MAJOR DEVELOPMENTS IN THE COMMODITY FUTURES MARKET DURING 2010-11:1.

Substantial increase in traded volumes in the Commodity Derivatives Market:The total value of trade of the Indian Commodity Futures Market during the Year 2010-11 stood at Rs. 119.49 lakh crore. The Market registered a growth of 54% during the year, as compared to the value of trade of Rs. 77.65 lakh crore during 2009-10.The value of agriculture commodities traded in the commodity Exchanges stood at Rs. 14.56 lakh crore growing at a rate of 20% over the previous year. The top five commodities traded in the Futures Market during 2010- 11 were Silver, Gold, Crude oil, Copper & Nickel. The top five agri commodities traded in the futures market were Soy oil, Guar seed, Chana, Rape/Mustard seed and Soya been/seed. 2. Introduction of New Contract :A new contract was introduced in Iron Ore during the year. At present, there are 113 commodities permitted for trading in the commodity futures market. 3. Recognition of a New National Exchange :The year saw the registration of the Ahmedabad Commodity Exchange, under the new nomenclature ACE Derivatives & Commodity Exchange Limited (ACE) as a National Multi Commodity Exchange, on a permanent basis in respect of forward contracts in all the commodities to which Section 15 of the Forward Contracts (Regulation) Act 1952 is applicable. With this, the total number of commodity Exchanges operating in the country stood at 21 including five National Commodity Exchanges and sixteen Regional Commodity (Commodities Specific) Exchanges. 4. Major Regulatory Initiatives of the Forward Markets Commission:The significant regulatory initiatives taken by the Forward Markets Commission during 2010-11 included: Issuing of directives to the Commodity Derivatives Exchanges on the regulatory framework for market access through authorized persons in the commodity futures market. This was seen as a step towards streamlining the regulation of intermediaries in the commodity futures market. Amending the guidelines for granting of recognition to new Commodity Exchanges under the Forward Contracts (Regulation) Act, 1952. Amending the guidelines on the equity structure of Multi Commodity Exchanges to be adopted after completing five years of their operation.

 Revising guidelines for members of the Commodity Exchanges for setting up Joint Ventures/ wholly owned subsidiaries abroad. 5. Awareness Creation & Capacity Development Initiatives :The Forward Markets Commission continued its efforts to spread awareness about the benefits of commodity derivatives market among all stakeholders of the market. The focus of the awareness programme has, as always, been the farmers to enable them to benefit from the price information emanating from the commodity futures market. The total number of awareness programmes conducted during 2010-11 stood at 829, of which 486 were farmer awareness programmes as compared to 515 programmes during the previous year which included 423 farmer awareness programmes. These awareness programmes covered more than 26,000 participants during the year. The FMC also conducted 79 capacity building programmes, covering over 2400 participants in the area of Commodity Futures Market in Universities, Management Institutes and Training Colleges of banks and cooperative institutions during 2010-11, as against 63 programmes during the previous year. The expenditure incurred for conducting awareness and capacity building programmes during 2010-11 was Rs. 2.79 crore. During 2011-12, it is proposed to conduct 900 awareness programmes and 100 capacity building programmes, thereby reaching out to many more stakeholders of the commodity futures market. A budget of Rs. 2.50 crore has been allocated for the purpose. The Forward Markets Commission also undertook a press campaign on Dos and Donts to be observed while trading in Commodity Exchanges in major national and vernacular dailies across the country. 6. Dissemination of Price Information to Farmers :The Forward Markets Commission implemented the Price Dissemination Project in 588 APMCs during 2010-11 taking the total APMCs covered under this project to 768 APMCs. The Scheme aims at disseminating spot and futures prices of agricultural commodities at the APMCs for the benefit of farmers and other agricultural market stakeholders. It is expected that the availability of agricultural prices at the mandis would support the price discovery process in the mandis and strengthen the bargaining capacity of the farmers to optimize the return on their agricultural produce. An amount of Rs. 2.49 crore was spent for implementation of the Price Dissemination Project during 2010-11. It is proposed to cover 1500 locations under the Price Dissemination Project during 2011-12 for which a provision of Rs. 324 lakh has been made and also to take the project to Krishi Vigyan Kendras (KVKs) in addition to APMCs. BENEFITS OF TRADING IN COMMODITY DERIVATIVES:Trading in futures provides two important functions of price discovery and price risk management. It is useful to all the segments of the economy, particularly to all

