First state-of-the art National Multi Commodity Exchange set up by Public Institutions:

NMCE

In response to the Press Note issued by the Government of India during May'1999, first state-of-
the-art demutualised multi-commodity Exchange, National Multi Commodity Exchange of India
Ltd. (NMCE) was promoted by commodity-relevant public institutions, viz., Central
Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of
India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State
Agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM),
and Neptune Overseas Limited (NOL). While various integral aspects of commodity economy,
viz., warehousing, cooperatives, private and public sector marketing of agricultural commodities,
research and training were adequately addressed in structuring the Exchange, finance was still a
vital missing link. Punjab National Bank (PNB) took equity of the Exchange to establish that
linkage. Even today, NMCE is the only Exchange in India to have such investment and technical
support from the commodity relevant institutions. These institutions are represented on the Board
of Directors of the Exchange and also on various committees set up by the Exchange to ensure
good corporate governance. Some of them have also lent their personnel to provide technical
support to the Exchange management. The day-to-day operations of the Exchange are managed
by the experienced and qualified professionals with impeccable integrity and expertise. None of
them have any trading interest. The structure of NMCE is impossible to replicate in India.

NMCE is unique in many other respects. It is a zero-debt company; following widely accepted
prudent accounting and auditing practices. It has robust delivery mechanism making it the most
suitable for the participants in the physical commodity markets. The exchange does not
compromise on its delivery provisions to attract speculative volume. Public interest rather than
commercial interest guide the functioning of the Exchange. It has also established fair and
transparent rule-based procedures and demonstrated total commitment towards eliminating any
conflicts of interest. It is the only Commodity Exchange in the world to have received ISO
9001:2000 certification from British Standard Institutions (BSI).

NMCE commenced futures trading in 24 commodities on 26th November, 2002 on a national

scale and the basket of commodities has grown substantially since then to include cash crops,
food grains, plantations, spices, oil seeds, metals & bullion among others. Research Desk of
NMCE is constantly in the process of identifying the hedging needs of the commodity economy
and the basket of products is likely to grow even further. NMCE has also made immense
contribution in raising awareness about and catalyzing implementation of policy reforms in the
commodity sector. NMCE was the first Exchange to take up the issue of differential treatment of
speculative loss. It was also the first Exchange to enroll participation of high net-worth corporate
securities brokers in commodity derivatives market. It was the Exchange, which showed a way to
introduce warehouse receipt system within existing legal and regulatory framework. It was the
first Exchange to complete the contractual groundwork for dematerialization of the warehouse
receipts. Innovation is the way of life at NMCE.

A Close Look At NMCE

NMCE’s Exchange solution is a mission critical application which it had then selected in 2002
off the shelf market and then it worked around and built a heavy structure with multiple features
and functionalities including its integration with delivery and settlement system & to bring user
friendliness and regulatory changes from time to time. Now this is completely different than the
original basic application. DTSS is built on C, C++, VC, Power Builder Languages with Sybase
as database. This is message based architecture.

When an order is placed on the exchange, the server at NMCE scans through the orders posted
on it from all its trading terminals. It then locates and matches the best counter-offers/bids by
maintaining anonymity of the counter-parties. Anonymity helps is eliminating formation of
cartels and other unfair practices, thereby protecting the efficiency of price-discovery at the
Exchange. NMCE was the first commodity exchange to provide trading facility through internet,
through Virtual Private Network (VPN).

NMCE follows best international risk management practices. The contracts are marked to market
on daily basis. The system of upfront margining based on Value at Risk is followed to ensure
financial security of the market. In the event of high volatility in the prices, special intra-day
clearing and settlement is held. NMCE has also set up a Trade Guarantee Fund. Well-capitalized
in-house clearinghouse assumes counter-party risk of settlement. NMCE was the first to initiate
process of dematerialization and electronic transfer of warehoused commodity stocks. The
unique strength of NMCE is its settlements via a Delivery Backed System, an imperative in the
commodity trading business. These deliveries are executed through a sound and reliable
Warehouse Receipt System, leading to guaranteed clearing and settlement.

