COMMODITY FUTURES

Presentation By:
Multi Commodity Exchange of India Ltd. (MCX)

Multi Commodity Exchange of India Ltd, www.mcxindia.com

 Commodity Ecosystem

Multi Commodity Exchange of India Ltd, www.mcxindia.com

 Commodity Market Structure

Quality
Certification Spot Market
Agencies
Hedger
Warehouses (Exporters/
Millers/
Industry)

Producers
Commodities (Farmers/
Clearing Bank Ecosystem Co-operatives/
MCX Institutional)

Traders
Transporters/ (Speculators)
Support Arbitrageurs/
Agencies Client)
Consumers
(Retail/
Global Commodities Institutional)
Market
Multi Commodity Exchange of India Ltd, www.mcxindia.com
 Commodity Markets - Overview

Indian commodity market – set for paradigm shift

• Four licenses recently issued by Govt. of India to set-up National Online Multi
Commodity Exchanges – to ensure a transparent price discovery and risk management
mechanism

• List of commodities for futures trade – increased from 11 in 1990 to over 100 in 2003

• Reforms with regard to sale, storage and movement of commodities initiated

• Shift from administered pricing to free market pricing – WTO regime

• Overseas hedging has been allowed in metals

• Petro-products marketing companies have been allowed to hedge prices

• Institutionalization of agriculture

Multi Commodity Exchange of India Ltd, www.mcxindia.com

 India’s Place in World Market

COMMODITY INDIA WORLD SHARE RANK

RICE (PADDY) 240 2049 11.71 THIRD
WHEAT 74 599 12.35 SECOND
PULSES 13 55 23.64 FIRST
GROUNDNUT 6 35 17.14 SECOND
RAPESEED 6 40 15.00 THIRD
SUGARCANE 315 1278 24.65 SECOND
TEA 0.75 2.99 25.08 FIRST
COFFEE(GREEN) 0.28 7.28 3.85 EIGTH
JUTE AND JUTE FIBERS 1.74 4.02 43.30 SECOND
COTTON (LINT) 2.06 18.84 10.09 THIRD
Multi Commodity Exchange of India Ltd, www.mcxindia.com
 Business Potential

Conservative Global Multiplier

Size of Physical Multiplier
Commodities Market
(Rs. Crore) (Rs. Crore)
(Rs. Crore)
( In 3 years) (In 3 – 5 Years)
Gold & Silver Rs. 43000 cr 20 Times 50 Times
Rs. 8,30,000 cr Rs. 21,50,000 cr

Edible Oils Rs. 30000 cr 10 Times 20 Times

Rs. 3,00,000 cr Rs. 6,00,000 cr

Metals Rs.11000 cr 10 Times 20 Times

Rs. 1,10,000 cr Rs. 2,20,000 cr

Total Rs. 84,000 cr Rs. 12,40,000cr Rs. 29,70,000cr

Multi Commodity Exchange of India Ltd, www.mcxindia.com

 About MCX

National Level Online Multi Commodity Futures Exchange

Key Promoters –
Financial Technologies (India) Ltd, State Bank of India,
Union Bank
Corporation Bank, Bank of India, Canara Bank,
State Bank of Indore Bank of Baroda
Operations from 300 cities with over 775 members & 3000 TWS
First Indian Exchange to enter into an agreement with an International
Exchange (TOCOM)
Facilitating Cost effective and economic technology.
Real-time price & information dissemination through website and info vendors

Multi Commodity Exchange of India Ltd, www.mcxindia.com

 MCX Business Associates

• Statutory Auditor - M/s. Deloitte, Haskins & Sells

• Internal Auditor- M/s V.Shankar Aiyer & Company
• Network services - HCL Comnet Ltd.(VSAT)S
VSNL (Internet)
Tata Tele (Leased line)
Reliance gateway ( Wireless )
• Clearing Banks - BOI, HDFC, IndusInd, UBI & UTI
• Quality Certification SGS, Geochem , Dr. Amin Lab.,
Agencies Rubber Board
• Warehouses – CWC, Gujarat, Kerala, Tamilnadu and UP
• Bullion Logistics – Group 4 and Brinks Arya

Multi Commodity Exchange of India Ltd, www.mcxindia.com

 Salient Futures of MCX
• On-line monitoring at members and contract level -
exposure, price, open interest, quantity, client, etc.
• On-line margin adjustment - Business in relation to
deposit
• System driven control and actions
• Electronic fund transfer
• Daily clearing – marked to market
– Pay-in and pay-out: T+1 working day
– Exchange approved depositories
– Seller to submit proof of delivery with proper quality
certification to MCX

