Earlier, all the sellers and buyers of a commodity used to come to a common market place for the trade. Buyer could judge the amount of produce that year while the seller could judge the amount of demand of the commodity. Thus, they could dictate their terms and hence the counter party was left with no choice. So, in order to hedge from this unfavorable price movement, need of the commodity exchange was felt.

A "Commodity exchange” is an association, or a company or any other body corporate organizing futures trading in commodities. There are some 25 commodity exchanges in India. However most of them are regional, offline (non screen-based) and commodity specific, hence these are almost inoperative. Significantly the government has allowed four national level multi-commodity exchanges to trade in all permitted commodities.

The NMCE [ Nationwide Multy Commodity Exchanges ] have been recognized by the Central Government for organizing trading in all permissible commodities which include precious (gold & silver) and non-ferrous metals; cereals and pulses; ginned and un-ginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur; coffee and tea; rubber and spices, etc.

These NMCE have a nationwide reach ensuring trades in maximum possible commodities with economies of scale & practices like demutualisation (i.e. not owned or managed by members brokers), automation & settlement guarantee.

THE NATIONAL LEVEL MULTI-COMMODITY EXCHANGES ARE

National Multi Commodity Exchange of India Ltd, Ahmedabad (NMCE)-- www.nmce.com. This is presently working on-line and trading in many active commodities like castor seed/oil, rapeseed and mustard seed/oil, aluminum, soybean/oil, pepper, gold, silver etc.

National Board of Trade, Indore (N-BOT)--www.nbotind.org. This is working presently but it is not completely on-line, screen-based. In this exchange maximum trades are carried out in soya oil.

National Commodity and Derivative Exchange, Mumbai (NCDEX)-- www.ncdex.com. The exchange is promoted by ICICI Bank, National Stock Exchange (NSE), Life Insurance Corporation and NABARD. It is more or less on the lines of the NSE of the capital market and offers trading facilities in various commodities.

Multi Commodity Exchange of India Ltd, Mumbai (MCX)--www.mcxindia.com. The exchange is promoted mainly by professionals and supported by Financial Technology (FT). The exchange offers trading facility in various commodities like gold, silver,castor seed etc.

Learning the number of exchanges available to trade in, the question arises as to why we need futures trading in commodities? The reason is pretty obvious ;

Futures trading in commodities results in transparent and fair price discovery on account of large-scale participations of entities associated with different value chains.Futures trading perform price risk management with reference to the given commodity.. It enables the consumer do proper costing and also cover his purchases by making futures contracts. It also provides hedging, trading and arbitrage opportunities to market players.

One of the biggest attraction of the commodities future market is “One doesn't need to have commodity physically or to own a contract for the commodity to enter into a sale contract in the futures market. The contract is simply an agreement to sell the physical commodity at a later date or sell it short. It is possible to repurchase the contract before the maturity, thereby dispensing with delivery of goods.”

One can trade in commodities through an intermediary, which could be any Exchange Authorized Member/ Broker / Authorized Persons The Exchanges for equity futures & commodities futures are separate. Thus, the VSATs, trading terminals, risk management systems, contract notes etc for commodities futures will be independent of the equity future.

"Indira Commodities [P} Limited”, is authorized Member of NCDEX & MCX We at ICPL, provide you with a golden opportunity to trade in the commodity market.

Fee Structure

One has to pay brokerage to the member / broker / Authorized person on all the trades done by him. The brokerage rates would be under the maximum brokerage rate ceiling as specified by the Exchange. Transaction Charges levied by certain exchanges has to be paid. Also, one has to pay MARGINS.

As in stocks, in commodities also the margin is calculated by VaR system. Normally it is between minimum 5-10% 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 (MTM) margin. The margin keeps changing depending on the change in price and volatility.

Initial Margin : An initial margin is to be paid before the order for buy/sale for any commodity is made.

Daily Margin : Daily Margin or Mark to Market [ MTM ] margin is calculated daily. It is calculated on the daily closing price of each day. It is calculated for each client & for each contract executed. It is payable on T+1 basis [ where, “T” is the trade date ]. It is payable on daily settlement price.

Just as Equity futures, Commodities future also works in Lot Size & the lot size is different for each commodity. The details on the lot sizes can be obtained from the respective exchanges’ site

Please note the trading/delivery lot varies from exchange to exchange. You don’t need to pay sales tax on all trades. 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 the sales tax. The sales tax is applicable at the place of delivery. Those who are willing to opt for physical delivery need to have local sales tax registration number.

The availability of contracts for futures trading are as follows :

At NCDEX three consecutive calendar month contracts will be available. MCX is providing six contracts in a year. For example in gold there are six contracts (February 2005, April 2005, June 2005 and so on); in the same way in silver also there are six contracts (January 2005, March 2005, May 2005 and so on) and castor seed will also have six contracts (February 2005, April 2005 and so on).

At NCDEX the contracts will expire tentatively around 20th day of each month. If the 20th happens to be a holiday the expiry day will be the previous working day. At MCX every commodity has its own expiry day. The date of expiry is freezed at the time of launch of the commodity contract. If the expiry day happens to be a holiday the expiry day will be the previous working day.

The Clearing House of the Exchange shall function in respect of trading in contracts permitted on the exchange so as to provide clearing & settlement services for the transaction

Three types of settlement are possible in commodities trading. They are :

Square Up :

The trades / positions can be squared up during the continuance cycle on any day. i.e if one has a open buy position he can square it off on any day between the trade date & the last day of the contract.

By Taking Delivery :

Delivery is not mandatory in commodity futures contract trading. However, there is always a provision for delivery in commodity futures trading to ensure that the future prices are in conformity with the underlying. All contracts materializing into deliveries would settle in a period of 2-7 days after the expiry. The exact settlement day would be specified for each commodity by the exchange. The option for delivery is normally with the seller; the buyer/seller has to express his intention for delivery about three days before the expiry or as per rules and regulations of the exchange and contract specifications. However provisions vary from exchange to exchange. The market lot for delivery is normally different (higher than the trading lot). The contracts which are not assigned for delivery will be settled in cash.

In case of delivery, the margin during the delivery period increases to 20-25% of the contract value. The member/ broker will levy extra charges in case of trades resulting in delivery or as per rules and regulations of the exchange and contract specifications Any buyer intending to take physicals would have to put a request to its Depository Participant, who would pass on the same to the registrar and the warehouse. On a specified day, the buyer would go to the warehouse and pick up the physicals.

Prices quoted for the futures contracts would be basis warehouse and exclusive of sales tax applicable at the delivery center. For contracts materializing into deliveries, sales tax would be added to the settlement amount. The sales tax would be settled on the specified day after the payout.

The buyer intending to take delivery would give declaration for re-sale at the time of giving intention for delivery. Accordingly the seller would issue the invoice, exclusive of sales tax. The declaration form duly signed by the buyer would be forwarded through the buyer's clearing member to the seller's clearing member within a specified time after pay-in and payout. The exchange will specify, in its contract description, the particular grade / variety of a commodity that is being offered for trade. In case the properties fall within the range, but differ from the benchmark specifications, the Exchange will specify a premium / rebate .Partial delivery as well as bad delivery would be considered as default. Penalties would be levied.

Cash Settlement : All open contracts not intended for delivery and non-deliverable positions at client level would be cash settled. I.e if the buyer’s / seller’s delivery intention does not matches, then that will be cash settled by the Final Settlement Price All contracts settling in cash would be settled on the following day after the contract expiry date.. Also if the buyer / seller does not give the delivery instruction nor does he squares up his position, then also the position will be cash settled & a penalty will also be imposed.