Evolution of Commodity Derivatives Markets in India.

The Indian experience in commodity futures market dates back to thousands of years. References
to such markets in India appear in Kautialya’s ‘Arthasastra’. The words, “Teji”, “Mandi”, “Gali”,
and “Phatak” have been commonly heard in Indian markets for centuries.

The first organized futures market was however established in 1875 under the aegis of the
Bombay Cotton Trade Association to trade in cotton contracts. Derivatives trading were then
spread to oilseeds, jute and food grains. The derivatives trading in India however did not have
uninterrupted legal approval. By the Second World War, i.e., between the 1920’s &1940’s,
futures trading in organized form had commenced in a number of commodities such as – cotton,
groundnut, groundnut oil, raw jute, jute goods, castor seed, wheat, rice, sugar, precious metals
like gold and silver. During the Second World War futures trading was prohibited under Defence
of India Rules.

After independence, the subject of futures trading was placed in the Union list, and Forward
Contracts (Regulation) Act, 1952 was enacted. Futures trading in commodities particularly,
cotton, oilseeds and bullion, was at its peak during this period. However following the scarcity in
various commodities, futures trading in most commodities was prohibited in mid-sixties. There
was a time when trading was permitted only two minor commodities, viz., pepper and turmeric.

Deregulation and liberalization following the forex crisis in early 1990s, also triggered policy
changes leading to re-introduction of futures trading in commodities in India. The growing
realization of imminent globalization under the WTO regime and non-sustainability of the
Government support to commodity sector led the Government to explore the alternative of
market-based mechanism, viz., futures markets, to protect the commodity sector from price-
volatility. In April, 1999 the Government took a landmark decision to remove all the
commodities from the restrictive list. Food-grains, pulses and bullion were not exceptions.

The long spell of prohibition had stunted growth and modernization of the surviving traditional
commodity exchanges. Therefore, along with liberalization of commodity futures, the
Government initiated steps to cajole and incentives the existing Exchanges to modernize their
systems and structures. Faced with the grudging reluctance to modernize and slow pace of
introduction of fair and transparent structures by the existing Exchanges, Government allowed
setting up of new modern, demutualised Nation-wide Multi-commodity Exchanges with
investment support by public and private institutions. National Multi Commodity Exchange of
India Ltd. (NMCE) was the first such exchange to be granted permanent recognition by the
Government

Vision

National Multi-Commodity Exchange of India Limited is committed to provide world class

services of on-line screen based Futures Trading of permitted commodities and efficient Clearing
and guaranteed settlement, while complying with Statutory / Regulatory requirements. We shall
strive to ensure continual improvement of customer services and remain quality leader amongst
all commodity exchanges.

Mission

• Improving efficiency of marketing through on-line trading in Dematerialization form.

• Minimization of settlement risks.
• improving efficiency of operations by providing best infrastructure and latest technology.
• Rationalizing the transaction fees to optimum level.
• Implementing best quality standards of warehousing, grading and testing in tune with
trade practices.
• Improving facilities for structured finance.
• improving quality of services rendered by suppliers.
• Promoting awareness about on-line features trading services of NMCE across the length
and breadth of the country.

In short, NMCE is leading transition of highly fragmented, controlled, and restricted commodity
economy to globally integrated, efficient, and competitive environment in the 21st century.
Futures Market

Futures market is expected to help the market participants through two vital economic functions,
viz., Price Discovery and Price Risk Management. At the macro level, the liquid and vibrant
futures market having nationwide participation also assists in sobering down inter-seasonal and
intra-seasonal price fluctuations. This not only helps in bringing about reasonable stability in the
prices of commodities, but also supports farmers to get remunerative prices without adversely
affecting interests of consumers. Such a market also provides a market-based alternative to
government involvement like procurement at Minimum Support Price and Public Distribution
System.

