CURRENT STATUS OF DERIVATIVE PRODUCTS IN INDIA:

AN OVERVIEW*

1. Introduction

Derivative products have emerged globally, to a large extent, as significant tools for price discovery and
risk management. In India the last few years have witnessed significant developments towards the
introduction of various derivative products, placement of the appropriate regulatory frameworks and in
the setting up of modern, transparent, and technology driven institutional mechanisms to functionalize
these products.

It is believed that derivatives in the form of forward trading existed in India in ancient times, but in the
absence of appropriate record keeping, nothing is known in this sphere till about a century ago. While
commodity derivatives in some form, albeit crude, were prevalent in India since the late 19 th century, it
is only after the turn of the year 2000 that these have been introduced in a significant and systematic
manner. Financial derivatives, barring forward contracts on currencies, have come into India only from
on or around the year 2000.

The purpose of this note is to acquaint the students with various major derivative products that are in
existence in India as on the date of preparation of this note, that is, third week of February, 2015, to the
extent that information and data were reasonably available. The note comprises of two broad sections.
The first section enumerates the status with respect to financial derivatives and the subsequent section
covers commodities.

2. Financial Derivatives

In India, as in the developed world, there exist both Over-the-Counter (OTC) financial derivatives as well
as exchange traded ones. It would be notable to mention that OTC financial derivatives are available
only on currencies and interest rates, while exchange traded derivatives are now available in India not
only on stocks and stock indices, but also on interest rates and currencies. The principal regulatory body
for currency and interest rate derivatives is the Reserve Bank of India (RBI) while the regulatory body for
stock derivatives is the Securities and Exchange Board of India (SEBI). However, SEBI, through its
regulatory role on Stock Exchanges, has a corresponding function with respect to exchange- traded
currency and interest rate futures.

*The earlier versions of this teaching note was prepared by Late Prof. Shiladitya Roy, Professor, Institute of Rural
Management, Anand and Kushankur Dey and Debasish Maitra, Doctoral (fellow) participants of the Institute of
Rural Management, Anand. The February 2015 version has been modified and updated by Kunal Soni, Academic
Associate – Finance.

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First described below is the status position with respect to the ones where RBI being the principal
regulatory body, has some role: interest rate and currency derivatives. That is subsequently followed by
those under the purview of the SEBI, namely, stock derivatives.

2.1. Currency Derivatives

The first currency derivative to come into being was forward contracts on foreign currencies and this
has been in existence over the last few decades. Introduction of forward contracts provided some form
of a hedging mechanism to importers and exporters against their foreign currency exposure and the
forward contracts were offered by authorized banks and other Authorized Dealers (ADs). In January
1997, ADs were allowed derivative products including currency swaps to manage their foreign currency
assets and liabilities and to hedge their asset-liability portfolios and in April 1997, ADs were allowed to
arrange forex-rupee swaps between corporate without prior approval of the RBI (RBI Annual Report,
1996-97; pp. 35, 37). Both forward contracts and currency swaps have witnessed significant volume of
transactions. The relevant data for 2010-11 June 2013 is presented in Table 1 below.

Table 1: Currency Forward Contracts and Swaps

(Rs. in billions)
Currency Swap
Year/Month Currency Forward
2010 – 11 28,902 41,125
2011 – 12 24,134 46,876
2012 – 13 53,185 50,616
2013 – 14 6,291 10,451
June 2013 1,533 3,281

Source: adapted from the “Appendix Table 13: “Turnover in Indian Derivatives Market”; RBI Annual
Report, 2013-14, http://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/T13_AR22082013.pdf (Retrieved
on February 19, 2015).

Interest Rate Swaps (IRS) were introduced in July 1999. The following observation from the Annual
Report 2009-10 of the RBI would give an indicative idea of the position:

Interest Rate Swaps (IRS) were introduced in July, 1999 to allow banks, primary dealers (PDs)
and all India financial institutions as well as corporate to manage their interest rate risks in an
environment of deregulated interest rates. In the Indian market, swaps are traded on four
benchmarks viz. MIBOR (Mumbai Inter- Bank Offer Rate), MIFOR (Mumbai Inter-Bank Forward
Offer Rate), INBMK and MISOIS, though the first two benchmarks i.e. MIBOR and MIFOR account
for most of the trade. The market has grown significantly over the years; the gross notional
principal outstanding reached Rs.80,18,647 crore in March 2008 and stood at Rs. 42,82,452
crore as at the end of April 2010 (RBI Annual Report, 2009-10, Page 49).

