultural Commodities (bullion, metals and energy)
Agricultural commodities with small market size (or narrow commodities) like guar, Urad,
Menthol etc.
Out of 17 recognized exchanges (6 National and 11 Regional Exchanges), Multi
Commodity Exchange (MCX), Mumbai, National Commodity and Derivatives Exchange
(NCDEX), Mumbai, National Multi Commodities Exchange, (NMCE), Ahmedabad, ACE
Derivatives Commodity Exchange (ACE), Mumbai, Indian Commodity Exchange, Ltd.
(ICEX), Mumbai, and Universal Commodity Exchange Ltd. (UCX), Navi Mumbai
contributed 99.72% of the total value of the commodities traded during the year.

Total volume and value of trade during the (April 2013 to March 2014) in the major commodity
exchanges

Name of Exchange

Volume of
Trade
(In lakh tons)
5305.81

Multi Commodity Exchange of India

Ltd., Mumbai
National Commodity & Derivatives
2745.43
Exchange Ltd., Mumbai
National Multi Commodity Exchange
310.23
of India Ltd., Ahmedabad
Indian Commodity Exchange Ltd.,
217.45
Mumbai
ACE Derivatives & Commodity
52.13
Exchange Ltd., Mumbai
Universal commodity Exchange Ltd.,Navi

Value (` in
Crore)
8611449.07

% share (In
value
terms)
84.89

1146328.09

11.30

152819.01

1.51

85664.19

0.84

46756.74

0.46

Mumbai

133.07

73013.19

0.72

Grand total

8764.12

10116030.29

100.00

Note: Natural Gas volumes are not included in the Total Volume
Pattern on Multi Commodity Exchange (MCX):-

MCX is currently largest commodity exchange in the country in terms of trade volumes,
further it has even become the third largest in bullion and second largest in silver future trading
in the world. Coming to trade pattern, though there are about 100 commodities traded on MCX,
only 3 or 4 commodities contribute for more than 80 percent of total trade volume. As per recent
data the largely traded commodities are Gold, Silver, Energy and base Metals. Incidentally the
futures trends of these commodities are mainly driven by international futures prices rather than
the changes in domestic demand-supply and hence, the price signals largely reflect international
scenario. Among Agricultural commodities major volume contributors include Gur, Urad,
Menthol Oil etc. Whose market sizes are considerably small making then vulnerable to
manipulations. MCX is Indias leading commodity futures exchange with a market share of
84.89 per cent in terms of the value of commodity futures contracts traded in FY 2013-14. The
Exchange was the third largest commodity futures exchange in the world, in terms of the number
of contracts traded in CY2013, based on the Futures Industry Associations annual volume
survey released in March 2014. Moreover, as per the survey, during CY 2014, MCX was the
world's largest exchange in silver and gold futures, second largest in copper and natural gas
futures, and the third largest in crude oil futures. MCX has forged strategic alliances with leading
international exchanges such as CME Group, London Metal Exchange (LME), Shanghai Futures
Exchange (SHFE) and Taiwan Futures Exchange (TAIFEX). The Exchange has also tied-up with
various trade bodies, corporate, educational institutions and R&D centers across the country.
These alliances enable the Exchange in improving trade practices, increasing awareness, and
facilitating overall improvement of commodity futures market.
During the period under review Silver, Gold, Crude Oil, Copper, Natural Gas, Lead, Zinc &
Nickel contracts constituted a major share of the value of commodities traded at the MCX,
Mumbai. The following table indicates the % share of major commodities traded at MCX,
Mumbai, during the period under review.

