Role of Commodity Futures Exchange in Price Discovery & Price Risk Management
Unlike the physical market, a futures market facilitates offsetting the trades without exchanging physical goods until the expiry of a contract. As a result, futures market attracts hedgers for risk management, and encourages considerable external competition from those who possess market information and price judgment to trade as traders in these commodities. While hedgers have long-term perspective of the market, the traders or arbitragers, prefer an immediate view of the market. However, all these users participate in buying and selling of commodities based on various domestic and global parameters such as price, demand and supply, climatic and market related information. These factors, together, result in efficient price discovery, allowing large number of buyers and sellers to trade on the exchange. The Exchange is communicating these prices all across the globe to make the market more efficient and to enhance the utility of this price discovery function.

Price Risk Management
Hedging is the practice of off-setting the price risk inherent in any cash market position by taking an equal but opposite position in the futures market. This technique is very useful in case of any long-term requirements for which the prices have to be firmed to quote a sale price but to avoid buying the physical commodity immediately to prevent blocking of funds and incurring large holding costs.

Participants of a Futures market
The Futures market participants comprise of farmers, traders, producers, processors, exporters, importers and industries associated with commodities. The futures market is used for hedging the price risk and for trading or arbitrage. Brokers of the Exchange, who are located all across the country, serve the futures market users directly through their own branch offices' network or through the network of their franchisees or sub-brokers.

Trading on a Commodity Exchange
Only exchange members and their authorized users are entitled to trade on the Exchange. Those who are not members of the Exchange can trade through members of the Exchange or their authorized users.

Clearing the Trades on the Exchange
All trades on the Exchange are supported by an initial margin. At the End-of day the Exchange does mark-to-market of all the open positions. This activity results into final position of all members in respect to booked losses or losses on open positions. Members make the shortfalls good by way of pay-ins to the Exchange by next day and the members in profit on such positions are given the necessary credits. These payments are processed electronically through a country-wide network of clearing banks, like- Bank of India, HDFC Bank, IndusInd Bank, Union Bank of India and UTI Bank wherein members maintain their accounts.

Settlement Process
A contract has a life cycle of one month or longer. At the Exchange, two weeks before the expiry of a contract, the contract enters into a tender period. At the start of the tender period, both the parties must state their intentions to give or receive delivery, based on which the parties are supposed to act or bear the penal charges for any failure in doing so. Those who do not express their intention to give or receive delivery at the beginning of tender period are required to square-up their open positions before the expiry of the contract. In case they do not their positions are closed out at 'due date rate'. The links to the physical market through the delivery process ensures maintenance of uniformity between spot and futures prices

The Exchange has tied up with State Level Warehousing Corporations of Kerala, Gujarat, Tamil Nadu and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and other State level Warehousing Corporations.

Buyer Receiving Delivery
Buyers intending to take delivery will receive it, if there are sellers willing warehouse at the designated delivery centers on the designated delivery days. There are commission agents who help the brokers with handling of the delivery, logistic support, associated quality certification through give delivery. The Buyer will have to make the payment within three days after the delivery is allotted. The buyer will take actual delivery from the empanelled agencies and associated billings due to tax implications. This support is required as the buyer may be in a different city than the place where the delivery is being received.

Use of the Physical Delivery (in the Warehouse) by the Client
The client of a buyer may use this delivery for his consumption in the industry, or for exports, or he may sell in the spot market or may sell in futures market in the subsequent contract, if he is a regular trader. Generally the commodities available in the physical form are consumed by the industry and, rarely, commodities, are stored in the warehouse for a longer period.

Percentage of Delivery in the Futures Market
The percentage is fairly low. Generally, the futures markets all over the world are used for hedging where actual delivery percentage is about 1%. Any user in the commodities ecosystem unlike the physical spot or forward market does not use these markets for regular consumption.

Operating a Futures Market under FC(R)A, 1952 on Cash Settlement Basis and the Position at the Exchange
The FC(R) Act, 1952 does not permit any exchange to create a market where settlement of contract happens only on cash basis, without giving the seller an option to tender deliveries. The Exchange permits the sellers to tender delivery if they chose to. This has to be followed by any commodity exchange recognized under FC(R) Act.

