Ready-forward deals, already famous in currency trading, are now coming on commodity exchanges, too. In what might change the country’s commodities landscape, ready forwards, besides other forward products, are set to be introduced on commodity futures platforms.
According to sources in the know, the National Commodity and Derivative Exchange (NCDEX), which is to initially launch ready-forward products for oilseeds, edible oils, cotton, etc, will later offer these for all major agricultural commodities like sugar, maize and chana.
When contacted, NCDEX Managing Director & Chief Executive Sameer Shah declined to divulge details but said forward products had a huge potential for trading on the futures platform. The synchronisation between the spot and futures markets would significantly improve, he added. An NCDEX study shows the total value of agriculture output in India in 2012-13 was worth Rs 9.23 lakh crore, while the trading volume was in its multiples. Since the country’s spot markets are scattered and there is no single national market for spot trading (barring a few oil and oilseeds on futures exchanges), volumes have not shown any meaningful increase vis-à-vis crop size. Globally, volumes on futures platforms are seven to 28 times the crop size.
Ready forwards are like stock exchanges’ trade-for-trade segment. But in commodities, such a transaction will be made on a certain day with a forward delivery date; the price and place of delivery will be decided at the time of entering into the deal.
These are called ready forwards because deliveries take place on terms pre-decided on the date of transaction. At present, most commodity deals are transacted on spot wholesale markets, or mandis. These will now take place across the nation on online commodity exchanges. NCDEX will shortly approach the regulator, Forward Markets Commission, with a proposal on this.
NCDEX has a spot exchange subsidiary developing products to be traded on a dedicated segment on the futures exchange platform. That is how spot market products would come under the futures market regulator.
The Forward Contract Regulation Act, the law governing commodity futures, will apply on ready-forward deals as well. These deals could be traded on a separate segment on futures exchanges — like cash & derivatives segments operated on stock exchanges.
With ready forwards and other such forward products coming on the futures platform, volumes on India’s futures market could also grow several times over. These markets are meant for hedging, as deliveries are not even one per cent of trading. By comparison, every transaction on forward market is finally settled in delivery.
In cotton and imported edible oils, forward deals are common. Even before the crop hits the market, exporters enter into deals to buy cotton from ginners at a fixed price. These deals are settled later, when the crop comes. In the case of edible oils, at the time of entering into import contracts, importers sell oil in forward deals on the spot market with a future date for delivery.
NCDEX has proposed such deals take place on the exchange platform, where individual parties get to decide the quality, delivery date, price, quantity and place of delivery. The exchange will stand as counter-party guarantee that the contract will be honoured. For this, it will either take margins or security deposits for defaults in delivery difference or the loss to buyers will be settled in cash.
“Ready-forward deals on the exchange platform will bring in transparency and security,” said NCDEX’s Shah.