Table 1.4 Top commodities traded on MCX during the quarter (April 2013 to March 2014)

S. No

Commodity

MCX 2013-2014
Volume
lakh Tonnes

Value-Cr

Share of Value to
Total

1
2
3
4
5
6
7
8
9
10
11

GOLD
CRUDEOIL
SILVER
COPPER
NATURAL GAS
LEAD
ZINC
NICKEL
ALUMINIUM
COTTON
OTHER COMMODITIES
TOTAL

0.09
4211.48
3.91
183.67
26082271250
319.46
203.76
21.62
126.53
52.79
182.50
5305.81

2482438.18
1794312.34
1780756.98
776666.28
655322.01
398401.56
228653.60
187172.77
134964.85
62439.13
110321.38
8611449.07

28.83
20.84
20.68
9.02
7.61
4.63
2.66
2.17
1.57
0.73
1.28
100.00

Note: Natural Gas Volumes is not included in the Total Volume of the Exchange

Pattern on National Commodity & Derivatives Exchange (NCDEX):NCDEX is the second largest commodity exchange in the country after MCX. However the
major volume contributors on NCDEX are agricultural commodities. But, most of them have
common inherent problem of small market size, which is making them vulnerable to market
manipulations and over speculation. About 60 percent trade on NCDEX comes from guar seed,
channa and Urad (narrow commodities as specified by FMC)
During the period under review Soy Oil, Soya Bean, Castor Seed, Dhaniya, R/M Seed, Chana,
Cotton Seed Oil Cake, Kapas, Jeera & Turmeric constituted a major share of the value of
commodities traded at the NCDEX, Mumbai.The following table indicates the % share of major
commodities traded at NCDEX, Mumbai during the period under review.
Table 1.5 Top commodities traded on NCDEX during the quarter (April 2013 to March 2014)

S. No

Commodity

1
2
3
4
5
6
7
8
9
10
11

SOYA_OIL
SOYABEAN
CASTOR_SEED
CHANA
DHANIYA
RAPE_MUSTARD_SEED
COTTONSEED_OILCAKE
KAPAS
TURMERIC
JEERA
OTHER COMMODITIES

NCDEX 2013-2014
VolumeValue lakh tonnes
cr
388.86
269914.56
488.29
182336.33
405.04
161068.66
423.87
132966.22
125.60
95259.02
239.78
84217.51
328.85
51044.17
73.03
35461.41
49.31
29606.19
22.48
28917.50
200.34
75536.52

Share of Value to
Total
23.55
15.91
14.05
11.60
8.31
7.35
4.45
3.09
2.58
2.52
6.59

TOTAL

2745.43

1146328.09

100.00

Note : Natural Gas Volumes is not included in the Total Volume of the Exchange

Pattern on National Multi Commodity Exchange (NMCE):NMCE is third national level futures exchange that has been largely trading in Agricultural
Commodities. Trade on NMCE had considerable proportion of commodities with big market size
as jute rubber etc. But, in subsequent period, the pattern has changed and slowly moved towards
commodities with small market size or narrow commodities.
Analysis of volume contributions on three major national commodity exchanges reveled the
following pattern,
During the period under review Raw Jute, coffee Rep Bulk, Nickel, copper and Lead constituted
a major share of the value of commodities traded at the NMCE, Ahmedabad. The following table
indicates the % share of major commodities traded at NMCE, Ahmedabad during the period
under review.
Table 1.6 Top commodities traded on NMCE during the quarter (April 2013 to March 2014)

S. No

Commodity

NMCE 2013-2014
Volume- lakh
Tonnes

Value- Cr

Share of Value
to Total

RAW JUTE

70.33

20248.24

13.25

CASTORSEED
RAPE/MUSTARD SEED
CHANA
COFFEE REP BULK
OTHERS
TOTAL

48.70
53.61
49.49
11.35
76.75
310.23

18916.78
17024.17
15264.09
13807.78
67557.93
152819.01

12.38
11.14
9.99
9.04
44.21
100.00

3
4
5
6

Pattern on Indian Commodity Exchange Ltd., New Delhi

In 2009 ICEX is recognized as 4th National Stock Exchange. In 2013-14 the share of ICEX was .
84%.
During the period under review Natural Gas, Crude Oil, Silver, Copper, Iron ore, Lead, & Gold
constituted a major share of the value of commodities traded at the ICEX, Mumbai. The
following table indicates the % share of major commodities traded at ICEX, Mumbai during the
period under review.