Price discovery made in spot markets – sometimes also called as cash market -, which are mostly
fragmented over-the-counter markets, is inefficient. Price discovery in spot market is affected by
geographical dispersion, differential needs of the buyers and sellers in terms of quality, quantity,
place of delivery and difficulties associated with handling physical delivery, absence of option to
settle the contract by payment of price-difference. In any case, the spot market does not meet the
need for price-forecast felt by participants in the physical markets.

With convergence of bids and offers emanating from a large number of buyers and sellers from
different parts of the country – and possibly from abroad - futures trading is a very efficient
means of forecasting the price for a commodity. Convergence of bids and offers in a single order
book at NMCE, is facilitated by the DTSS software.

Price Risk Management is very closely related to Hedging, which means transfer of some or all
of that risk to those who are willing to accept it, which are in turn called Speculators. Price risk is
managed by taking opposite positions on the two legs of the market e.g. spot and futures. The
futures prices are linked to the spot prices through carrying cost, which comprises cost of
storage, interest, wastage, shrinkage etc. Therefore, the two prices tend to move in parity. Taking
opposite positions in the two legs of the market therefore tends to offsets loss in any market on
account of adverse price fluctuation. All the participants in the physical markets, like, producers,
processors, manufacturers, importers, exporters and bulk consumers can focus on their core
activities by covering their price-risk in futures market. Their operations become more
competitive since the price-risk involved in procurements, supply is transferred to the futures
market.

Promoters

 Central warehousing corporation

 Gujurath agro industries corporation ltd

 Gujarat state agricultural marketing board

  National Agricultural Cooperative Marketing Federation of India Ltd (NAFED)

 National institute of agricultural limited

 Neptune overseas ltd

 Punjab national bank

Strategic investor

 Reliance Money

Legal and Regulatory Framework

The Department of Consumer Affairs in the Ministry of Consumer Affairs, Food and Public
Distribution -Government of India, is the apex regulatory body governing all commodity
exchanges. Various powers to provide regulatory supervision, besides the powers to grant or
withdraw recognition of any exchange rests with this Department of the Government of India.
The Forward Markets Commission (FMC) was set up in 1953 to provide regulatory advice to the
Government and have closer regulatory interaction with the commodity exchanges. Most of the
regulatory powers of the Central Government have been delegated to the FMC. For example,
FMC has powers to approve the Memorandum and Articles of Associations as well as Byelaws
of the Exchange. It has also powers to conduct inspection of accounts of the exchanges/their
members, inquire into the affairs of the exchange. In an emergency, it can even suspend trading.
All contracts for futures trade have to be approved by the FMC before they can be launched on
the exchange. As a self-regulatory organization, NMCE also plays an important role by ensuring
that the provisions in the Articles of Association, and Byelaws etc. are followed in letter and
spirit. The regulation by the Exchange is rule-based and incorporated in the software itself.
Regulation involving human intervention and of discretionary nature is implemented through
various committees of professional and experts. Special care is taken while constituting these
committees to ensure that there is no conflict of interest.

COMMODITIES

Oils and Oil Seeds Pulses Precious Metals

• Castor Seed • Gold Guinea

• Copra • Channa • Gold 100g
• Soybean Oil • Gold 1kg

• Rape/Mustard Seed • Silver

 Base Metals Spices Others

• Aluminium • Pepper • Rubber

• Copper • Cardamom • Sacking
• Lead • Turmeric • Guar Seed
• Nickel • Guar Gum
• Wheat
• Zinc • Raw Jute
• Coffee Rep Bulk
• Menthol
• Isabgul Seed

• Kalyan Kapas V-797

Trading at NMCE

Benefits of futures market, viz., price discovery and price risk management flow more easily
from an Order-driven system rather than Quote-driven system. NMCE follows the former
system. NMCE does not support any market maker. Traders submit orders and the incoming
orders are matched against the existing orders in the order book. Transactions are cleared and
settled through NMCE’s in-house Clearing and Settlement House, which is connected to all its
Members and the Clearing Banks. Delivery of the underlying commodities is permitted only
through a Central Warehousing Corporation (CWC) receipt, which meets highest contemporary
international standards. Anonymity of trading participants and effective risk management system
strengthens the trust of the participants in the trading system, which is a precondition for
enhancing breadth and depth of the market.

