HOW TO TRADE IN COMMODITY MARKET?
On a yearly basis, most of traders aspire to diversify his or her portfolios through the stock market with commodity market. However, this commodity marketplace can be quite high-risk and several aspiring traders are generally left asking yourself how to make easy money by commodity trading. The good news is, trading in commodity market is very easy and profitable if the trader or investor follows breakout trends and other few simple trading rules.
Take commodity live charting software and service from the internet . You need to use a free commodity chart services such as one particular with Mcxmetal.com .Otherwise you can take any software for commodity real time charting and data services. There are so many real time chart software available in the market.
Find the particular chart intended for commodities which have bullish trend, which means trending up wards. You can place most of these commodities due to the price movement of the particular commodities will start from the lower level of the chart .Mark and find commodities which are trending in this manner. You can also mark the commodities which have bearish pattern, but then you should prepare for making short position in the particular commodity.
Be aware of virtually any commodity item as their price range steps continues to be consolidating in the tight trading range for the least a month or perhaps more time. This type of price consolidation takes place before the breakout.
The breakout entry level takes place when the price of the commodity rises up and it breaks the higher price level.
Open a buy position in a commodity since its price action increases up and the price breaks the upper price range on strong price movement. Strong price action is in the event the price moves up over the upper price level . It confirms the entry into a breakout trend movement of the commodity.
Put the stop loss order under the bottom level of the commodity’s trading price range. A stop loss order can save you from a huge loss if the commodity price take reverse to the downward. Stop loss order will square off or sell your position when the of the commodity touches the stop loss level. A stop loss order’s function is to save you from huge or larger loss in the commodity market.
Put the offer bid or sell your position when the particular commodity price touches the target level. You can set the target level easily by calculating 3 times of your stop loss .
For example: you have bought a position at the level of 100 and your stop loss was at 96.
Then you can set the target at 12 point (100-96)*3 upper from your buying price. Then you should sell at the 112 price level .
Beginners Guide to Commodities Futures Trading in India
Indian markets have recently thrown open a new avenue for retail investors and traders to participate: commodity derivatives. For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities is the best option.
Till some months ago, this wouldn’t have made sense. For retail investors could have done very little to actually invest in commodities such as gold and silver — or oilseeds in the futures market. This was nearly impossible in commodities except for gold and silver as there was practically no retail avenue for punting in commodities.
However, with the setting up of three multi-commodity exchanges in the country, retail investors can now trade in commodity futures without having physical stocks!
Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option.
In fact, the size of the commodities markets in India is also quite significant. Of the country’s GDP of Rs 13,20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent.
Currently, the various commodities across the country clock an annual turnover of Rs 1,40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grow many folds here on.
Like any other market, the one for commodity futures plays a valuable role in information pooling and risk sharing. The market mediates between buyers and sellers of commodities, and facilitates decisions related to storage and consumption of commodities. In the process, they make the underlying market more liquid.
MCX (MULTI COMMODITY EXCHANGE OF INDIA LTD.) is one of the leading commodity exchange in the world as well as the leading commodity exchange in India. Multi Commodity Exchange (MCX) has taken the fifth spot among the global commodity Exchanges in terms of the number of futures contracts traded. Based on the latest data from Futures Industry Association (FIA), during the period between January and June in the year 2011, about 127.8 million futures contracts were traded on MCX. Commodities are very essential for our life and comfort.
“Trade that which you can see, Not really that which you think” incredibly well said and very true said… In the present fast moving life around the world, every person wants the opportunity to making profits and earns money by their investment in the safest way. A trader or investor wants the guaranteed high return from the Investment .But there are few questions in their mind like, when to invest? Where to invest? How much to invest?
Bullion trading includes precious metals like gold,silver,platinum and palladium.All of these metals are available for trading in commodity future market.Few points for bullion trading given below:
1.There are some international economic indicators like Inflation,GDP growth rates,productivity and energy prices,a trader or investor should analyse all of these macroeconomic data for safe and good return.
3. Learning technical analysis is the best option to make profits in commodity future trading.By the help of technical analysis you can speculate in future price and movements of the commodity.Technical analysis includes chart patterns,market trends,moving averages,Elliott wave and many more indicators.
Base metal trading:
Base metals usually are a vital part of each of our world Economic growth. A number of the Industrial metals like copper,Lead and Zinc have been identified pertaining to thousands of years while others including lightweight alloy and nickel include just already been identified within the past 300 years . The essential tips for risk-free investing and trading for the Base metals usually are:
1. Learn the about the particular Base metals before you make investments.
2. Study the reports and analyse exactly what influences for prices movement.
3. Join the subscription service to the best advisory ,they will help by updating you just like reports, tutorials,commodity trading tips,bullion tips,base metal tips, real time charts,live charts,live commodity data,Live TV,live commodity rates,live bullion rates,and many more.It will help you to understand the current market conditions.
4. Involving your self in the commodity market education as well as commodity trading as much as possible.U can join any online commodity trading courses to get the knowledge of the entire commodity market.Only commodity trading tutorials and knowledge can help you to make assured profits from the commodity market .
The energy commodities are most likely the commodities as their trading has got the best effect on investors in addition to non-investors too. Energy commodity trading includes Crude oil, Natural Gas and etc…
MCX own a very good get ranking based on its performance by recent few years. In the Commodity trading sector large growth, tremendous rise and huge development have seen in a short period of time. Now Commodity trading in India is in a very good and established position.
Most of the investors and traders have diverted from the Equity market to commodity trading only for the safe and secure investment.
Native Indian Bazaar possess just lately thrown available a brand new method intended for investors and daily traders for you to invest in Commodity future markets. For individuals who want to diversify their particular portfolios equity, bonds and property, commodity is the foremost choice for them.
Nevertheless, using the putting together involving three commodity exchanges in India, Investors are now able to trade inside the Commodity future markets without having physical Commodity items.
Commodity trading actually offer huge prospective to become a individual asset category intended for market-savvy traders, arbitrageurs and investors. List buyers, who assert to be aware of your share market might find everything an unfathomable marketplace. Although Commodities are usually easy to understand in terms of fundamentals involving demand & supply come to mind. Investors should comprehend your advantages and risks of investing in commodity future trading ahead of having a Trade. In times past, pricing inside everything futures has been much less volatile balanced with stocks market and bonds, hence delivering an efficient profile variation choice.
Such as every other marketplace, normally the one intended for Commodity market futures takes on a priceless function inside information pooling and danger sharing. The market mediates among buyers and sellers involving commodities, and helps decisions linked to storage devices and use of Commodities. At the same time, they create your underlying marketplace more active.
In which Exchanges I can trade with Commodity market futures?
You’ve a few options -
MCX – Multi Commodity Exchange of India Limited.
NCDEX- National Commodity And Derivatives Exchange
NMCE – National Multi Commodity Exchange of India Ltd
NSEL – National Spot Exchange Limited.
How can I pick my brokerage firm?
Various Commodity brokerages firms have membership in NCDEX, NSEL along with MCX. Companies RK GLOBAL, SHAREKHAN, ICICIcommtrade, Angel Broking along with Sunidhi Consultancy etc.. are already offering commodity futures trading services. All of them furthermore provide buying and selling on web trading similar to the way they offer equities. You can even acquire a list of far more people on the respected exchanges along with settle on to the actual broker you intend to choose from.
What is the particular lowest investment necessary for the commodity trading?