Table 1.7 Top commodities traded on ICEX during the quarter (January 2013 to March 2013)
S. No
1
2
3
4
5
6
7

Commodity
MUSTARD SEED
NATURAL GAS
CASTOR SEED
IRONORE62FINES
SOYBEAN
SILVER

ICEX 2013-2014
Volume- lakh
Tonnes
40.49
49283750
23.18
106.42
19.40
0.02

OTHER COMMODITIES
Total

14285.21
11229.92
9972.41
8040.08
7574.28
6550.87

Share of Value to
Total
16.68
13.11
11.64
9.39
8.84
7.65

27.95

28011.43

32.70

217.45

85664.19

100.00

Value- Cr

Pattern on Ace Derivatives and Commodity Exchange Ltd., Mumbai

In 2010 it is recognized as 5th national Commodity Exchange . The Share of ACE in 2013-14
was .46% of the total commodities traded during the year.
During the period under review Soy Oil, RBD, Soya Meal & Cotton constituted a major share of
the value of commodities traded at the ACE, Mumbai. The following table indicates the % share
of major commodities traded at ACE, Mumbai during the period under review.
Table 1.8 Top commodities traded on ACE during the quarter (april 2013 to March 2014)
S. No
1
2
3
4
5
6

Commodity
COTTON 118
REFSOYOIL
SOYBEAN
CPO
CASTOR
OTHER
COMMODITIES

Grand Total LT/ cr

ACE 2013-2014
Volume- lakh Tonnes
Value- cr
3.88
21004.34
19.56
13634.36
14.39
4946.16
8.66
4852.12
2.31
840.43

Share of Value to Total

44.92
29.16
10.58
10.38
1.80

3.34

1479.33

3.16

52.13

46756.74

100.00

Pattern on Universal Commodity Exchange Ltd,Navi Mumbai

In 2012 it is recognized as 6th National Commodity exchange.in
UCX,Mumbai
Details of total volume and value of the commodities traded at the Exchange during 2013-14

S. No
Commodity
1
CHANA
2
KILO GOLD
3
RAPE/MUSTARD SEED
4
SOYA BEAN
5
TURMERIC
6
OTHERS
Grand Total LT/ cr

UCX 2013-2014
Volume- lakh tonnes
52.35
0.00
32.30
23.85
14.33
10.25
133.07

CHAPTER 2: RESEARCH METHODOLOGY

Value- cr
16515.55
12903.06
11344.39
8769.33
8651.55
14829.31
73013.19

Share of Value
22.62
17.67
15.54
12.01
11.85
20.31
100.00

1. Objectives of research:
To study the meaning, history and evolution of commodity market
for commodity market trading in India and its regulations implemented by
forward market commission.
To study the operation and functioning of commodity market.

2. Research Design: Exploratory design has been selected as data has been collected from
the secondary sources in order to understand the functioning of commodity market and
data has been collected from secondary sourcse in order to satisfy fulfillment the
objectives of study.
3. Data Collection Method: Most of the data has collected from secondary sources
whereas for conduct of research the secondary data has been collected through a already
publish sources.

4. Analysis and Interpretations: The analysis of the data collected has been performed
appropriately and inferences have been drawn. Charts and Graphs are used for analysed
the data.
5. Limitations of the study:
This study only gives the overview of the market because it is difficult to understand the
each and minor things in the market because it requires expert knowledge.
In this we study data only on the basis of historical data current data is not used in the
study.
This study has not been conducted over an extended period of time having both ups and
downs of stock market conditions which a significant influence on investor s buying
pattern and preferences.
The research is only exploratory, no conclusion may finally be drawn from it, but only
direction may be sought.
This is an independent study and the observations may not comply with those which have
been made by an experienced professional.

