Chapter 7 - Commodity Futures Markets

Abstract

In India, commodity derivatives are traded on exchanges that are separate and distinct from the exchanges on which financial derivatives are traded. This chapter describes the commodities and design of the futures contracts with focus on the market for these commodity derivatives. The Indian commodity futures markets went through a transformation between 2000 and 2003 with significant regulatory liberalization and the creation of three new national, electronic exchanges, each listing scores of products. Today, there are 23 exchanges in India listing futures on physical commodities, including the three national exchanges. The concepts of trading, clearing, and settlement systems are described with special attention to the new national exchange infrastructure that has been put in place since 2002. This includes some innovations and differences between markets in India and outside, such as the process that is in place today to obtain reference prices for the underlying commodities. Equity derivatives have been trading on national electronic exchanges since 2000, while commodity derivatives trading on a similar platform began at the end of 2003. In a relatively short span of just over three years, commodity derivatives markets have reached more than 40 percent of the size of equity derivatives. The behavior of trading volumes and the futures price vis-à-vis the spot price is analyzed. The current regulations that form the underlying legal infrastructure for commodity derivatives trading in India are discussed.