You might have what can the small sum of Rs 2, 000. All you will be require funds with regard to margins payable straight up to commodity exchange through Broking firms. The actual margins range between 4-20% of the value of the total commodity future contract. Though you can begin away investing on Rs 2,000 with different brokers get various programs with regard to clients.
Intended for investing throughout bullion, that’s silver and gold, the particular lowest fund needed will be Rs 3000 (silver micro) & Rs 150(GOLD PETAL) with regard to within the recent trading price of approximately Rs 60,000 with regard to silver for one investing product (1 kg) in addition to regarding Rs 30,000 with regard to gold (10 gram).
Rates and commodity future lots plenty throughout agri commodities differ from exchange to exchange , although yet again the actual minimum investment to start trading is going to be roughly Rs 3,000.
what is this settlement procedure?
You can apply equally. All exchanges have got equally procedure : cash settlement and give the delivery system. If you would like your current trade being cash settled, you need to indicate before putting the order that you don’t will deliver them.
This Exchange with an inside clearing house which often monitors along with functions almost all things to do in relation to shipping and delivery, margining & handling the particular settlement guarantee resources along with cash settlement.
It works some sort of well-defined settlement cycle to be sure simply no deviations or deferments using this cycle.
In case you prefer to take or give delivery, it’s necessary to have the required warehouse invoices. The alternative to be insettle in cash by delivery could be modified as much instances as you wishes until the expiration on the contract.
Exactly what do I want to begin trading within commodity futures?
At first you need a banking account.Then will need a trading account in NCDEX OR MCX to trade with the future commodities.
Do you know the other demands from broker level?
You will have to sign an ordinary accounts agreements while using the broker. Included in this are the process from the Know Your Client formatting which exist within stock market along with terms and conditions from the exchanges along with broker. However you will need to give with details such as Photo,PAN card , Address proof ,Bank A/c no etc.
What are the broker charges and transaction costs?
The brokerage consist of 0.01%-0.03% ( as low as Rs.9 per lot ) of the total contract valuation. Transaction charges assortment between Rs 2.5 (0.0025%)and Rs 4 (0.004%) per lakh / lot. The brokerages may change regarding different commodities. It will likewise fluctuate determined by trading volume and delivery transactions. In case of the commitment contributing to shipping, this broker might be 0. 25 : 1 % from the commitment worth. The brokers are not able to charge more than the maximum limit set by the exchanges.
Wherever should i try to find information on Commodities Market?
Day-to-day economic news papers give the position price ranges , news as well as articles of all Commodities. Besides, there are specialist publications with Agri Commodities as well as metals/bullion trading for request. Brokerage firms offer research as well as research service.
Apart from all the simplest way to get access through Internet / websites. However several sites tend to be subscription facility, some of in addition deliver details totally free. You are able to browse the web as well as get the detail information whatever you want for commodity trading.
Who is the actual regulator?
The particular exchanges usually are controlled by the Forward Market Commission.
The particular FMC handles Exchange supervision and definitely will scrutinize the actual books regarding broking. The potent procedures usually are alleged as well as if the exchanges themselves fails to take action. In this way, as a result, the actual commodity exchanges tend to be self-regulating in comparison with share exchanges. But this will change in case investors involvement throughout commodities develops considerably.
That are the actual participants inside Commodity Current market?
People inside the commodity market into the following 3 different types:
Hedgers join into commodity future contracts for being assured usage of the commodity item, as well as the opportunity to sell the item, at the assured price. They trade with futures to shield independently against unexpected fluctuations inside commodity item price.
Speculators usually are the individuals who wish to choice upon future motions with the price of a commodity. Individual people prepared to take risk, participate with commodity market futures as speculators.Speculating of commodity future is not for those people who can not take the risk.The climate and weather may cause for the volatility or unexpected fluctuation as well as supply & demand of a commodity . As a result of this kind of leveraged speculated position, that they improve the risk of significant profits in addition to significant losses.
Arbitrageur: A kind of investor exactly who attempts to make money from price inefficiencies out there by trading simultaneous positions that offset each other and making risk-free money. Arbitrageurs are usually extremely knowledgeable investors since arbitrage prospects are generally nearly impossible to find along with need comparatively quickly investing. Arbitrageurs play an important purpose within the procedure of commodity market segments, while their own efforts in applying price inefficiencies keep price ranges much more correct than that they in any other case will be..
How can Commodity prices fluctuate ?
This variables impact the particular item prices:
Demand & Supply
Government Policies : electronic. g. EXIM Policies like contract price rates, bare minimum support prices.
Natural Aspects: Soil and damage through climate disorders, healthy mishaps etc.
Production: Consumption and Quantity of stocks
Interest rates : hike lucrative-ness of expense in silver and gold coins.
Which are the major commodity exchanges?
Multi Commodity Exchange of India Ltd (MCX).
National Commodity and Derivatives Exchange of India (NCDEX).
National Spot Exchange Ltd (NSEL)
National Multi Commodity Exchange, Ahemdabad (NMCE).
Will be delivery regarding commodities offered? Will it be mandatory?
Of course, however it is not compulsory, potential buyers and sellers going to take/give delivery should communicate the commodity exchange.Exchange will probably match the delivery at random , and designate this appropriately.
In which commodities can I trade?
Although the Exchanges are eligible for executing trade in commodity future trading in almost all commodity items. In the MCX (Multi Commodity Exchange of India Ltd.) Bullion trading , Base Metal trading, Energy trading, Cereals trading, Oil and Oil Seeds trading, Petro-chemicals trading, Plantations trading, Pulses trading and Spices trading can be executed. Under the Bullion Trading Gold future, Gold HNI future, Gold Guinea future, Gold M future, Gold Mini future ,Gold MUM future, Intl.Gold future ,Platinum future, Silver future, Silver Mini future, Silver micro future as well as Silver HNI future are listed. The commodity trader can also trade with Cereals in the Mcx like Barley JPR, Basmati Rice, Maize, Rice, Sarbati Rice, Wheat etc… Cotton ,Kapas, LS Cotton, Raw Jute in the Fibre segment in MCX. In the Base metals MCX have the facility to trade in Copper future, Lead future, Zinc future, Nickel future, Aluminium future, Mild Steel future, Steel Long future, Tin future and many others. Energy future is widely traded around the world of commodity future trading market. MCX have few options for trading in energy futures like Natural Gas ,Crude Oil, Thermal Coal and etc…For Pulses trading MCX have chana ,masur tur, urad, Yellow peas, Cardamom , Jeera , pepper, Red chilli, Turmeric and many other Agri Commodities. Rubber & Cashew are in plantation. Many other Commodities listed for future trading in MCX like Almond , Castor Oil, Castor Seeds, Mustard Oil, Mustard Seed, Soy Seeds and etc…
who much sales tax I have to pay on commodity trading? Is any registration compulsory?
No. When the buy and sell trade position is squared off ,you do not have to pay sales taxes . but when you trade with delivery any commodity item then the sale taxes are applicable. Commonly it is the seller’s duty to collect as well as pay sales taxes.the seller will pay the sales taxes or vat.the seller will issue the invoice in the name of the buyer.
What goes on if there is any default ?
All Exchanges NCDEX as well as MCX, have settlement guarantee funds. the Exchanges will charge the penalty if there any default by any member. There is also a different arbitration cell in Exchanges.
What happens if there is any buyer or seller delivery default?
The exchange will charge penalty if there is any default regarding delivery settlement.The amount of penal charges will depends on the lot sizes and the commodity items.In many Commodity item its compulsory for the buyer to taking delivery .Default of the taking delivery is not allowed.