CHAPTER 3: Analysis and Interpretation

Chart3.1 Major commodity Groups traded during 2009-2010

shares of commodities traded in %

energy; 16%
Bullion; 41%
Agricultural; 20%

Metals other than bullion; 23%

Chart 3.1 Shows the Major commodity Groups traded in the year. In this the share of bullion
trading was 40.75% and its value was 31.64 Lakh crores, the share of metals other than bullion
was 23.20 % and its value was 18.02 lakh crores, the share of agricultural Commodities Was
20.32 % and its Value was 23.11 lakh crores and the share of energy was 15.69 % and its value
was 12.18 lakh crores.

Chart 3.2Group of major Commodity traded during the year 2010-2011

share of commodity traded in %

Energy; 12%
Agricultural; 19%

Bullion; 46%

Metals other Than Bullion; 23%

Chart 3.2 Shows the Major commodity Groups traded in the year. In this the share of bullion
trading was 45.98% and its value was 59.94 Lakh crores, the share of metals other than bullion
was 22.50 % and its value was 26.88 lakh crores, the share of agricultural Commodities Was
19.34 % and its Value was 23.11 lakh crores and the share of energy was 12.19 % and its value
was 14.56 lakh crores

Chart 3.3Major group of commodites traded during the year 2011-12

share of commodity traded in %

Energy; 12%
Agricultural; 16%
Bullion; 56%
Metals others than bullion; 16%

Chart 3.3 Shows the Major commodity Groups traded in the year. In this the share of bullion
trading was 56% and its value was 101.82 Lakh crores, the share of metals other than bullion
was 16 % and its value was 28.94 lakh crores, the share of agricultural Commodities Was 16 %
and its Value was 28.51 lakh crores and the share of energy was 12 % and its value was 21.96
lakh crores

Chart 3.4Major group of commodities traded during the year 2012-13

Share of Commodities traded in %

Energy; 2%
Agricultural; 16%
Bullion; 58%
Metals other than bullion; 24%

Chart 3.4 Shows the Major commodity Groups traded in the year. In this the share of bullion
trading was 46% and its value was 78.63 Lakh crores, the share of metals other than bullion was
19 % and its value was 32.60 lakh crores, the share of agricultural Commodities Was 13 % and
its Value was 21.56 lakh crores and the share of energy was 22% and its value was 36.78 lakh
crores

Chart 3.5 Commodities traded during the year 2013-14

Share of commodity traded in %

Energy; 9%
Agricultural; 10%
Bullion; 59%
Metals Other Than bullion; 23%

Chart 3.5 Shows the Major commodity Groups traded in the year. In this the share of bullion
trading was 43% and its value was 43.09 Lakh crores, the share of metals other than bullion was
17 % and its value was 17.61 lakh crores, the share of agricultural Commodities Was 16 % and
its Value was 16.02 lakh crores and the share of energy was 24 % and its value was 24.72 lakh

crores

Graph 3.6 Five years graph of major group of commodity

60
50
40
30
20
10
0

2009-10
2010-11
2011-12
2012-13
13-14

Bullion:-This graph represents the five years data of major group of commodity traded. It shows
that the there was maximum trading of bullion commodities in year 2012-13 which was 56% 0f
total commodities and value of 101.82 lakh crore .
Metals other than bullion:-the maximum trading of metals other than the bullion was in year
2009-10 which was 23.20% and its value was 18.02 lakh crores and minimum in year 2011-12
which was 16 % and its value was 28.94 lakh crore
Agricultural commodities:- the maximum trading of agricultural commodities was in year

2009-10 its share is 20.32 % and its value is 15.78 lakh crore and its minimum share in 201314 and its value is 16.02 lakh crore which shows its share less but value is more as compare to
2009-10 so the maximum value of agricultural commodities is in the year 2011-12 which was
28.51 lakh crores which shows the fluctuations in agricultural commodities.
Energy:- The maximum share of energy traded is in 2013-14 which was 24 % and its value is
24.72 lakh crores and minimum share in 2011-12 which is 12% and its value was 21.96 lakh
crores and maximum value of energy is in year 2012-13 which was 36.78 lakh crores.

