Future of Futures Trading

Future of Futures Trading

With globalization India felt the need to have the tools to manage the price risk and proper price discovery of the huge commodities that it was either producing or consuming. Thus the need for commodity exchanges, matching international standards was felt. These exchanges are modern, having best of the technology, risk management and surveillance. These exchanges, in the last few years have been able to grow at rapid pace and have brought all the stakeholders (producers, traders, processors, speculators, arbitragers, investors and consumers) into its fold.

Leading the way has been National Multi commodity Exchange (NMCE) of India Ltd., the pioneer exchange which has revolutionized the commodity trade in the country. NMCE, since inception has positioned itself as an exchange for the purpose of price discovery, price risk management, transparent transactions and seamless hedging and compulsory delivery as dispute free settlement.

NMCE’s product offering is built around agricultural commodities with 75% of its turnover accruing from agri- commodities and 25 % from bullion and metals. Among agricultural commodities, rubber, coffee, pepper, castor seed, sacking, guar seed, chana, soy oil, etc are actively traded. It also has a 100% market share in commodities like rubber, coffee, copra, sacks and isabgul seeds.

In order to improve its presence in the industry, NMCE has brought about key changes in its operations. Since September 2008, NMCE has increased its trading window by starting an evening session and launching international commodities such as coffee, bullion and metals. Also, the exchange has been consistently improvising its product basket which has increased from eight commodities to 20 currently. On the back of these developments as also the increasing penetration of commodity markets in the country, the exchange is seeing a revival in turnover. In FY09, NMCE registered a turnover of US$12bn – a jump of 142% year on year. The leading bourse has also seen a jump in Pan-India membership by 100% in the last two years.

NMCE has shown a tremendous growth in the FY 2009-10, as the exchange has already exceeded the previous year’s turnover in the first five months of the current year. It has also managed to add newer member across the country. The exchange expects a growth of around 200% by the end of the FY.

NMCE is aggressively pushing various initiatives it has taken recently. These include:

1. Substantial increase in Membership:

NMCE added close to 100 new members last year and brought the tally to over 300 members. The projections predict another 150 members this year. The membership is coming from existing geography and new geography as well helping it spread pan India.

2. NMCE integration on ODIN:

NMCE is being integrated on flagship ODIN of FTIL. This would increase the reach of NMCE to around 35,000 terminals and would also help large broker members to do the client level risk management. This would increase their participation which in turn would grow the volume.

3. Investment in Exchange Ecosystem:

NMCE has taken initiatives, in co-operation with APMC for setting up spot exchange in the name of National APMC which has already been registered and has got the approval from the Govt. of Gujarat. Additionally, it is making investments in the field of technology and warehousing.

4. Increase the Size of the Market:

The exchange is focused to increase the size of the market where they have their strong foothold, in commodities like rubber, coffee, castor seed, chana, copra, sackings, Isabgul etc and increase the %age share in other commodities where they have comparatively lesser share. The exchange is also planning to come up with new and innovative products, the first initiative being the Gold Guinea.

5. Training programs:

NMCE is conducting various training programs for the traders at terminal operator level so that proper guidance reaches the grass root level. It is a mammoth task but the pioneer commodity exchange has already undertaken this.

6. Technology Initiatives:

There are a lot of initiatives on technological enhancement front such as new Traders Work Station, Client Work Station; Mobile based trading application, SMS Service, Price Dissemination Project in mandis, unique delivery settlement system and warehouse management systems.

7. Warehouse Receipt Financing:

NMCE is also going to increase warehouse receipt financing with many more banks. It has been very helpful for delivery based farmers, small and big traders.

Today, the turnover on the exchanges has increased to over $ 1 trillion which is approximately thrice the size of the physical commodity market in India. Leveraging the strong US$320bn physical commodities market (valued at 45% of India’s GDP), Indian commodity exchanges are over-riding structural inefficiencies and are headed towards growth.

The size of the commodity derivative markets in the developed nations is usually 30-40 times the underlying physical markets, while in India it stands at three times. Thus, there exists a scope of ten-fold growth for the Indian commodity exchanges. And to add to this, the turnover of the commodity exchanges has registered 40 times growth over the last five years, exhibiting the ability of the commodity exchanges to exploit  the huge potential that exists.