How much fund I have to deposit to my broker as margin of a commodity future?
As in shares or equity future tarding, in Commodity market margin is copmuted buy “value at risk” or VaR technique. Normally it truly is in between 4 % and 10 % of the particular Commodity future value .
The margin values are depends on the Commodity items.The margin values may change depending on the Commodity future price changes as well as increasing or decreasing of volatility.
The main reason of taking margin from the investors to reducing the counter party default risk, it is a part of the risk management system.
what is initial margin?
When the trader or investor wants to open a position of a future commodity it requires a minimum percentage of the contract value.That percentage is known as Initial margin.
What is mark to market?
In each trading day of the Trader or the client’s margin account adjusted by consistently for their profit or loss .there might be a difference between Every trading day at the closing price and the previous day’s closing price .This difference will be calculated and adjusted (debit/credit) to the trader or investor margin account .This difference is known as Mark-To-Market margin.
What is the function of Commodity market clearing house?
Exchange Clearing House have the different types of work, such as delivery related pay-in and pay-out of the delivery and settlement process monitoring.
What’s the process of trading spot exchange?
Initial margin and it is supported by the Exchange for each trade mark-to-market control by every day. Exchange Makes the debit and credit to the every member’s settlement account by electronic bank clearing system.
what is contract specification of a Commodity future contract ?
Contract specification is a document that details the instructions and value/standards of the commodity traded in the Exchange. It also indicates the time limnit or expiration of the Commodity spot contract,the details of quality,delivery mode and many more.
It is necessary to includes all the details and description in the contract specification for successful trading. Trading lot, Price quote, minimum order size, Daily price limit, Margins, Tick size, Tender period, Delivery period, Delivery period margins, Delivery unit, Delivery centre, Quality specification, due date rate calculation, charges to delivery and some other detail includes in a contract specification of a commodity future contract.
what is the meaning of DELIVERY STORE mentioned in contract specification?
The delivery store is a exchange identified or approved ware house. The participated investor or trader have to give or take the delivery of the commodity item only at that delivery centre mentioned in particular commodity contract specification.
What is the circuit filter?
Circuit filter or daily price limit is the maximum allowed price range percentage(upside/downside) in that day with respect to the previous day’s closing price.
Circuit filter is different for the different commodities. The details of circuit filter is given in the contract specification of particular commodity contract. If any trader or investor put a order beyond the daily price range or circuit filter the exchange will reject that order by their sophisticated trading system.
Here’s how a retail investor can get started for Commodity trading:
Where do I need to go to trade in commodity futures?
You have three options – the National Commodity and Derivative Exchange, the Multi Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd. All three have electronic trading and settlement systems and a national presence.
How do I choose my broker?
Several already-established equity brokers have sought membership with NCDEX and MCX. The likes of Refco Sify Securities, SSKI (Sharekhan) and ICICIcommtrade (ICICIdirect), ISJ Comdesk (ISJ Securities) and Sunidhi Consultancy are already offering commodity futures services. Some of them also offer trading through Internet just like the way they offer equities. You can also get a list of more members from the respective exchanges and decide upon the broker you want to choose from.
What is the minimum investment needed?
You can have an amount as low as Rs 5,000. All you need is money for margins payable upfront to exchanges through brokers. The margins range from 5-10 per cent of the value of the commodity contract. While you can start off trading at Rs 5,000 with ISJ Commtrade other brokers have different packages for clients.
For trading in bullion, that is, gold and silver, the minimum amount required is Rs 650 and Rs 950 for on the current price of approximately Rs 65,00 for gold for one trading unit (10 gm) and about Rs 9,500 for silver (one kg).
The prices and trading lots in agricultural commodities vary from exchange to exchange (in kg, quintals or tonnes), but again the minimum funds required to begin will be approximately Rs 5,000.
Do I have to give delivery or settle in cash?
You can do both. All the exchanges have both systems – cash and delivery mechanisms. The choice is yours. If you want your contract to be cash settled, you have to indicate at the time of placing the order that you don’t intend to deliver the item.
If you plan to take or make delivery, you need to have the required warehouse receipts. The option to settle in cash or through delivery can be changed as many times as one wants till the last day of the expiry of the contract.
What do I need to start trading in commodity futures?
As of now you will need only one bank account. You will need a separate commodity demat account from the National Securities Depository Ltd to trade on the NCDEX just like in stocks.
What are the other requirements at broker level?
You will have to enter into a normal account agreements with the broker. These include the procedure of the Know Your Client format that exist in equity trading and terms of conditions of the exchanges and broker. Besides you will need to give you details such as PAN no., bank account no, etc.
What are the brokerage and transaction charges?
The brokerage charges range from 0.10-0.25 per cent of the contract value. Transaction charges range between Rs 6 and Rs 10 per lakh/per contract. The brokerage will be different for different commodities. It will also differ based on trading transactions and delivery transactions. In case of a contract resulting in delivery, the brokerage can be 0.25 – 1 per cent of the contract value. The brokerage cannot exceed the maximum limit specified by the exchanges.
Where do I look for information on commodities?
Daily financial newspapers carry spot prices and relevant news and articles on most commodities. Besides, there are specialised magazines on agricultural commodities and metals available for subscription. Brokers also provide research and analysis support.
But the information easiest to access is from websites. Though many websites are subscription-based, a few also offer information for free. You can surf the web and narrow down you search.
Who is the regulator?
The exchanges are regulated by the Forward Markets Commission. Unlike the equity markets, brokers don’t need to register themselves with the regulator.
The FMC deals with exchange administration and will seek to inspect the books of brokers only if foul practices are suspected or if the exchanges themselves fail to take action. In a sense, therefore, the commodity exchanges are more self-regulating than stock exchanges. But this could change if retail participation in commodities grows substantially.
Who are the players in commodity derivatives?
The commodities market will have three broad categories of market participants apart from brokers and the exchange administration – hedgers, speculators and arbitrageurs. Brokers will intermediate, facilitating hedgers and speculators.
Hedgers are essentially players with an underlying risk in a commodity – they may be either producers or consumers who want to transfer the price-risk onto the market.
Producer-hedgers are those who want to mitigate the risk of prices declining by the time they actually produce their commodity for sale in the market; consumer hedgers would want to do the opposite.
For example, if you are a jewellery company with export orders at fixed prices, you might want to buy gold futures to lock into current prices. Investors and traders wanting to benefit or profit from price variations are essentially speculators. They serve as counterparties to hedgers and accept the risk offered by the hedgers in a bid to gain from favourable price changes.
In which commodities can I trade?
Though the government has essentially made almost all commodities eligible for futures trading, the nationwide exchanges have earmarked only a select few for starters. While the NMCE has most major agricultural commodities and metals under its fold, the NCDEX, has a large number of agriculture, metal and energy commodities. MCX also offers many commodities for futures trading.
Do I have to pay sales tax on all trades? Is registration mandatory?
No. If the trade is squared off no sales tax is applicable. The sales tax is applicable only in case of trade resulting into delivery. Normally it is the seller’s responsibility to collect and pay sales tax.
The sales tax is applicable at the place of delivery. Those who are willing to opt for physical delivery need to have sales tax registration number.
What happens if there is any default?
Both the exchanges, NCDEX and MCX, maintain settlement guarantee funds. The exchanges have a penalty clause in case of any default by any member. There is also a separate arbitration panel of exchanges.
Are any additional margin/brokerage/charges imposed in case I want to take delivery of goods?