Graph 3.7 Share of major commodities Exchanges trading during the year 2013-14

Share of Major commodities exchanges in %

MCX

NCDEX

NMCE

ICEX

UCX

Others

2% 1% 1% 0%
11%

85%

Out of 17 recognized exchanges (6 National and 11 Regional Exchanges), Multi Commodity

Exchange (MCX), Mumbai, National Commodity and

Derivatives

Exchange (NCDEX),

Mumbai, National Multi Commodities Exchange, (NMCE), Ahmedabad, ACE Derivatives

Commodity Exchange (ACE), Mumbai, Indian Commodity Exchange, Ltd. (ICEX),
Mumbai, and Universal Commodity Exchange Ltd. (UCX), Navi Mumbai contributed

99.72% of the total value of the commodities traded during the year. The share of MCX was
84.89% and its value is 8611449.07 crore ,Share of NCDEX is 11.30 % and its value was
1146328.09,Share of NMCE was 1.51% and its value was 152819.01 crores , the share of ICEX
was .84% and its value was 85664.19 crores ,The share of ACE was .46% and its value was
46756.74 crore, the share of UCX was .72% and its value was 73013.19 crores and in other
regional exchanges there were only o.28 % trading. from the above data we can find that MCX
is the largest commodity exchange in india.

Graph 3.8Share of major commodities Exchanges trading during the year 2012-13

Share Of commodity exchanges in %

MCX

NCDEX

NMCE

ICEX

ACE

others

1% 1% 0%
10% 1%

87%

Out of 19 recognized exchanges, Multi Commodity Exchange (MCX), Mumbai, National

Commodity and Derivatives Exchange (NCDEX), Mumbai, National Multi

Commodities

Exchange, (NMCE), Ahmedabad, ACE Derivatives and Commodity Exchange, Mumbai,

Indian Commodity Exchange, Ltd., Mumbai, contributed 99.71% of the total value of the

commodities traded during the year.

The share of MCX was 86.99% and its value is

14881057.12 Cr ,Share of NCDEX is 10% and its value was 1598425.87 Cr,Share of NMCE was
1.% and its value was 176570.86 Cr , the share of ICEX was 1% and its value was 16987.14
Cr ,The share of ACE was 1% and its value was 16987.14 Cr, and in other regional exchanges
there were only o.28 % trading. from the above data we can find that MCX is the largest
commodity exchange in india.

Share of major commodities Exchanges trading during the year 2011-12

Share of Commodity Exchanges in %

MCX

NCDEX

9%

NMCE

ACE

ICEX

OTHERS

1% 1% 1%

87%

Out of 21 recognized exchanges, Multi Commodity Exchange (MCX), Mumbai, National

Commodity and Derivatives Exchange (NCDEX), Mumbai, National Multi

Commodities

Exchange, (NMCE), Ahmedabad, ACE Derivatives and Commodity Exchange, Mumbai,

Indian Commodity Exchange, Ltd., Mumbai ,National board of trade Indore, contributed
99.88% of the total value of the commodities traded during the year. The share of MCX was

86.05% and its value is 15597095.47 Cr ,Share of NCDEX is 9% and its value was
1810210.1Cr,Share of NMCE was 1.48.% and its value was 268350.95Cr , the share of ICEX
was 1.42% and its value was 258105.67 Cr ,The share of ACE was .76% and its value was
138654.61 Cr, and in other regional exchanges there were only 0.30 % trading. from the above
data we can find that MCX is the largest commodity exchange in india.

Share of major commodities Exchanges trading during the year 2010-11

Share of commodity exchanges in %

NCDEX; 12% OTHERS; 0%

NMCE; 2%
ICEX; 3%
ACE; 0%

MCX; 83%

Out of 21 recognized exchanges, Multi Commodity Exchange (MCX), Mumbai, National

Commodity and Derivatives Exchange (NCDEX), Mumbai, National Multi

Commodities

Exchange, (NMCE), Ahmedabad, ACE Derivatives and Commodity Exchange, Mumbai,

Indian Commodity Exchange, Ltd., Mumbai ,National board of trade Indore, contributed
99.88% of the total value of the commodities traded during the year. The share of MCX was
82.36% and its value is 9841502.91 Cr ,Share of NCDEX is 11.81% and its value was
1410602.21 Cr,Share of NMCE was 1.83% and its value was 2218410.904 Cr , the share of
ICEX was 3.16 % and its value was 377729 Cr ,The share of ACE was .25% and its value was
30057.033 Cr,in NBOT was 0.43% and in other regional exchanges there were only 0.16 %
trading. from the above data we can find that MCX is the largest commodity exchange in india.

