INTERNATIONAL COMMODITY DERIVATIVE MARKETS
A 2-credit course for PGCPIBF
Session 6
Course Coordinator: Dr. Niti Nandini Chatnani
Professor
Indian Institute of Foreign Trade, New Delhi
Email: nitinandini@iift.edu
Author- COMMODITY MARKETS AND DERIVATIVES
22 June 2024 PGCPIBF 1
Agenda: Working of Commodity Exchanges
1. The Commodity Exchange Ecosystem
2. Life Cycle of a Commodity Future Contract
3. Delivery and Role of Warehouse
4. Trading and Open Interest
Reading Commodity Markets and Derivatives (NNC)
Chapter 6
22 June 2024 PGCPIBF 2
Regulatory Regime
WDRA
Clearing House
Spot Market Exchange Accredited
(demutualized)
Department listing contracts Warehouse
NWRs
Trader Broker
Spot Markets Banks
C C
C
22 June 2024 MA_ECO 3
Essential requirements of an exchange-enabled derivative platform:
1. Regulatory Framework (SEBI and Exchange Rules)
2. Trust through Counter-Party Guarantee (Clearing House)
3. Infrastructure for Trading (Trading Technology)
4. Mechanism for delivery (Dematerialisation, NBHC, Accredited Warehouses,
Quality Assayers, WDRA)
5. Payment Systems (Banks)
6. Registration of Buyers and Sellers (Brokers)
22 June 2024 MA_ECO 4
A commodity futures contract’s life:
Cash Settlement
Delivery
Notice Physical
Offsetting/ Period Delivery*
Squared Off
1 2 7
Expiry
Matching for deliveries on expiry date
PCMs informed of deliverable/receivable/unmatched positions
* Entities in delivery: Accredited Warehouse; Accredited Registrar and Transfer
Agents; Approved Assayers
22 June 2024 PGCPIBF 5
Delivery:
• The tender and receipt of an actual commodity or warehouse receipt or other negotiable
instrument covering the commodity, in settlement of a futures contract
• Quality Assayers are authorized entities to certify and grade the commodities that are
delivered through exchange accredited warehouses
• Clearing Members (CMs) play the role of deliverer and receiver
• Options for Delivery (what happens to contracts that are open during the DNP will depend):
1. Both Option (Only if both B and S want to take and give delivery, physical delivery will happen.
Otherwise the contract will be cash settled)
2. Seller Option
3. Compulsory Delivery
• Delivery Lot is the minimum deliverable quantity in units a member can deliver at the time of
tendering delivery, and delivery lot is specified in contract specifications of the commodity to
be tendered for delivery
22 June 2024 PGCPIBF 6
Warehousing and Warehouse Receipts:
•Warehousing provides critical logistics support to the commodity sector
•Warehouse receipts (WRs) are title documents issued by warehouses to depositors against the
commodities deposited in the warehouses, and are transferred by endorsement and delivery
•WRs are dematerialized by issue in electronic from. Demat WRs eliminate disadvantages of
WRs in their physical form
•National Securities Depository Limited (NSDL) and national level multi-commodity exchanges
extend depository services for settling trades in commodity futures
•Demat accounts can be opened with Depository Participants (DPs) empanelled with the national
level exchanges
22 June 2024 PGCPIBF 7
How Trading Affects Open Interest
Time Action Open Interest
T=0 Trading opens for a contract 0
T=1 A buys and B sells 1 contract 1 (1 long: A & 1 short: B position)
T=2 C buys and D sells 3 contracts 4
T=3 A sells and D buys 1 contract 3 (as 1 contract is squared off)
T=4 C sells and E buys 1 contract 3
Ending Trader Long Short
Positions at
T=4
B 1
C 2
D 2
E 1
All Traders 3 3
22 June 2024 PGCPIBF 8
