A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts can include spots, forwards, futures and options on futures. Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts.
Commodity exchanges are institutions which provide a platform for trading in ‘commodity futures’ just as how stock markets provide space for trading in equities and their derivatives. They thus play a critical role in robust price discovery where several buyers and sellers interact and determine the most efficient price for the product.
In India there are 21 regional exchanges and three national level multi-commodity 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:
1. 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 Ratting 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 through out India. NCDEX currently facilitates trading of 57 commodities.
Commodities Traded at NCDEX:
- Bullion: Gold KG, Silver, Brent
- Minerals: Electrolytic Copper Cathode, Aluminum Ingot, Nickel Cathode, Zinc Metal Ingot, Mild steel Ingots
- Oil and Oil seeds: Cotton seed, Oil cake, Crude Palm Oil, Groundnut (in shell), Groundnut expeller Oil, Cotton, Mentha oil, RBD Pamolein, RM seed oil cake, Refined soya oil, Rape seeds, Mustard seeds, Caster seed, Yellow soybean, Meal
- Pulses: Urad, Yellow peas, Chana, Tur, Masoor,
- Grain: Wheat, Indian Pusa Basmati Rice, Indian parboiled Rice (IR-36/IR-64), Indian raw Rice (ParmalPR-106), Barley, Yellow red maize
- Spices: Jeera, Turmeric, Pepper
- Plantation: Cashew, Coffee Arabica, Coffee Robusta
- Fibers and other: Guar Gum, Guar seeds, Guar, Jute sacking bags, Indian 28 mm cotton, Indian 31mm cotton, Lemon, Grain Bold, Medium Staple, Mulberry, Green Cottons, Potato, Raw Jute, Mulberry raw Silk, V-797 Kapas, Sugar, Chilli LCA334
- Energy: Crude Oil, Furnace oil
2. 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 wit about 100 commodities.
Commodities Traded at MCX:
- Bullion: Gold, Silver, Silver Coins,
- Minerals: Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead
- Oil and Oil seeds: Castor oil/castor seeds, Crude Palm oil/ RBD Pamolein, Groundnut , Mustard/ Rapeseed oil, Soy seeds/Soy meal/Refined Soy Oil, Coconut Oil Cake, Copra, Sunflower oil, Sunflower Oil cake, Tamarind seed oil,
- Pulses: Chana, Masur, Tur, Urad, Yellow peas
- Grains: Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley,
- Spices: Pepper, Red Chili, Jeera, Cardamom, Cinnamon, Clove, Ginger,
- Plantation: Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut, Coffee,
- Fiber and others: Kapas, Kapas Khalli, Cotton (long staple, medium staple, short staple), Cotton Cloth, Cotton Yarn, Gaur seed and Guargum, Gur and Sugar, Khandsari, Mentha Oil, Potato, Art Silk Yarn, Chara or Berseem, Raw Jute, Jute Goods, Jute Sacking,
- Petrochemicals: High Density Polyethylene (HDPE), Polypropylene (PP), Poly Vinyl Chloride (PVC)
- Energy: Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour Crude Oil, Natural Gas
The exchanges follow best international risk management practices and provide a financially secure environment by putting in place a suitable risk management mechanism (system of upfront margining based on the Value at Risk margining system, daily mark to market and special intra-day clearing and settlement in the event of high volatility in prices). The performance of the contracts registered by the exchange are guaranteed either by the exchange or its clearing house.
Clearing Houses put in place a sound risk-management system to be able to discharge their role as counter-party to all participants. Clearing Houses interpose between buyers and sellers as a legal counter-party, i.e., the clearing house becomes the buyer to every seller and vice versa (novation). Novation thus obviates the need for ascertaining the credit-worthiness of each counter-party and the only credit risk that the participants face is the risk of clearing house committing a default.
The exchanges also maintain their own Trade/Settlement Guarantee Fund, which can be used in case of any default. Some exchanges have also prescribed certain minimum capital adequacy norms.
3. 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 25th 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.