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Advanced concepts In Options on commodity futures

SESSION 10

Associate Companies of MCX


NBHC and NSEL

Prepared for : New Delhi

NBHC
NBHC ( National Bulk Handling corporation ) is an end to end solution in warehousing and bulk handling of agri- commodities. Its a group company of Financial Technologies ( FT) Main objective of NBHC with a view to cater to the needs of the members of MCX NBHC successfully manages a chain of accredited warehouses across India. Ware house accreditation process includes operational , technical and financial parameters.

Services of NBHC
Scientific warehouse maintenance and storage of agri commodities Bank finance assistance for construction and renovation of warehouses Installation of V- Sat terminal , to get information about online stock of commodity Collateral management services Bank Finance assistance for lending against warehouse receipt Logistic assistance Quality certification assistance Training and awareness programs Research reports Receiving , storage of commodities.

Why Use NBHC


To minimize price risk : Uncertainty in price, when farmer sells his produce To minimize output risk : Caused by weather , poor seeds and other unforeseen circumstances To minimize lack of information on prices : Wrong crop selection , exploitation by intermediaries. To minimize poor storage facilities : Immediate sales after harvest , leading to sharp crash in prices and low profit of producers. To provide grading & Standardization facilities : to make commodities more marketable To provide transportation facilities : To make commodities more accessible.

Benefits to Banks
Volume of Business : Once a farmer keeps his produce with designated NBHC warehouses , banks can disburse loan and thus volume of business will increase/. Credentials of NBHC : Banks tie-up with NBHC , which would serve as a business partner of international repute. Quality certified commodities : NBHC issues Quality certification which provides documentary proof about the quality of commodity Timely information : NBHC will help banks to arrive at the value of the cargo and to have a view on the movement of price Sale of goods in organized market : The organized markets reduces counter party risk. In case of any default by the borrowers the bank have an organized market to fall back on.

Ware house receipts issued by NBHC


Have more credibility as issued by NHBC Private warehouses lack in management E- Warehouse receipt becomes negotiable , and warehouse receipt finance is expected to substantially increase Two major problems faced by farmers credit facility and price risk management against downward movement can be easily protected by way of warehousing system. Client dealing with NBHC receipt will get one point contact service. Guaranteed quality and quantity. Benefits to farmers , merchants and industries Easy for understanding commodity industry standards Round the clock utilization of warehouses from different part of country Receipt issued for commodities that will make it : Bankable Tradable

Quality Certification process


It is required when depositor wants to deliver the commodity at the warehouse. At specific date and time, truck carrying commodity deliver the commodity at designated warehouse ( WH) Truck is weighed with and without commodity to check the quantity delivered. Quality delivered checked by assayers certificate Quality certificate with warehouse receipt is dispatched to depositor. If depositor wants demat of commodity then it can be done in NSDL or CDSL. Physical WH receipt with signature and attestation is the proof the deposited commodity

Quality Certification process


Client call for WH space Availability of space Arrival of material Warehouse Manager

YES

Want quality certification

NO

Only storage at WH

Inform Quality certification agency for Sampling and analyzing If , No then rejected Want to Keep Warehouse only for storage

Analysis, Sampling , Quality Certification

NO

Matching MCX spec.

YES
Goods Accepted

YES

Inform Fumigation agency Store the Material

NSEL National Spot exchange Limited


National Spot Exchange Ltd. has been promoted by the following institutions: MCX (Multi Commodity Exchange of India Limited), the leading commodity exchange in India, prov ides futures trading in more than 70 commodities. It is also amongst the top three Exchanges in the world in bullion futures. FTIL (Financial Technologies India Limited) is among the very few companies globally that offers exhaustive solutions library for Exchanges, provides technology solutions to financial markets and facilitates expansion of stock broking terminals. NAFED (National Agricultural Cooperative Marketing Federation of India Limited), the leading Government agency, engages in food procurement, distribution and storage activities.

NSEL National Spot exchange Limited

National Spot Exchange is a national level institutionalized, electronic, transparent spot Exchange, which is poised to transform the rural economy. National Spot Exchange is a state-of the-art unique market place providing customized solutions to various problems faced by the farmers, traders, processors, exporters, importers, arbitrageurs, investors and the general mass. This project was launched by Shri Sharad Pawar, Honorable Union Minister for Agriculture and Consumer Affairs, Food and Public Distribution, in a function at New Delhi on 10th February, 2005.

Services offered by NSEL


Electronic spot trading facility in multiple commodities with specific delivery centers. Grading, quality certification and standardization of commodities. Facilitating borrowing against warehouse receipts. Customized services relating to storage, transportation, logistics handling and shipment. Procurement and disposal of commodities through online trading system. Market Intelligence Reports.