the constituents of the commodity market ecosystem. It is important to know how resorting to commodity trading benefits the constituents. Benefits to Investors, Producers, Consumers, Manufacturers: Price risk management: All participants in the commodity markets ecosystem across the value chain of different commodities are exposed to price risk. These participants buy and sell commodities and the time lag between subsequent transactions result in exposure to price risk. Commodity derivatives markets enable these participants to avoid price risk by utilizing hedging techniques. Price discovery: This is the mechanism by which a fair value price is determined by the large number of participants in the commodities derivatives markets. This is the result of automation and electronic trading systems established on the commodities derivatives exchanges. High financial leverage: This is possible in commodity markets. For example, trading in gold calls for only 4% initial margin. Thus, if one gold futures contract (each gold futures contract lot size is 1 kg) is valued at Rs 900,000, the investor is expected to deposit an initial margin of only Rs 36,000 to be able to trade. If the price of gold goes up by even 2%, the investor would make a profit of Rs 18,000 on a deposit of Rs 36,000 before the expiry of the contract. This is the benefit of leveraged trading transactions. With futures contracts, the investor trades in the expectation of the price at a later date. This is possible with a margin deposit, which is usually between 5% and 10% of the value of the commodity. Correspondingly, the margins required for equity futures contracts are higher, due to higher volatility in equity markets as compared to commodities futures contracts. The reason for higher volatility in equity markets (especially in India) as compared to commodities derivatives transactions is due to the fact that delivery is possible in commodity derivatives transactions. Commodities as an asset class for diversification of portfolio risk: Commodities have historically an inverse correlation of daily returns as compared to equities. The skewness of daily returns favours commodities, thereby indicating that in a given time period commodities have a greater probability of providing positive returns as compared to equities. Another aspect to be noted is that the Sharpe ratio of a portfolio consisting of different asset classes is higher in the case of a portfolio consisting of commodities as well as equities. Even with a marginal distribution of funds

in a portfolio to include commodities, the Sharpe ratio is greatly enhanced, thereby indicating a decrease in risk. Commodity derivatives markets are extremely transparent in the sense that the manipulation of prices of a commodity is extremely difficult due to globalization of economies, thereby providing for prices benchmarked across different countries and continents. For example, gold, silver, crude oil, etc. are international commodities, whose prices in India are indicative of the global situation. An option for high networth investors: With the rapid spread of derivatives trading in commodities, the commodities route too has become an option for high networth investors. Useful to the producer: Commodity trade is useful to the producer because he can get an idea of the price likely to prevail on a future date and therefore can decide between various competing commodities, the best that suits him. Farmers, for instance, can get assured prices, thereby enabling them to decide on the crop that they want to grow. Since there is transparency in prices, the farmer can decide when and where to sell, so as to maximize his profits. Useful for the consumer: Commodity trade is useful for the consumer because he gets an idea of the price at which the commodity would be available at a future point of time. He can do proper costing/financial planning and also cover his purchases by making forward contracts. Predictable pricing and transparency is an added advantage. Corporate entities can benefit by hedging their risks if they are using some of the commodities as their raw materials. They can hedge the risk even if the commodity traded does not meet their requirements of exact quality/technical specifications. Useful to exporters: Futures trading is very useful to the exporters as it provides an advance indication of the price likely to prevail and thereby help the exporter in quoting a realistic price and thereby secure export contract in a competitive market. Improved product quality: Since the contracts for commodities are standardized, it becomes essential for the producers/sellers to ensure that the quality of the commodity is as specified in the contract. The advent of commodities futures markets has also enabled defining quality standards of different commodities. Credit accessibility: Buyers and sellers can avail of the bank finances for trading in commodities. Nationalized banks and private sector banks have come forward to offer credit facilities for commodity trading.

 Benefits to Indian Economy:As the constituents of the commodity market ecosystem get benefited, the Indian economy is also benefited. Growth in the organized commodity markets and their constituents implies that there would be tremendous advantages and benefits accrued to the Indian economy in terms of business generation and growth in employment opportunities. As India imports bulk of raw material (especially in base metals and energy), there is scope for minimizing price risk for international commodities. With the consumption of commodities increasing rapidly, especially in developing countries such as China and India, the prices of commodities are volatile, emphasizing the need for organized commodity derivatives exchanges. Benefits to industry from futures trading Hedging the price risk associated with futures contractual commitments. Spaced out purchases possible rather than large cash purchases and its storage. Efficient price discovery prevents seasonal price volatility. Greater flexibility, certainty and transparency in procuring commodities would aid bank lending. Facilitate informed lending. Hedged positions of producers and processors would reduce the risk of default faced by banks. * Lending for agricultural sector would go up with greater transparency in pricing and storage. Commodity Exchanges to act as distribution network to retail agri-finance from Banks to rural households. Provide trading limit finance to Traders in commodities Exchanges. Benefits to exchange member Access to a huge potential market much greater than the securities and cash market in commodities. Robust, scalable, state-of-art technology deployment. Member can trade in multiple commodities from a single point, on real time basis. Traders would be t r a i n e d to be R u r a l Advisors and Commodity Specialists and through them multiple rural needs would be met, like bank credit, information dissemination, etc. WHAT MAKES COMMODITY TRADING ATTRACTIVE? A good low-risk portfolio diversifier

A highly liquid asset class, acting as a counterweight to stocks, bonds and real estate. Less volatile, compared with, equities and bonds. Investors can leverage their investments and multiply potential earnings. Better risk-adjusted returns. A good hedge against any downturn in equities or bonds as there is Little correlation with equity and bond markets. High co-relation with changes in inflation. No securities transaction tax levied.