Share of major commodities Exchanges trading during the year 2009-10

Share of Commodity exchanges in %

MCX

NBOT

ICEX

NMCE

NCDEX

OTHERS

12% 0%
3%
2%
1%
82%

Out of 21 recognized exchanges, Multi Commodity Exchange (MCX), Mumbai, National

Commodity and Derivatives Exchange (NCDEX), Mumbai, National Multi

Commodities

Exchange, (NMCE), Ahmedabad, ACE Derivatives and Commodity Exchange, Mumbai,

Indian Commodity Exchange, Ltd., Mumbai ,National board of trade Indore, contributed
99.62% of the total value of the commodities traded during the year. The share of MCX was
82,34 and its value is 15597095.47 Cr ,Share of NCDEX is 9% and its value was
1810210.1Cr,Share of NMCE was 1.48.% and its value was 268350.95Cr , the share of ICEX
was 1.42% and its value was 258105.67 Cr ,The share of ACE was .76% and its value was
138654.61 Cr, and in other regional exchanges there were only 0.30 % trading. from the above
data we can find that MCX is the largest commodity exchange in india.

Chart 3. Commodities traded in Mcx

MCX

ZINC; 3% NICKEL; 2% ALUMINIUM; 2% COTTON; 1% OTHER COMMODITIES; 1%

LEAD; 5%
GOLD; 29%
NATURAL GAS; 8%
COPPER; 9%
SILVER; 21%
CRUDE OIL; 21%

Chart 3. Commodities traded in NCDEX During 2013-14

NCDEX

JEERA; 3% OTHER COMMODITIES; 7%

TURMERIC; 3%

SOYA OIL; 24%

KAPAS;
3%
RAPE_MUSTARD_SEED; 7%
COTTONSEED_OILCAKE; 4%
DHANIYA; 8%
SOYABEAN; 16%
CHANA; 12%
CASTOR SEED; 14%

Chart 3 Commodity traded in NMCE during 2013-2014

NMCE

RAW JUTE; 13%

OTHERS; 44%

CASTROSEED; 12%

RAPE/MUSTAED SEED; 11%

COFFEE REP BULK; 9%

CHANA; 10%

Chart 3 commodity Traded in ICEX during 2013-2014

ICEX

MUSTARD SEED; 17%

OTHER COMMODITIES; 33%
NATYRAL GAS; 13%
SILVER; 8% CASTOR SEED; 12%
SOYABEAN; 9% IRON ORES; 9%

Chart 3.Commodities traded in ACE during 2013-14

ACE

CASTOR; 2% OTHER COMMODITIES; 3%

CPO; 10%
SOYBEAN; 11%

COTTON 118; 45%

REFSOYOIL; 29%

Chart 3 Commodity traded in UCX during 2013-14

UCX

OTHERS; 20%

CHANA; 23%

TURMERIC; 12%
KILO GOLD; 18%
SOYA BEAN; 12%
RAPE/MUSTARD SEED; 16%

CHAPTER 4: CONCLUSION and RECOMMENDATIONS

This decade is termed as "Decade for Commodities". Since the economic slowdown all over the
world, the first scenes of recovery have been witnessed in commodity market. It was in 2010 that