Benefits of NSEL
Benefits to Farmers Realizing the best possible price at the time of sale for agricultural produces. Trade and payment guarantee. Cost reduction in handling and other activities. Access to a national level transparent market, where direct selling to processors or end users would be feasible. Increase in holding capacity due to availability of warehouse receipt financing. Increase in bargaining power due to availability of an alternative market.

Benefits of NSEL
Benefits to Traders Common National Level Platform for Buying and Selling of Commodities. No counter party risk in trade. Procurement and disposal of huge quantity possible. Benefits to Corporates/ Processors/ Exporters/ Importers Facilitates bulk procurement operations without counter party and quality risks. Customized services relating to storage and logistics. Availability of professional services for grading and standardization. Complete avoidance of hassles relating to physical market operations.

Benefits of NSEL
Benefits to Arbitrageurs Advantage of cash-future arbitrage electronically. Disposal of deliveries received on Future market. Jobbing and spread trading between cash and futures. Benefits to Futures Exchanges Transparent spot price available for Due Date Rate calculation. Ease of moving towards compulsory delivery contracts through structured spot market. Healthy growth of futures market ensured through development of the structured spot market.

Dematerialization and Rematerialization


Ware house receipts : WH receipts are title documents issued by warehouses to depositors These receipts are transferable by endorsement and delivery Ware house receipts suffers from following flaws : Risk of fake / forged warehouse receipt Need to physically move the warehouse receipt from one place to another with risk of theft , mutilation , loss in transit etc. Part transfer is not possible in case of warehouse receipts , hence can not be split.

Entities involved in the D Mat Process


Issuer : The issuer is an entity , which floats the physical paper document. It would be a company in case of the share certificate or warehouse in case of warehouse receipt The Registrar and Transfer Agents : It acts on behalf of the issuer as an interface between the issuer and the depository for converting the physical warehouse receipt in the demat form The Depository : The depository maintains the records of the beneficial owner in its books presently there are two depositories in India i.e. NSDL and CDSL

Demat Account types and purposes


Two types of accounts : Beneficiary owner account Clearing member pool account Beneficiary Owner account : is used to hold and transact in commodity balances. The depositor is required to quote this account number at the time of depositing commodity in the warehouse. All the investors who are interested in giving / taking delivery have to compulsory open beneficiary owner account for commodity. Investor have to open account with both the depository NSDL and CDSL because inter depository transfer have not yet started in commodities unlike equities

Demat Account types and purposes


Two types of accounts : Beneficiary owner account Clearing member pool account Clearing member pool account : is used for the purpose of settlement of delivery obligation. The account is used by the member for giving or receiving delivery of commodity to or from the clearing house of the exchange. Any shortage in Pay-in or Pay- out of the exchange is settled through this account. All the members of the exchange are required to open the CM Pool account with both the depositories This account can not be used for holding the commodities

Process of demat of commodity


Depositor at the time of deposit of commodity contacts the exchange approved quality certifying agency to get the quality of goods assayed . After receipt of QCA , depositor is required to fill Commodity deposit form ( CDF) which contains details like quantity, quality, validity date of the quality . Depositor submits CDF , quality certificate and warehouse receipt to warehouse and receives an acknowledgment of the same. The warehouse managers then initiates the process of demat credit in co-operation with exchange, registrar and transfer agent and the depository .

ICIN International Commodity Identification number

ICIN is generated on the uniqueness of the following 4 parameters Commodity Warehouse location Grade / Fineness of the commodity Validity date of the commodity

Change in any of the above parameters will change in generation of new ICIN

Process of Dmat Delivery

If the futures contract on its expiry results into delivery , the member having delivery obligation is required to give delivery of the commodity to exchange on or before pay in date. In case of pay- out, exchange credits the commodity to the buying member pool account.

Rematerialisation /withdrawal/ revalidation


Depositor approaches DP and makes request for withdrawal of commodity in prescribed form called RPF ( Remat request form) Acknowledgment copy of RPF given to depositor Depositor will approach the vault / warehouse along with following documents for withdrawal of commodity Original copy of acknowledgment slip issued by DP Authority letter from the depositor ( in agent case) Proof of identification All agricultural commodities have shelf life and cannot be stored for long. After certain time, agro commodities needs to be revalidate. This process is called revalidation of commodities In the process of revalidation fresh quality certificate is required.

Process of D mat Delivery

Clearing corporation account

PAY- IN
Selling member pool a/c

PAY- OUT
Buying members pool account

Selling Clients beneficiary account

Buying clients beneficiary account

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