30
 To strengthen regional financial and economic cooperation, the SAASRC swap arrangement was
announced at the 24th SAARCFINANCE Governors’ Meeting held on May 16, 2012. Under the
arrangement, the Reserve Bank will offer a swap facility of US$ 2 billion both in foreign currency
and Indian rupee to all SAARC member countries, viz., Afghanistan, Bangladesh, Bhutan,
Maldives, Nepal, Pakistan and Sri Lanka. India will contribute the entire fund. The swap will be
offered in US dollar, euro or Indian rupee against the domestic currency or domestic currency
denominated G-sec of the requesting country. The requesting member countries can access US
dollar, euro or Indian rupee in multiple tranches. Each drawal will be of three months tenor and
can be rolled over twice. The swap arrangement is intended to provide a back stop line of
funding for SAARC member countries to meet any balance of payments and liquidity crises, until
longer-term arrangements are made, or if there is a need for short-term liquidity due to market
turbulence. (RBI Annual Report 2011-12, Page 98).

Credit Default Swaps (CDS)

A credit derivative enables an investor to hedge the credit risk. The RBI had initiated the process of
bringing about CDSs in India by issuing draft guidelines in 2007. However, following the economic
meltdown of 2008, the introduction in India was kept in abeyance. Subsequently the proposal for CDS
was revived and the RBI had put up the draft guidelines at its website on August 4, 2010 for public
comments. All the necessary guidelines were issued by November 2011 and participants were permitted
to enter into CDS from December 1, 2011.

Forward contracts, swaps and CDS are OTC instruments. Hence there was concern on the issue of
transparency. To address this issue and as per India’s commitment made at the G-20 meeting in 2009 at
Pittsburgh, an OTC Derivatives Trade Repository has been launched under the aegis of RBI. While this
reporting framework was put in place for CDS from the beginning, the reporting of other OTC trades are
being brought within this reporting framework (Gokarn, 2012, Launch of the OTC Derivatives Trade
Repository, inaugural speech at the CCIL, Mumbai on July 9, 2012, retrieved from RBI Monthly Bulletin
August 2012. http://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/4LOTCD100812F.pdf retrieved on February
19, 2015).

While exchange traded futures serve the same economic purpose as OTC forwards, they offer certain
advantages. As brought out in the “Report of the RBI-SEBI Standing Technical Committee on Exchange
Traded Currency Futures (2008)”:

 In the case of an exchange traded futures contract, Mark to Market (MTM) obligations are settled
on a daily basis. Since the profits or losses in the futures market are collected / paid on a daily basis,
the scope for building up of MTM losses in the books of various participants gets limited.
 The counter party risk in a futures contract is further eliminated by the presence of a clearing
corporation, which by assuming counter party guarantee eliminates credit risk.
 Further, in an Exchange traded scenario where the market lot is fixed at a much lesser size than the
OTC market, equitable opportunity is provided to all classes of investors whether large or small to
participate in the futures market.

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 An Exchange traded market would offer greater transparency, efficiency, and accessibility.
Consequent on the steps taken by the RBI/SEBI, Exchange traded currency futures came into being from
August 29, 2008 at the National Stock Exchange (NSE) and on October 1, 2008 at Multi Commodity
Exchange – Stock Exchange (MCX-SX) and from October 7, 2008 at the Bombay Stock Exchange (BSE)
and subsequently at the United Stock Exchange (USE) from September 20, 2010. Initially futures
contracts on currencies were for USD-INR and, consequent on a RBI recommendation, SEBI issued a
circular on January 19, 2010, permitting eligible stock exchanges to introduce currency futures on Euro-
INR, Pound Sterling-INR and Japanese Yen-INR. This was to enable Indian residents to be able to hedge
their exposures to these currencies directly.

BSE has stopped all its operations in the currency derivative segment. (Annual Report of SEBI, 2010-11,
Page 57 & 62).
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1314357411160.pdf, retrieved on February 19,
2015). The magnitude of trading at the NSE, MCX-SX and USE is illustrated in Table-2 below:

Table 2: Currency Futures Segment at the NSE, MCX-SX and USE

NSE MCX-SX USE

Month/Year
2010-11 2011-12* 2010-11 2011-12* 2010-11 2011-12*
No. of
contracts 749602075 782233920 903185639 626686064 167772367 309903126
traded
Trading value
3449788 3702389 4194017 2999176 762501 1469293
(Rs. Crore)
Average daily
trading value 13855 20569 16843 16662 5733 8163
(Rs. Crore)

Source: Economic Survey of India 2011-12, pp. 122, http://indiabudget.nic.in/survey.asp

(Retrieved on August 20, 2012).
* As on 31st December, 2011.