Yes. In case of delivery, the margin during the delivery period increases to 20-25 per cent of the contract value. The member/ broker will levy extra charges in case of trades resulting in delivery.
Is stamp duty levied in commodity contracts? What are the stamp duty rates?
As of now, there is no stamp duty applicable for commodity futures that have contract notes generated in electronic form. However, in case of delivery, the stamp duty will be applicable according to the prescribed laws of the state the investor trades in. This is applicable in similar fashion as in stock market.
How much margin is applicable in the commodities market?
As in stocks, in commodities also the margin is calculated by (value at risk) VaR system. Normally it is between 5 per cent and 10 per cent of the contract value.
The margin is different for each commodity. Just like in equities, in commodities also there is a system of initial margin and mark-to-market margin. The margin keeps changing depending on the change in price and volatility.
Are there circuit filters?
Yes the exchanges have circuit filters in place. The filters vary from commodity to commodity but the maximum individual commodity circuit filter is 6 per cent. The price of any commodity that fluctuates either way beyond its limit will immediately call for circuit breaker.
What is a Derivative contract?
A derivative contract is an enforceable agreement whose value is derived from the value of an underlying asset; the underlying asset can be a commodity, precious metal, currency, bond, stock, or, indices of commodities, stocks etc. Four most common examples of derivative instruments are forwards, futures, options and swaps/spreads.
What is a forward contract?
A forward contract is a legally enforceable agreement for delivery of goods or the underlying asset on a specific date in future at a price agreed on the date of contract. Under Forward Contracts (Regulation) Act, 1952, all the contracts for delivery of goods, which are settled by payment of money difference or where delivery and payment is made after a period of 11 days, are forward contracts.
What are standardized contracts?
Futures contracts are standardized. In other words, the parties to the contracts do not decide the terms of futures contracts; but they merely accept terms of contracts standardized by the Exchange.
What are customized contracts?
Forward contracts (other than a futures) are customized. In other words, the terms of forward contrac
ts are individually agreed between two counter-parties.
Is delivery mandatory in futures contract trading?
The provision for delivery is made in the Byelaws of the Associations so as to ensure that the futures prices in commodities are in conformity with the underlying. Delivery is generally at the option of the sellers. However, provisions vary from Exchange to Exchange. Byelaws of some Associations give both the buyer and seller the right to demand/give delivery.
What is the n.t.s.d. contracts ?
Non-Transferable Specific Delivery Contracts is an enforceable bilateral agreement under which the terms of contract are customized and the performance of the contract is by giving specific delivery of goods. The rights or liabilities under this contract cannot be transferred by transferring delivery order, railway receipt, bill of lading, warehouse receipts or any other documents of title to the goods.
Are n.t.s.d. contracts regulated by the Forward Markets Commission?
Though the Forward Contracts (Regulation) Act, 1952, contains enabling provisions to regulate or prohibit such contract in notified goods, the Government have freed n.t.s.d. contracts from regulation or prohibition by issue of notification No.369(E) dated 1.4.2003.
What is the t.s.d. contracts ?
Transferable Specific Delivery contracts is an enforceable customised agreement where unlike known transferable specific delivery contracts, the right or liabilities under the delivery order, railway receipt, bill of lading, warehouse receipts or any other documents of title to the goods are transferable. The contract is performed by delivery of goods by first seller to the last buyer. The parties, other than the first seller and the last buyer, perform the contract merely by exchanging money differences.
What is a futures contract?
Futures Contract is specie of forward contract. Futures are exchange – traded contracts to sell or buy standardized financial instruments or physical commodities for delivery on a specified future date at an agreed price. Futures contracts are used generally for protecting against rich of adverse price fluctuation (hedging). As the terms of the contracts are standardized, these are generally not used for merchandizing propose.
What are the commodities suitable for futures trading ?
All the commodities are not suitable for futures trading and for conducting futures trading. For being suitable for futures trading the market for commodity should be competitive, i.e., there should be large demand for and supply of the commodity – no individual or group of persons acting in concert should be in a position to influence the demand or supply, and consequently the price substantially. There should be fluctuations in price. The market for the commodity should be free from substantial government control. The commodity should have long shelf-life and be capable of standardisation and gradation.
How many commodities are permitted for futures trading ?
With the issue of the Notifications dated 1.4.2003 futures trading is not prohibited in any commodity. Futures trading can be conducted in any commodity subject to the approval /recognition of the Government of India. 91 commodities are in the regulated list i.e. these commodities have been notified under section 15 of the Forward Contracts (Regulation) Act. Forward trading in these commodities can be conducted only between, with, or through members of recognized associations. The commodities other than those listed under Section 15 are conventionally referred to as ‘Free’ commodities. Forward trading in these commodities can be organized by any association after obtaining a certificate of Registration from Forward Markets Commission.
How are futures prices determined?
Futures prices evolve from the interaction of bids and offers emanating from all over the country – which converge in the trading floor or the trading engine. The bid and offer prices are based on the expectations of prices on the maturity date.
How professionals predict prices in futures?
Two methods generally used for predicting futures prices are fundamental analysis and technical analysis. The fundamental analysis is concerned with basic supply and demand information, such as, weather patterns, carryover supplies, relevant policies of the Government and agricultural reports. Technical analysis includes analysis of movement of prices in the past. Many participants use fundamental analysis to determine the direction of the market, and technical analysis to time their entry and exist.
How is it possible to sell, when one doesn’t own commodity?
One doesn’t need to have the physical commodity or own a contract for the commodity to enter into a sale contract in futures market. It is simply agreeing to sell the physical commodity at a later date or selling short. It is possible to repurchase the contract before the maturity, thereby dispensing with delivery of goods.
What are long position?
In simple terms, long position is a net bought position.
What are short position?
Short position is net sold position.
What is bull spread (futures)?
In most commodities and financial derivatives market, the term refers to buying contracts maturing in nereby month, and selling the deferred month contracts, to profit from the wide spread which is larger than the cost of carry.
What is bear spread (futures)?
In most of commodities and financial derivatives market, the term refers to selling the nearby contract month, and buying the distant contract, to profit from saving in the cost of carry.
What is ‘Contango’?
Contango means a situation, where futures contract prices are higher than the spot price and the futures contracts maturing earlier.
When is futures contract in ‘Contango’?
It arises normally when the contract matures dur
ing the same crop-season. In an well-integrated market, Contango is equal to the cost of carry viz. Interest rate on investment, loss on account of loss of weight or deterioration in quantity etc.
What is ‘Backwardation’?
When the prices of spot, or contracts maturing earlier are higher than a particular futures contract, it is said to be trading at Backwardation.
When is futures contract at ‘Backwardation’?
It is usual for a contract maturing in the peak season to be in backwardation during the lean period.
What is ‘basis’?
It is normally calculated as cash price minus the futures price. A positive number indicates a futures discount (Backwardation) and a negative number, a futures premium (Contango). Unless otherwise specified, the price of the nearby futures contract month is generally used to calculate the basis.
What is cash settlement?
It is a process for performing a futures contract by payment of money difference rather than by delivering the physical commodity or instrument representing such physical commodity (like, warehouse receipt)
What is offset?
It refers to the liquidation of a futures contract by entering into opposite (purchase or sale, as the case may be) of an identical contract.
What is settlement price?
The settlement price is the price at which all the outstanding trades are settled, i.e, profits or losses, if any, are paid. The method of fixing Settlement price is prescribed in the Byelaws of the exchanges; normally it is a weighted average of prices of transactions both in spot and futures market during specified period.