Quality of a Commodity given by a Seller
The Exchange has specified the deliverable grades in the contract specifications, which are notified before commencement of trading in a contract. The seller is required to submit the quality certification issued by the Exchange's empanelled quality certification agencies, like, SGS, Geo Chem, Dr. Amins, among others.

Role of a Warehouse in Futures Market
In India, vibrant spot markets, in various commodities, exists for 100s of years. In these markets, there are farmers, industrialists, warehouses, consumers, dealers and traders, who buy and sell commodities. There are warehouses, which stores commodities and there are consumers, who consume them eventually. the Exchange or, for that matter, any other Futures Exchange do not aim to replace, replicate or substitute such spot markets, rather the only value added service of THE EXCHANGE is to support the spot market players by developing their price risk efficiency through providing hedging tools. Therefore, a Futures Exchange has to base its delivery process on the basis of existing physical market practices and use existing warehouse infrastructure, which is capable of handling billion dollars worth of physical market trades. So the same infrastructure can properly take care of minuscule delivery tendered in a futures market.

Necessity of the role of Warehouse
The role of a warehouse is most necessary in the spot market where a farmer after having harvested his crop sells them to commission agents who in turn sell them to a Mandi. The Traders in Mandi may then sell it to a large consumer or to a trader who in turn will sell it to some other consumer, industry, exporter or miller at the right time and right price. The Goods during this period are stored in the warehouse. It is seen that today 80% of the warehousing capacity is used by the Government for storing various commodities under the Public Distribution System and for storing fertilizers.

Demat Electronic Warehouse Receipt
Demat Electronic Warehouse Receipts are expected to be electronic records created by an approved agency after dematerialization of the physical receipt issued by a Warehouse. In securities market the physical shares of the company are dematerialized by their Registrar and Transfer Agents using a Depository empowered under the Depositories Act. Also, the total shares of a company are monitored by the Registrar of Companies and the Stock Exchanges. In commodities market, there is no standardization of monitoring of warehouse receipts issued by a warehouse by any regulatory body. Similarly, the transfer of ownership also gets affected under a mutual agreement and not as per any Statutory Act. It remains to be seen whether such transfer will be considered good transfer under Negotiable Instruments Act and whether electronic records will be good title considering the above shortcomings. And also the fact that commodity is perishable and may not be a good delivery if the buyer finds out that it has deteriorated beyond the specifications mentioned in the contract

Necessity of Demat Electronic Warehouse Receipts for Futures Trading
As 99% of the trading does not result in delivery, demat electronic warehouse receipts are not mandatory. Further, in futures market, since this 1% delivery also happens only once in a month or perhaps once in two months, it may not be economically viable to create such an elaborate system for futures market only.

In the securities market also, demat deliveries were useful only in the spot segment where the delivery percentage is 15-20% and it occurs on a daily basis across the country. Further, the demated shares in securities market are perpetual in nature and, therefore are rarely required to be used in the physical form. Whereas, in the commodities market such an elaborate system is pointless initially as commodities traded on the futures markets are consumed regularly and are rarely available in abundance for extended storage.

As far as commodities are concerned, there is no law, which regulates dematerialization of warehouse receipts. Availability of a commodity at any point of time is a direct derivative of total production, carried forward stocks, imports and consumption. Equity shares are off the market if the issuing company buys them back. Commodities, on the other hand, are extinguished due to consumption, the perishable nature and exports.

Currently, 80% of the warehousing in India is used primarily for wheat, rice and fertilizers, among others. The import of commodities is spaced out at regular intervals to reduce storage cost and commodities produced seasonally are used completely, by the next season Therefore, it may not be a feasible business proposition to recommend market participants to use electronic warehouse receipts without first providing for a legal secured framework, which guarantees the quantity, quality, title and ownership of the commodities held by a genuine buyer and covers issues like sales tax concerning sale and movement of goods.