when the prices of commodity markets were on a rise after recession which triggered a revival of
many economies such as USA, UK , India , China etc. Now the trend for commodity market is
shifting to developing countries like India due to high agricultural dependence and production.
Moreover, in coming years China will take over USA in commodity trading all over the world
and India will jump to 3rd place this will be because of high and growing population which will
lead to increase in demand for agriculture products and if we see the trend the overall yield per
hectare is also increasing for the last decade.
India is one of the top producers of large number of commodities and also has a long history of
trading in commodities and related derivatives. The Commodities Derivatives market has seen
ups and downs, but seems to have finally arrived now. The market has made enormous progress
in terms of Technology, transparency and trading activity. As majority of Indian investors are not
aware of organized commodity market; their perception about it is of risky to very risky
investment. Many of them have wrong impression about commodity market in their minds. It
makes them specious towards commodity market. So, there is a large or vast amount of untapped
market in India in both urban as well as rural sectors and regulatory bodies have to play a major
role in tapping these markets and luring investors to invest in commodity market.
It is also believed that Indians have a high risk appetite. So, There is no doubt that in near future
commodity market will become hot spot for Indian farmers rather than spot market. And
producers, traders as well as consumers will be benefited from it. But for this to happen one has
to take initiative to standardize and popularize the Commodity Market.
So, one can conclude on the basis of the analysis that have been carried out that investors in
current scenario i.e. with the burden of fall in rupee, increase inflation and high volatility have
changed their objectives to Reasonable income along with safety for the purpose of future
welfare as future looks uncertain. Now a day's investors are willing to bear very minimum risk
and that too for short span of period and most of the investors are inclined to invest their money
in commodity market. Investors are willing to invest only in bullions(gold, silver) as their prices
tend to rise over a time horizon and due to lack of knowledge other areas of commodity market
as not favored upon as compared to international market where large amount of money is
invested in agriculture based products. Inorder to increase investment in commodity market the
regulators have to take initiative to educate and inform mass people about the working of

commodity market and ensure strict rules and regulations for investors safety which is a major
concern these days.
At last the major findings of this study are that investors are reluctant to invest in commodity
market due to lack of knowledge ad difficulty in understanding the functioning of commodity
market and the major area of concern for investors is the safety driven by the objective of
reasonable income for future welfare.
So it provides us the overview of the commodity market it provides the list of commodities
traded in the market ,gives the knowledge of commodity exchanges share of commodity traded
so it increases our knowledge related to commodity market in india
Recommendations:i) The Commodity market operational environment is becoming more competitive.
Hence, the impact of emerging competition on investor behavior/behavioral changes
needs to be studied further.
ii) Developments in technology influence the changes in the structure and regulation in
commodity market so there is required another potential area for close study.
iii) Since the industry is still struggling to win the investors confidence, in-depth
analysis into investors expectations from Commodity market, its performance,
management, service and other related areas could be done.
iv) This study reveals that Commodity market investors feel that currently the two major
benefits, which Commodity market claim to offer, namely, Diversification and Safety
are not satisfactorily delivered. In spite of this, Commodity market industry is
growing and we attribute this to investor behavior and other macroeconomic factors.
Further research can be done to understand the reasons for growing popularity on one
side and the struggle to win investors confidence on the other side.
v) As we have seen from this study that Commodity market is on a rise in terms of
value, so a study can be conducted further to understand the untapped market.
vi) This study was conducted during less volatile period of market, a further research can
be conducted on commodity market taking into consideration a long period where
volatility can also be taken into consideration and more meaningful conclusions can
be drawn.

REFERENCES

 businesstoday.intoday.in/story/top-commodities
businesstoday.intodayin/story/indias-commodity-market-to-register-gains/1/15682.html
commodities.about.com/old/managingourportfolio/a/commodities-Review-For-2012.htm
en.wikipedia.org/wiki/commodity_market
moneyweek.com/eight_reasons_commodities_beat_study_every_time
www.bseindia.com/education/content/module_ncfm.htm
www.cmegroup.com
http://commodities.in
http://finance.indiamart.com/markets/commodity/
http://www.commoditiescontrol.com
http://www.mcxindia.com

http://www.ncdex.com

http://investmentz.co.in

http://trade.indiainfoline.com

http://www.finance.indiamart.com

http://www.fmc.gov.in

ANNEXURE