What is convergence?
This refers to the tendency of difference between spot and futures contract to decline continuously, so as to become zero on the date on maturity.
Can one give delivery against futures contract?
Futures contract are contracts for delivery of goods. But most of the futures contracts, the world over, are performed otherwise than by physical delivery of goods.
Why the proportion of futures contracts resulting in delivery is so low?
The reason is, futures contracts may not be suitable for merchandising purpose, mainly because these are standardized contracts; hence various aspects of the contracts, viz., quality/grade of the goods, packing, place of delivery, etc. may not meet the specific needs of the buyers/sellers.
Why delivery of good is permitted when futures contract by their very nature not suitable for merchandising purposes?
The threat of delivery helps in dissuading the participants from artificially rigging up or depressing the futures prices. For example, if manipulators rig up the prices of a contract, seller may give his intention to make a delivery instead of settling his outstanding contract by entering into purchase contracts at such artificially high price.
How can one avoid delivery being imposed against outstanding purchase contracts?
All the Exchanges give option to the participants to liquidate their outstanding position by entering into offsetting contract, before the “delivery period” commences. There is no delivery if the contracts are so liquidated. The threat of delivery – whether in terms of physical goods or by warehouse receipts – becomes a reality once delivery period commences.
Can a buyer demand delivery against futures contract?
The Byelaws of different Exchanges have different provisions relating to delivery. Some Exchanges give the option to seller, i.e., if the seller gives his intention to give delivery, buyers have no choice, but to accept delivery or face selling on account and/or penalty. Some Exchanges, particularly the northern Exchanges trading contracts in “gur”/jaggery provide the option both to buyer and seller. In some Exchanges, if the sellers do not give intention to give delivery, all outstanding short and long position are settled at the “Due Date Rate”.
What is “Due Date Rate”?
Due Date Rate is the weighted average of both spot and futures prices of the specified number of days, as defined in the Byelaws of Associations.
What is delivery month?
It is the specified month within which a futures contract matures.
What is delivery notice?
It is a written notice given by sellers of their intention to make delivery against outstanding short open futures positions on a particular date.
What is Warehouse Receipt?
It is a document issued by a warehouse indicating ownership of a stored commodity and specifying details in respect of some particulars, like, quality, quantity and, some times, indicating the crop season.
Are futures markets “satta” markets?
Participants in futures market include market intermediaries in the physical market, like, producers, processors, manufacturers, exporters, importers, bulk consumers etc., besides speculators. There is difference between speculation and gambling. Therefore futures markets are not “satta markets”.
Why do we need speculators in futures market?
Participants in physical markets use futures market for price discovery and price risk management. In fact, in the absence of futures market, they would be compelled to speculate on prices. Futures market helps them to avoid speculation by entering into hedge contracts. It is however extremely unlikely for every hedger to find a hedger counterparty with matching requirements. The hedgers intend to shift price risk, which they can only if there are participants willing to accept the risk. Speculators are such participants who are willing to take risk of hedgers in the expectation of making profit. Speculators provide liquidity to the market, therefore, it is difficult to imagine a futures market functioning without speculators.
What is the difference between a speculator and gambler?
Speculators are not gamblers, since they do not create risk, but merely accept the risk, which already exists in the market. The speculators are the persons who try to assimilate all the possible price-sensitive information, on the basis of which they can expect to make profit. The speculators therefore contribute in improving the efficiency of price discovery function of the futures market.
Does it mean that speculation need not be curbed?
Informed and speculation is good for the market. However over-speculation needs to be kerbed. There is no unanimity about what constitutes over-speculation.
How is over-speculation kerbed?
In order to curb over-speculation, leading to distortion of price signals, limits are imposed on the open position held by speculators. The positions held by speculators are also subject to certain margins; many Exchanges exempt hedgers from this margins.
How should a futures contract be designed ?
The most important principle for designing a futures contract is to take into account the systems and practices being followed in the cash market. The unit of price quotation, unit of trading should be fixed on the basis of prevailing practices. The “basis” – the standard quality/grade – variety should generally be that quality or grade which has maximum production. The delivery centers should be important production or distribution centers. While designing a futures contract care should be taken that the contract designed is fair to both buyers and sellers and there would be adequate supply of the deliverable commodity thus preventing any squeezes of the market.
What are the benefits from Commodity Forward/Futures Trading?
Forward/Futures trading performs two important functions, namely, price discovery and price risk management with reference to the given commodity. It is useful to all segments of the economy. It enables the ‘Consumer’ in getting an idea of the price at which the commodity would be available at a future point of time. He can do proper costing and also cover his purchases by making forward contracts. It is very useful to the ‘exporter’ as it provides an advance indication of the price likely to prevail and thereby helps him in quoting a realistic price and secure export contract in a competitive market It ensures balance in supply and demand position throughout the year and leads to integrated price structure throughout the country. It also helps in removing risk of price uncertainty, encourages competition and acts as a price barometer to farmers and other functionaries in the economy.
What is hedging?
Hedging is a mechanism by which the participants in the physical/cash markets can cover their price risk. Theoretically, the relationship between the futures and cash prices is determined by cost of carry. The two prices therefore move in tandem. This enables the participants in the physical/cash markets to cover their price risk by taking opposite position in the futures market.
Illustrate hedging by a stockist by using futures market?
To illustrate the concept of hedging, let us assume that, on 1st December, 2002, a stockist purchases, say, 10 tonnes of Castorseed in the physical market @ Rs. 1600/- p.q.. To hedge price-risk, he would simultaneously sell 10 contracts of one tonne each in the futures market at the prevailing price. Assuming the ruling price in May, 2003 contract is Rs.1750/- p.q., the stockist is able to lock in a spread/“badla” of Rs. 150/- p.q., i.e., about 9% for about 6 months. The stockist would, in the first instance, take the decision to purchase stock only if such a spread covers his cost of carry and a reasonable profit of margin. Assuming that the stockist sells his stock in the month of April when the spot price is Rs. 1500/- p.q.. The stockist would incur a loss of Rs. 100/- p.q. on his physical stocks. He would also make a loss of expenses incurred for carrying the stocks. However, since the spot and futures prices move in parity, futures price is also likely to decline, say, from Rs. 1750/- p.q. to, say, Rs. 1625/- p.a. The stockist can liquidate his contract in the futures market by entering into purchase contract @ Rs. 1625/- p.q. He would end up earning a profit of Rs. 125/- in the futures segment. Looking at the gain/loss in the two segments, we find that the stockist is able to hedge his price risk by operating simultaneously in the two markets and taking opposite positions. He gains in the futures market if he loses in the spot market; but he would lose in futures market if he gains in the spot market. Similarly, processors, exporters, and importers can also hedge their price risks.
How does futures market benefit farmers?
World over, farmers do not directly participate in the futures market. They take advantage of the price signals emanating from a futures market. Price-signals given by long-duration new-season futures contract can help farmers to take decision about cropping pattern and the investment intensity of cultivation. Direct participation of farmers in futures market to manage price risk –either as members of an Exchange or as non-member clients of some member – can be cumbersome as it involves meeting various membership criteria and payment of daily margins etc. Options in goods would be relatively more farmer-friendly, as and when they are legally permitted.
Can the loss incurred on the futures market be set off against normal business profit?
Loss incurred in futures market by entering into contracts for hedging purposes can be set off against normal profit. The loss incurred on account of speculative transactions in futures market cannot be set off against normal business profit. This loss is however allowed to be carried forward for eight years, during which it can be set off against speculative profit.