Trading hierarchy:

Trading rights on the Exchange can be acquired by Individuals, Registered Firms, Corporate
bodies and Companies (as defined in the Companies Act 1956) by complying with the admission
norms. Membership of the Exchange follows a hierarchy, and each level is characterized by a
definitive role and incumbent privileges and obligations.

Trading Cum Clearing Member (TCM):

TCM is one who has the right to execute transactions in addition to a right to clear its
transactions in contracts executed at NMCE either on his own behalf or on behalf of other
Trading Members

Trading Member/Broker (TM):

TM is one who has the right to execute transactions in the trading system of the exchange and the
right to have contracts in his own name. The TM can also deal on behalf of clients (Registered
Non Members) or enlist Sub Brokers who may in turn have their own set of clients. TM must
settle all his transactions (and those of Sub Brokers and Registered Non Member) through
Clearing Members (Trading cum Clearing Members or Institutional Clearing Members).

Institutional Clearing Members (ICMs):

ICM’s are professional entities providing clearing services to their institutional clients (viz.
Trading Members and their Sub Brokers & Registered Non Members). They however do
not have the right to trade on their own account.

Transaction Cost:

Simply put, participants trade in any market to make money. If transactions costs are high, there
will be less incentive to trade. Notwithstanding the distinctive advantages NMCE offers to its
customers, it has not lost sight of the need to provide membership as well as trading, clearing and
settlement facilities at lowest possible cost. To this end, the exchange has not only acquired
technology at lowest cost going by global standards, but has also put in place effective cost
cutting strategies to minimize non-capital expenditure.

Both uniqueness of its business model as well as cost structure provides clear competitive
advantage to NMCE over other comparable Indian Exchanges.

Delivery Mechanism

One of the methods of settling the contracts is by taking or making delivery. Delivery
period at NMCE is during last three days of the contract expiry date. During this period
Members of the exchange are not permitted to create any fresh position in the expiring contracts.
They can either square up their position or take/give delivery to settle their outstanding contracts.
Various steps required to be followed by the participants having outstanding position on 12th of
delivery month are as follows

1. Sellers and buyers have to convey intention on or before three days of the contract
expiry date
2. The intentions are then matched and assigned by the Exchange with the
corresponding buyers. As is the case universally, seller has freedom to tender
delivery during the delivery period at any approved delivery centers. In other words,
buyer cannot demand delivery at delivery center of his choice. When the seller gives
intimation, a call is made to the corresponding buyer to whom the delivery is
assigned by the Exchange. Delivery margin is collected from both the buyer and
seller
3. After matching the open positions of relevant buyer and seller, the same is
transferred from the system and settled at the closing price of the preceding day, so
that mark to market (MTM) is not levied or paid to the member
4. Within three days from the position transfer, the buyer has to maintain the required
funds in their clearing & settlement account while the seller has to tender the
 warehouse receipts to the exchange along with the computation of warehouse
charges. On the 3rd day, the exchange makes pay-in & payout simultaneously after
retaining the warehouse charges margin and sales tax margin from the buyer and
seller respectively
5. After the completion of pay-in and payout, duly endorsed warehouse receipts are
sent to the buyer immediately
6. Settlement of warehouse charges, margins and sales tax margins take place soon
after receipt of relevant documents (copies of sales bill, sales tax form) from the
member

DELIVERY MECHANISM OF NMCE

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