Coming Soon Paradigm Change In Commodity Derivatives

Indian equity markets had a prosperous financial year 2016-17. During this period, Nifty surged about 19 per cent and it continues to attract a lot of investors and traders. On the other hand, the Indian commodity market had wrapped up the FY2016-2017 on a flat note and it has lost some of its sheen amongst the market participants from the peak it had witnessed in its golden period of 2011-2013. Nonetheless, there are hopes that commodity derivative market will bounce back. This is because in the recent times, the market regulator Securities and Exchange Board of India (SEBI), with a view to taking the Indian commodities market to the next level, is in the process of making some notable developments which will not only help to renew the interest of the market participants but also help deepen the Indian commodity derivatives.

SEBI is preparing to introduce options contracts and allow the entry of financial institutions in the Indian commodity derivatives market. Detailed guidelines and necessary amendments in the law are currently being worked out to implement these measures in the coming months. The purported objectives behind these measures are to deepen the Indian commodity derivatives market by allowing the entry of financial institutions and to widen it by allowing options with commodity futures contracts as underlying. At present, only futures contracts are allowed on the commodity derivatives exchanges.

HISTORY AND EVOLUTION OF THE COMMODITY DERIVATIVES MARKET IN INDIA: 

The history of commodity derivatives market in Indian dates back to the ancient times, but the first organised market was established in the year 1875. However, by mid-1960s, the government took a drastic step by banning derivatives trade altogether. The commodity derivatives market remained virtually absent in the next four decades and it made a comeback only in early 2000s, when the MCX (Multi Commodity Exchange), NCDEX (National Commodities Derivate Exchange) and the NMCE (National Multi-Commodity Exchange) were established. Once the trading on these modernised and electronically traded exchanges began, there was no looking back. The commodity derivatives market has developed significantly in terms of both network and volumes. The Indian commodity exchanges have risen to global standards and have become entrants in the leading exchanges in the world. While the MCX began as an exchange focused on nonagricultural commodities, in today's time it has diversified into the agricultural commodities and looking to enhance its position in that segment. Similarly, the NCDEX that was initially focused on trading in agri-commodities, is now expanding its trading horizon as the exchange introduced a host of non-farm commodities. In 2015, the Indian commodity derivatives market witnessed a significant transition when the erstwhile commodities market regulator, Forward Markets Commission (FMC) was merged with the Securities and Exchange Board of India (SEBI) with effect from September 28, 2015.

GROWTH OF INDIAN COMMODITY MARKETS INTERMS OF VALUE OF FUTURES TRADED (INR TN) 

As per the Annual Report of SEBI 2015-16, presently the Indian commodity futures market active eco-system comprised of three national exchanges:

1. MCX (Multi Commodity Exchange) 
2. NCDEX (National Commodity & Derivative Exchange) 
3. NMCE (National Multi Commodity Exchange)



TURNOVER ON THE EXCHANGES:

The cumulative turnover at all the exchanges in the domestic commodity derivatives segment increased by 9.1 per cent to Rs.66,96,380 crore in 2015-16 from Rs.61,35,672 crore in 2014-15. The major chunk of about 84 per cent of the cumulative turnover was recorded by MCX, followed by about 15 per cent at NCDEX and 0.4 per cent at NMCE.

COMMODITY FUTURES AT MCX:

In 2015-16, the total turnover at MCX increased by 8.7 per cent to Rs.56, 34.194 crore as compared to Rs.51, 83,707 crore in 2014-15. Bullion, which holds a dominant place in the turnover, slipped by about 3.9 per cent to Rs.20,70,147 crore, as compared to Rs. 21,53,427 crore in 2014-15. The share of energy to the total turnover increased by 17.7 per cent in 2015-16 as compared to 2014-15. The metals and agriculture segments recorded an 18.1 per cent and 10.4 per cent surge, respectively, in the turnover in 2015-16.

COMMODITY FUTURES AT NCDEX

At NCDEX, the total turnover witnessed a jump of 12.8 per cent to Rs.10,19,588 crore from Rs.9,04,063 crore in 2014-15. The agriculture segment surged 14.7 per cent to Rs.9,98,811 crore from Rs.8,79,863 in 2014-15. The turnover in the bullion segment declined by 36.5 per cent in 2015-16 over the previous year.

COMMODITY FUTURES AT NMCE: 

At NMCE, the total turnover which is predominately contributed by the agriculture segment, stood at Rs.29,368 crore, a decrease of 18.5 per cent from Rs.36,040 crore in 2014-15.

PRODUCT SEGMENT-WISE TURNOVER/VOLUME TRADED

Non-agri commodities recorded 82.6 per cent of the aggregate all India turnover, while the remaining 17.4 per cent was contributed by agri-commodities during the period 2015-16. Agricommodities recorded a marginal increase from 16.8 per cent in 2014-15 to 17.4 per cent in 2015-16. Share of agri and non-agri commodities in all-India turnover


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PRODUCT SEGMENT-WISE PERCENTAGE SHARE IN TURNOVER AT NATIONAL COMMODITY EXCHANGES

At MCX, most of the segment delivered a growth as compared to the previous year. However, the most dominant product segment, bullion, bucked the trend as it declined from 41.5 per cent in 2014-15 to 36.7 per cent in 2015-16. Energy, the second dominant product segment, contributed a 34.4 per cent share in turnover followed by metals at 26.7 per cent and agriculture at 2.2 per cent

At NCDEX, bulk of the turnover contribution came in from agriculture segment, which registered 98 per cent share in the turnover followed by bullion at 2 per cent.

At NMCE, entire turnover was from agriculture segment.

MONTH-WISE TURNOVER OF AGRICULTURAL COMMODITIES FUTURES AT NATIONAL EXCHANGES SINCE APRIL 2015 TO FEBRUARY 2017 (CRORE)

India's leading farm futures exchange NCDEX witnessed a decline in the volumes on the back of suspension of commodities like castor and chana and finally disruption as a result of demonetisation. The volumes witnessed a tremendous blow during the demonetisation phase due to closure of mandis and low arrivals. However, things are likely to turnaround as NCDEX has sought capital market regulator SEBI's approval for relaunching of chana, urad and tur contracts on commodity exchanges. Moreover, the demonetisation impact has faded and, going forward, if options are launched, it could provide fresh boost to the turnover. MCX, the country's largest commodity exchange, has seen in green shoots in agriculture commodities turnover.

India's leading farm futures exchange NCDEX witnessed a decline in the volumes on the back of suspension of commodities like castor and chana and finally disruption as a result of demonetisation. The volumes witnessed a tremendous blow during the demonetisation phase due to closure of mandis and low arrivals. However, things are likely to turnaround as NCDEX has sought capital market regulator SEBI's approval for relaunching of chana, urad and tur contracts on commodity exchanges. Moreover, the demonetisation impact has faded and, going forward, if options are launched, it could provide fresh boost to the turnover. MCX, the country's largest commodity exchange, has seen in green shoots in agriculture commodities turnover.

MONTH-WISE TURNOVER OF NON-AGRICULTURAL COMMODITIES FUTURE AT EXCHANGES SINCE APRIL, 2015 TO FEBRUARY, 2017(CRORES)

In the month of December, 2016, there was decline in the volume of non-agricultural commodities on the MCX.

YEAR-WISE TREND OF TOP 5 COMMODITIES TRADED BASED ON TURNOVER OF VOLUME SINCE 2015 (NCDEX)

10-YEAR VOLUME TRENDS FOR GLOBAL FUTURES AND OPTIONS 
 Over the last decade, the main drivers of growth on derivatives exchanges have been in the commodity and currency categories.