How can futures trading be successful when the cash markets of the underlying commodities are fragmented?
It is true that in order to attract wide participation, the cash market of commodities should be geographically integrated and free from Government restrictions on production, marketing and distribution, like limit on stock-holding, movement of goods across state borders etc. Differential inter-state tax structure as well as the APMC Acts introduced by various State Governments restraining direct purchase from farmers also comes in the way of developing nationwide market. It is however not a bad idea to introduce futures trading in commodity without waiting for the cash market in the commodity to become geographically integrated. The number of commodities attracting Essential Commodities Act, as well as the restrictions imposed on production, marketing and distribution of the commodities under the Essential Commodities Act have declined rapidly. Existence of futures/derivatives market as well as wide use of derivatives in commodities to manage price risk would create conditions for the Government to consider dilution/withdrawal of Administered price mechanism.
PARTICIPANTS IN DERIVATIVES MARKETS
Who can be a member of the Exchange ?
The Bye-laws and Articles of the Association prescribed the criteria for being a member of the Exchange. Any person desirous of being a member of the Exchange may approach the contact persons whose names, telephone numbers, fax numbers, email addresses etc. are available on the website of fmc: < www.fmc.gov.in >. They may also refer to the Bye-law and Articles of Association of the concerned Exchange which contain various criteria for the membership of the Exchange. 50. Who are the participants in forward/futures markets?
Participants in forward/futures markets are hedgers, speculators, day-traders/scalpers, market makers, and, arbitrageurs .
Who is hedger?
Hedger is a user of the market, who enters into futures contract to manage the risk of adverse price fluctuation in respect of his existing or future asset.
What is arbitrage?
Arbitrage refers to the simultaneous purchase and sale in two markets so that the selling price is higher than the buying price by more than the transaction cost, so that the arbitrageur makes risk-less profit.
Who are day-traders?
Day traders are speculators who take positions in futures or options contracts and liquidate them prior to the close of the same trading day.
Who is floor-trader?
A floor trader is an Exchange member or employee, who executes trade by being personally present in the trading ring or pit floor trader has no place in electronic trading systems.
Who is speculator?
A trader, who trades or takes position without having exposure in the physical market, with the sole intention of earning profit is a speculator.
Who is market maker?
A market maker is a trader, who simultaneously quotes both bid and offer price for a same commodity throughout the trading session.
What kinds of risks do participants face in derivatives markets?
Different kinds of risks faced by participants in derivatives markets are:
• credit risk
• market risk
• liquidity risk
• legal risk
• operational risk
What is credit risk?
Credit risk on account of default by counter party: This is very low or almost zeros because the Exchange takes on the responsibility for the performance of contracts
What is market risk?
Market risk is the risk of loss on account of adverse movement of price.
What is liquidity risk?
Liquidity risks is the risk that unwinding of transactions may be difficult, if the market is illiquid
What is Legal risk?
Legal risk is that legal objections might be raised, regulatory framework might disallow some activities.
What is operational risk?
Operational risk is the risk arising out of some operational difficulties, like, failure of electricity, due to which it becomes difficult to operate in the market.
EXCHANGES AND THEIR ROLE
How many recognized/registered associations engaged in commodity futures trading?
At present 21 Exchanges are recognized/registered for forward/ futures trading in commodities.
Why are associations required to get recognized?
Under the Forward Contracts (Regulation) Act, 1952, forward trading in commodities notified under section 15 of the Act can be conducted only on the Exchanges, which are granted recognition by the Central Government (Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution).
Are the associations organizing forward trading required to get themselves registered?
All the Exchanges, which deal with forward contracts, are required to obtain certificate of Registration from the Forward Markets Commission.
What is the difference between Registered Associations and Recognized Associations?
All the associations concerned with regulation and control of business relating to forward contracts in goods, including recognized associations, are required to obtain Certificate of Registration from the Forward Markets Commission. Such business can be conducted only in accordance with the conditions of Certificate of Registration. All the Associations concerned with the regulation and control of business relating to forward contracts in commodities, which are notified u/sec. 15 of the Act have to obtain recognition from the Central Government. The associations organizing trading in commodities other than those notified under section 15, need not seek recognition; they merely have to obtain certificate of registration.
What is the procedure for obtaining recognition for an Association?
The application for grant of recognition will have to be made in triplicate in a prescribed form to Secretary, Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution, Krishi Bhavan, New Delhi – 110 00. Form A prescribed for application for the recognition is placed on the web site of the FMC www.fmc.gov.in .The application for grant of recognition should be forwarded through Forward Markets Commission, Everest, 3rd Floor, 100, Marine Drive, Mumbai – 400 002.. The Government may grant recognition to the applicant association on the basis of recommendations made by the Forward Markets Commission. A fee of Rs. 2500/- will have to be paid by the applicant association for grant of recognition. The fee could also be deposited in the nearest Government Treasurery or the nearest branch of State Bank of India; provided that at Mumbai, Kolkatta, Delhi, Kanpur and Chennai, the amount has to be deposited in the Reserve Bank of India. T
he fee can also be remitted by crossed Indian Postal Order drawn in favour of Secretary, Forward Markets Commission. The application has to be accompanied by 3 copies of Memorandum and Articles of Association and Byelaws.
What is the procedure for obtaining certificate of registration from the Forward Markets Commission?
Application in triplicate for grant of certificate of Registration in Form B – placed on the web site of the FMC < www.fmc.gov.in > – should be sent to Forward Markets Commission, Everest, 3rd Floor, 100, Marine Drive, Mumbai – 400 002. A fee of Rs. 50/- will have to be paid by the applicant association for grant of registration certificate. The fee could also be deposited in the nearest Government Treasurery or the nearest branch of State Bank of India; provided that at Mumbai, Kolkatta, Delhi, Kanpur and Chennai, the amount has to be deposited in the Reserve Bank of India. The fee can also be remitted by crossed Indian Postal Order drawn in favour of Secretary, Forward Markets Commission. The application has to be accompanied by 3 copies of Memorandum and Articles of Association and Byelaws.
What is “National” Commodity Exchange?
Government identified the best international systems and practices in respect of trading, clearing, settlement and governance structure and invited applications from associations – existing and potential – to set up National Commodity Exchanges by introducing such systems and practices. The term, “National” used for these Exchanges does not mean that other Exchanges are restricted from having nationwide operations.
How do National Commodity Exchanges differ from other Commodity Exchanges?
National Commodity Exchanges would be granted recognition in all permitted commodities; the other exchanges have to approach the Government for grant of recognition for each futures contract separately. Also, National Commodity Exchanges would be putting is place the best international practices in trading, clearing, settlement, and governance.
Which are the approved National Commodity Exchanges?
The Government of India identified four commodity exchanges – two existing and two at proposal stage for setting up of Nation-Wide Commodity Exchanges. One of these existing Exchanges, Online Commodity Exchange of India Ltd. – now renamed as National Multicommodity Exchange of India Ltd. – completed the preconditions for grant of national status, and was granted permanent recognition in all commodities, permitted from time to time. National Board of Trade, Indore is also an existing Exchange, recognised in Soya Complex, Mustard Complex and Palm Derivatives. Three Exchanges, including National Board of Trade, Indore, were given ten months’ time to complete the preconditions. They are expected to be operational by October, 2003.
What is the role of an Exchange in futures trading?
