A primer on commodity derivatives market

What are commodity derivatives ?

Similar to equity futures and options, they are futures and, options on futures, on a variety of commodities from sugar to gold, edible oils to silver and rubber to crude oil .

How many exchanges offer commodity trading ?

MCX offers trading on metals and energy products . NCDEX is the country’s largest farm futures exchange and ICEX offers trading on plantation products and diamonds . BSE and NSE also recently launched commodity segments to their trading platforms .

Is a separate trading account needed to trade?

Your existing equity trading account may be used to trade in commodity futures provided your broker is a member on the commodity exchanges . But Clients trading on NSE and BSE will, through their brokers, have to get registered with the likes of MCX and NCDEX . You can check with your broker as regulator Sebi has allowed financial services firms to merge their commodity broking subsidiaries with their parent companies which offer equity trading.

Is there a risk in trading?

Yes there is.Without proper understanding those adept at trading equity F &O should not venture into this segment . It is likely that crude, gold and base metals would attract trading interest in the initial stages from retail equity clients. Hedgers will also be keen to cover their risk on agri counters like wheat, sugar etc.

Who are the participants?

Mainly retail and wholesale commodity traders and a few corporate clients besides punters across asset classes. Sebi allows category 3 alternate investment funds to trade and MFs would get approval to trade in due course . Also foreign companies with exposure to Indian commodities not having presence in India have been allowed to trade recently . Banks and FPIs are still not allowed though former can offer broking services to their clients to trade commodity derivatives .