Multi Commodity Exchange of India Ltd, www.mcxindia.com

 Participants in Commodity Futures

Farmers/ Producers

Merchandisers/ Traders

Importers

Exporters

Consumers/ Industry

Commodity Financers

Agriculture Credit providing agencies

Corporate having price risk exposure in commodities

Multi Commodity Exchange of India Ltd, www.mcxindia.com

 Benefits of Futures Trading

• Price discovery for commodity players

– A farmer can plan his crop by looking at prices prevailing in the futures market
• Hedging against price risk
– A farmers can sell in futures to ensure remunerative prices
– A processor/ manufacturing firm can buy in futures to hedge against volatile
raw material costs
– An exporter can commit to a price to his foreign clients
– A stockist can hedge his carrying risk to ensure smooth prices of the seasonal
commodities round the year
• Easy availability of finance
Based on hedged positions commodity market players (farmers, processors,
manufacturers, exporters) may get easy financing from the banks

Multi Commodity Exchange of India Ltd, www.mcxindia.com

 How Commodity Futures Help

•Risk Management

Growers – Short hedge on upcoming produce

Traders – Short Hedge on stored quantity
Manufacturers – Long Hedge on input cost, Short hedge on finished
products

Any price risk that is not managed is a cost; any cost is a direct dent
on profitability

•Price Discovery

Futures prices can be used as indicative prices for negotiating the export
prices and also upcountry sales

Multi Commodity Exchange of India Ltd, www.mcxindia.com

 Profitability Areas in Futures Market

Action Impact

Cover raw material price risk Certainty in input cost. Certainty in

cost of production

Cover the export commitment Certainty about profits. Certainty in

income

Cover input requirements through Less financing requirements; reduced

futures market interest cost. Reduces cost of
production. Increase in profits

Buy in futures markets Save on storage and storage

management costs. Increase in
profitability
Multi Commodity Exchange of India Ltd, www.mcxindia.com
 MCX vis a vis Other Bullion Exchanges

With Respect to Present Practices of Domestic Bullion Players

(Approx. figs.) MCX NYMEX TOCOM
Contract Size (grams) 1000 3110 1000
Benchmark Market Mumbai New York Tokyo
Operational Cost Low High High
Transaction cost 0.01 % 0.08 – 0.1 % 0.4 %
Channel Trade High Low Low
Transparency
Channel Financial Integrity High Low Low
Lead Transaction Time Low High High
Physical Delivery Yes No No

Multi Commodity Exchange of India Ltd, www.mcxindia.com

 Nation-wide Multi Exchanges vis
a vis Regional Exchanges
•Better Reach in all parts of the country

•Wider base for speculators from other markets including securities market

•Broad basing of the underlying commodity

•Industry diffused in several parts of the country may also

directly participate

•Few commodities can be projected viable for an international futures

Contract, with participation from global player

•Novation of all open positions in the market by the exchange

•Best management practices, end of day mark to market, online margining and
surveillance, daily pay-in & pay-out are some of the features to woo the players

Multi Commodity Exchange of India Ltd, www.mcxindia.com

 Key Differentiators of MCX

• Team
– Best Industry Professionals – Technology, Exchange Management and Advisory Board with 8
Decades of Exchange Management Expertise
– Best Support Agencies – Warehouses, Quality, Banks & Others
– Best Intermediaries across the country & in multiple commodities

• Technology
– State of the art Information Technology
– Real time price and trade information dissemination
– Robust risk management system and controls

• Techniques (Practices)
– Best International practices of Exchange governance
– Competitive membership fee structure and operational cost.
– To provide information - international & spot markets and commodity research

Multi Commodity Exchange of India Ltd, www.mcxindia.com

 What’s in it for Industry

• Free Markets price commodities best & consistently

• Globalisation & standardisation - global price convergence
• Futures Market - Most efficient Market Place
• Price discovery on futures Exchange with consistent
Agriculture policy will give right direction to market for
pricing commodities
• MSP does not serve much purpose in free market regime
• Problems of different sectors in Agriculture need a different
policy with a common direction

Multi Commodity Exchange of India Ltd, www.mcxindia.com

 Future of Commodity Market

• India - Largest Consumer - Producer - Exporter -

Importer
• Large size intermediaries penetrate commodities market
• Banks to Finance commodities – Futures a secured route
• RBI permits Banks to hedge their bullion risk through
Futures Exchange – Other commodities to follow
• Using Exchange Network for various products & Services
• BPO & Trade Interest will attract International players
• Hub for value added services & food processing
• New class of commodity Traders & Value Investors
India to become Hub of Global Trading in Commodities
It is a US $ 600 billion Opportunity
Multi Commodity Exchange of India Ltd, www.mcxindia.com
 Thank You

Multi Commodity Exchange of India Ltd, www.mcxindia.com