An Exchange designs a contract, which alone would be traded on the Exchange. The contract is not capable of being modified by participants, i.e., it is standardized. The Exchange also provides a trading platform, which converges the bids and offers emanating from geographically dispersed locations. This creates competitive conditions for trading. The Exchange also provides facilities for clearing, settlement, arbitration facilities. The Exchange may also provide financially secure environment by putting in place suitable risk management mechanism (margining system etc.), and guaranteeing performance of contract through the process of novation.
Why does Exchange collect margin money?
The aim of margin money is to minimize the risk of default by either counter party. The amount of initial margin is so fixed as to ensure that the probability of loss on account of worst possible price fluctuation, which cannot be met by the amount of ordinary/initial margin is very low. The Exchanges fix rates of ordinary/initial margin keeping in view need to balance high security of contract and low cost of entering into contract.
What are the different types of margins payable on futures?
Different margins payable on futures contracts are:
Ordinary/initial margin, mark-to-market margin, special margin, volatility margin, and delivery margin.
What is initial/ordinary margin?
It is the amount to be deposited by the market participants in his margin account with clearing house before they can place order to buy or sell a futures contracts. This must be maintained throughout the time their position is open and is returnable at delivery, exercise, expiry or closing out.
What is Mark-to-Market margin?
Mark-to-market margins (MTM or M2M or valan) are payable based on closing prices at the end of each trading day. These margins will be paid by the buyer if the price declines and by the seller if the price rises. This margin is worked out on difference between the closing/clearing rate and the rate of the contract (if it is enterned into on that day) or the previous day’s clearing rate. The Exchange collects these margins from buyers if the prices decline and pays to the sellers and vice versa.
Why is Mark-to-Market margin collected daily in commodity market?
Collecting mark-to-market margin on a daily basis reduces the possibility of accumulation of loss, particularly when futures price moves only in one direction. Hence the risk of default is reduced. Also, the participants are required to pay less upfront margin – which is normally collected to cover the maximum, say, 99.9%, of the potential risk during the period of mark-to-market, for a given limit on open position. Alternatively, for the given upfront margin the limit on open position would have to be reduced, which has the effect of restraining the trade and liquidity.
What is Volatility?
It is a measurement of the variability rate (but not the direction) of the change in price over a given time period. It is often expressed as a percentage and computed as the annualized standard deviation of percentage change in daily price.
What is a Client Account?
Client Account is an account maintained for any individual or entity being serviced by an agent (broker, members), for a commission. A customer’s business must be segregated from the broker’s/member’s/principal’s own business and clients’ money should be kept in segregated accounts.
What is a client agreement?
It is a legal document entered into between the broker and the client setting out the conditions of their relationship and meeting the requirements of the relevant self-regulatory organization and the Regulator.
What is the ‘Trade Guarantee Fund’?
The main objectives of Trade Guarantee fund are (a) to guarantee settlement of bonafide transactions of the members of the Exchange (b) thereby, to inculcate confidence in the minds of market participants’ (c) to protect the interest of the investors. All the members of the Exchange are required to make initial contribution towards trade guarantee fund of the Exchange.
What is the role of Clearing House?
Clearing House performs post trading functions like confirming trades, working out gains or losses made by the participants during the course of the clearing period – usually a day-collecting the losses from the members and paying out to other who have made gains.
What is novation?
Some Clearing Houses interpose between buyers and sellers as a legal counter party, i.e., the clearing house becomes buyer to every seller and vice versa. This obviates the need for ascertaining credit-worthiness of each counter party and the only credit risk that the participants face is the risk of clearing house committing a default. Clearing House puts in place a sound risk-management system to be able to discharge its role as a counter party to all participants.
How does an exchange ensure the guarantee of the performance of the contract ?
The performance of the contracts registered by the exchange are guaranteed either by the exchange or its clearing house. The exchange interposes itself between each buyer and seller thereby becoming a seller to every buyer and a buyer to every seller. The Exchange In order to safeguard its interest by imposing mark to market margin (which is clearing all the transactions at the closing price of the day. All the profits and losses are either paid in or paid out). This minimises the chances of default as buyer or seller is exposed to one day of price movements. The Exchange also maintains its own TGF / SGF which can be used in case of a default. The Exchange also puts in place a membership criteria and some of the new Exchanges have also prescribed certain minimum capital adequacy norms.
MEMBERSHIP OF EXCHANGES
Does a member / broker need to register with the Forward Markets Commission?
No; but the Forward Contracts (Regulation) Act, 1952 is proposed to be amended to provide for registration of brokers with the Forward Markets Commission.
At what rate does the Forward Markets Commission charge its fee on the turnover of the members/brokers?
Forward Market Commission does not charge any regulatory fee from the Exchanges or its members and users. It is an office of the Government of India and sources its finances from the budget.
Can a security broker obtain the membership of a Commodity Exchange?
The Forward Contracts (Regulation) Act, 1952 does not prohibit security broker from obtaining membership of a Commodity Exchanges. Certain restrictions are however, imposed on a security broker from participating in the Commodity Exchanges under Securities Contracts (Regulation) Rules, 1952. Notification is being/has been issued removing such a restriction. The security broker will however have to set up a subsidiary – a separate legal entity – with separate capital adequacy and minimum networth for being able to trade on a commodity exchange.
Can a member enter into the options in goods ?
Options in goods are presently prohibited under Section 19 of the Forward Contracts (Regulation) Act, 1952. No exchange or no person – whether he is a member of any recognized association or not – can organize or enter into or make or perform options in goods; it constitutes cognizable offence, which is punishable under section 20(e) of the Act.
What is the present system of regulation in commodity forward/future trading in India?
At present, there are three tiers of regulations of forward/futures trading system exists in India, namely, Government of India, Forward Markets Commission and Commodity Exchanges.
The FC(R) Act, 1952 prohibits options in commodities. For the purpose of forward contracts in certain commodities can be regulated by notifying those commodities u/s 15 of the Act; forward trading in certain other commodities can be prohibited by notifying these commodities u/s 17 of the Act.
What is the need for regulating futures market?
The need for regulation arises on account of the fact that the benefits of futures markets accrue in competitive conditions. The regulation is needed to create competitive conditions. In the absence of regulation, unscrupulous participants could use these leveraged contracts for manipulating prices. This could have undesirable influence on the spot prices, thereby affecting interests of society at large.. Regulation is also needed to ensure that the market has appropriate risk management system. In the absence of such a system, a major default could create a chain reaction. The resultant financial crisis in a futures market could create systematic risk. Regulation is also needed to ensure fairness and transparency in trading, clearing, settlement and management of the exchange so as to protect and promote the interest of various stakeholders, particularly non-member users of the market.
What are the functions of the Forward Markets Commission ?
• FMC advises Central Government in respect of grant of recognition or withdrawal of recognition of any association.
• It keeps forward markets under observation and takes such action in relation to them as it may consider necessary, in exercise of powers assign to it.
• It collects and publishes information relating to trading conditions in respect of goods including information relating to demand, supply and prices and submit to the Government periodical reports on the operations of the Act and working of forward markets in commodities.
• It makes recommendations for improving the organization and working of forward markets.
• It undertakes inspection of books of accounts and other documents of recognized/regist
What are the powers of the Commission?
The Commission has powers of deemed civil court for (a) Summoning and enforcing the attendance of any person and examining him on oath; (b) Requiring the discovery and production of any document; (c) Receiving evidence on affidavits, and (d) Requisitioning any public record or copy thereof from any office.
The following powers are vested in the Central Government, most of which are delegated to the Commission:
The powers of approving memorandum and articles of association and Bye-laws; powers to direct to make or to make articles (Rules) or Bye-laws; powers to suspend governing body of recognised association, and, powers to suspend business of recognised association.
Why and what are the regulatory measures prescribed by Forward Markets Commission?
Forward Markets Commission provides regulatory oversight in order to ensure financial integrity (i.e. to prevent systematic risk of default by one major operator or group of operators), market integrity (i.e. to ensure that futures prices are truly aligned with the prospective demand and supply conditions) and to protect & promote interest of customers /non-members.
The Forward Markets Commission prescribes following regulatory measures:
(a) Limit on net open position as on the close of the trading hours. Some times limit is also imposed on intra-day net open position. The limit is imposed operator-wise, and in some cases, also member-wise.
(b) Circuit-filters or limit on price fluctuations to allow cooling of market in the event of abrupt upswing or downswing in prices.
(c) Special margin deposit to be collected on outstanding purchases or sales when price moves up or down sharply above or below the previous day closing price. By making further purchases/sales relatively costly, the price rise or fall is sobered down. This measure is imposed only on the request of the Exchange.
(d) Circuit breakers or minimum/maximum prices: These are prescribed to prevent futures prices from falling below as rising above not warranted by prospective supply and demand factors. This measure is also imposed on the request of the Exchanges.
• Skipping trading in certain derivatives of the contract, closing the market for a specified period and even closing out the contract: These extreme measures are taken only in emergency situations.
What are the legal and regulatory provisions for customer protection?
The F.C(R) Act provides that client’s position cannot be appropriated by the member of the Exchange, except a written consent is taken within three days’ time. Forward Markets Commission is persuading increasing number of Exchanges to switch over to electronic trading, clearing and settlement, which is more customer-friendly. Commission has also prescribed simultaneous reporting system for the Exchanges following open out-cry system. These steps facilitate audit trail and make it difficult for the members to indulge in malpractices like, trading ahead of clients, etc. The Commission has also mandated all the Exchanges following open outcry system to display at a prominent place in Exchange premises, the name, address, telephone number of the officer of the Commission who can be contacted for any grievance. The website of the Commission also has a provision for the customers to make complaint, send comments and suggestions to the Commission. Officers of the Commission have been instructed to meet the members and clients on a random basis, whenever they visit Exchanges, to ascertain the situation on the ground, instead of merely attending meetings of the Board of Directors and holding discussions with the office-bearers.
VII. ILLEGAL DERIVATIVE TRADING
What is FMC doing to curb illegal forward trading ?
Under the Forward Contracts (Regulation) Act, 1952 most of the contravention of the provisions of the Act constitutes cognizable offences. The powers of search, seizure and investigation are therefore with the State Police Authorities. The role of Forward Markets Commission is confined to communication of information relating to offences under the Act to the police authorities and assist such authorities in scrutinising documents referred to by them in rendering such expert advice as may be required by them (Please see Rule 13 of the Forward Contracts (Regulation) Rules, 1954).
Since the offences under the Act are technical in nature and it is difficult to prove the charges in accordance with the rules of evidence contained in the Evidence Act, beyond any reasonable doubt, the Forward Markets Commission periodically conducts training progammes, Seminars, Workshops etc. for the benefit of Police Officers/ Prosecutors and also Judicial Magistrates First Class/Metropolitan Magistrates. The officers of the Commission also accompany the police in conducting searches to assist in sifting incriminating documents. Commission also exhorts the office bearers and the members of the recognized exchanges to share information in respect of illegal forward trading.
What types of contracts are illegal?
The following contracts are illegal.
Forward Contracts in the permitted commodities, i.e., commodities notified under S.15 of the Forward Contracts (Regulation) Act, 1952, which are entered into other than: a) between the members of the recognised Association or b) through or c)with any such members.
Forward contracts in prohibited commodities, i.e., commodities notified under S. 17 of the Forward Contracts (Regulation) Act, 1952 (Presently no commodity has been notified under S. 17 of the Act.
Forward Contracts in contravention of the provisions contained in the Bye-laws of the Exchange, which attract S. 15(3) of the Act.
Forward Contracts in the commodities in which such contracts have been prohibited.Options in goods.
Who can be arrested and prosecuted under the Forward Contracts (Regulation) Act? For what offences?
The following persons attract penal provisions under the F.C.(R) Act, 1952:
• Owner or tenant of a place which is used, with the knowledge of such owner and tenant, for entering into or making or performing, whether
wholly or in part, illegal forward contracts;
• A person who, without permission of the Central Government, organizes or assists in organizing or becomes a member of any association other than recognized association for the purpose of assisting in, entering into, or making, or, performing; whether wholly or in part, in illegal forward contract;
• Any person who controls, manages, or assists in keeping any place, other than recognized association for entering into, or making, or performing illegal forward contract, or for clearing or settlement of such contracts;
• Any person who willfully misrepresents or induces any person to believe that he is a member of a recognized association or that forward contract can be entered into or made or performed, whether wholly or in part through him.
• Any person who is not a member of a recognized association canvasses, advertises or touts in any business connected with forward contracts in contravention of the Forward Contracts (Regulation) Act, 1952.
• Any person who joins, gathers, or assists in gathering at any place other than the place of business specified in the bye-laws of the recognized associations for making bids or offers or for entering into illegal forward contracts.
• Any person who makes publishes or circulates any statement or information, which is false and which he either knows, or believes to be false, affecting or tending to affect the course of business in forward contracts in permitted commodities.
• Any person who manipulates or attempts to manipulate prices of forward contracts in permitted commodities are liable for punishment under the Act on conviction.
What is bucketing?
Broker is said to be indulging in bucketing, when he takes directly or indirectly, the opposite side of a customer’s order either on his own account or into on account in which he or she has an interest, without executing the order on an Exchange. Appropriation of clients’ trade without written consent constitutes contravention of S. 15(4) of the Act and is punishable under S. 20(e).
What is Options in goods?
Options in goods is an agreement by whatever name called, like, Teji-Mandi, Jota Fatak, Najrana, under which buyer of the option (called as applier) pays a premium to the seller of option (called as writer of the option) for acquiring from him right to buy or sell the goods at a mutually agreed rate (called as strike price), in respect of which the premium amount is paid. When the buyer acquires right to buy, it is called as a “call” (Teji) and when he acquires right to sell it is called a “put” (Mandi) option. It is possible to acquire a rights both to buy and to sell the goods; but in this case higher premium amount would have to be paid. The buyer acquires only right, i.e., he is under no obligation to buy or sell, as the case may be, at the mutually agreed price. Options in goods are presently prohibited under section 19 of the Act. There is a proposal to amend the Act to allow options in goods under regulated conditions.
How Long Does It Take To Learn How To Trade Commodities?
How lengthy does it take to understand how to make trade with commodities? it is a million dollar question . we can say that a diligent person can understand the basics of commodity trading products in a few months. But to be a commodity trading master it can take 10 years .since many investor and trader in the commodity market trade without any knowledge and study. Trading in commodity market without any knowledge is very dangerous for new traders, they could lose their money.
The first one year period of your trading period is the most critical for commodity future trading. Most new commodity investors and traders like to make huge profit or want to earn big money from this commodity trading market in the starting time. That usually gets them into trouble and almost assures them an addition into the 80 – 90 percent of individuals who lose money from commodity trading.
The first season of commodity trading is all about studying how to trade. making profit from the portfolio at the end of season one is a success. Most commodity investors who can breakeven at least after one year of commodity trading will often become effective and profitable investors.
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