Forward and futures contracts and swaps entail firm obligation on both the parties to effect the
transaction and therefore, do not really provide insurance which is obtainable through the holding of
options. Options in foreign currencies have been introduced, with the approval of the RBI from July
2003. The draft circular of the RBI mentions:

As a part of developing the derivative market in India and adding to the spectrum of hedge
products available to residents and non-residents for hedging currency exposures, it has been
decided to permit foreign currency-rupee options… (RBI Draft Circular dated March 13, 2003,
retrieved from www.rbi.org.in on September 1, 2009).

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Customers who have genuine foreign currency exposures are eligible to enter into option contracts
written by authorized dealers. “Authorized dealers can use the product for the purpose of hedging
trading books and balance sheet exposures” (ibid). The outstanding position of currency options of the
banks are illustrated in Table-3 below.

Table 3: Outstanding Position of Currency Options of Banks

Item March-2007 March-2008 March-2009 December-2009

Outstanding
Currency Options 4601 7697 6015 4952
(INR billion)

Source: adapted from RBI Monthly Bulletin, August 2010.

http://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/0SBUAUG090810_F.pdf
(Retrieved on 10.09.2010, pp: 1554).

Recently, progress has been made in the introduction of exchange traded currency options on USD-INR.
As per the annual report 2009-10 of RBI,

In order to expand the existing menu of exchange traded hedging tools, recognized stock
exchanges have since been permitted to introduce plain vanilla currency options on spot US
Dollar / Rupee exchange rate for residents (RBI Annual Report, 2009-10, pp:102).

Subsequently, currency options have got introduced in the Indian stock exchanges from Oct, 2010 and
this segment has witnessed a significant increase in volume and open interest (RBI Annual Report, 2010-
11). For instance, at the NSE the number of contracts in 2011-12 was 27, 19, 72, 158 entailing a notional
turnover of Rs. 12,96,500.98 crores (NSE website: www.nseindia.com)

2.2. Interest Rate Derivatives

Till 1999 no derivative products were available in India through which organizations could hedge their
exposure to interest rate movements except that allowed to ADs (from January 1997) for their own
foreign exchange management. In July 1999 the RBI permitted scheduled commercial banks (except
RRBs), Primary Dealers (PDs), and all India Financial Institutions (FIs) to undertake Forward Rate
Agreements (FRAs) and Interest Rate Swaps (IRS) as a product for their own balance sheet management
and for market making purposes (RBI Annual Report, 1998-99; pp.29). According to the RBI guidelines on
FRAs and IRS, banks, FIs, and PDs can also offer these products to corporate for hedging their own
balance sheet exposures.

The above products, namely, FRAs and IRS are OTC instruments. The first exchange traded interest rate
futures was launched on the NSE on 24th June, 2003. However this product had a short existence. As
mentioned by Patwari, D.C. and Bhargava, Anshul (2009):

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 These were expected to take off with a bang, as debt funds, banks, investors and traders would
be interested in trading in them. The first day did see some active participation with Rs. 140
crore (roughly 7,660 contracts) being traded on day one. But surprisingly interest dwindled after
that and no trading took place in this segment after 28th July 2003 (up to 31st December 2004).
(Patwari, D.C. & Bhargava, Anshul, 2009: pp. 322).

Interest rate futures have since been resurrected in the Indian scene. Consequent on directions issued
by the RBI on August 28, 2009, interest rate futures were launched at the NSE on 31st August of the
same year. As per the RBI directions:

 Persons resident in India may purchase or sell interest rate futures;

 Foreign institutional investors registered with the SEBI may purchase or sell interest rate futures
subject to certain conditions stipulated in the directions;
 Banks may participate in the interest rate futures market only with the permission of the respective
regulatory department of the RBI;
 Agencies falling under the purview of any other regulatory body would need the permission of that
body for participating in the interest rate futures market. (Adapted from RBI/2009-10/134, FMD.
MSRG No. 39/02.04.003/2009-10, August 28, 2009 retrieved from www.rbi.org.in on September 2,
2009).
 The underlying for Interest Rate Futures would be 10–year notional coupon bearing GOI security
with the notional coupon rate being 7.0% with semiannual compounding.

The first day of the launch, i.e. August 31, 2009 witnessed a turnover of Rs. 267 crores (taken from
Business Line, Mumbai, September 2, 2009: “Interest rate futures turnover drops sharply”, retrieved
from:
http://www.blonnet.com/2009/09/03/ stories/2009090351440600.htm
September 3, 2009). On September 2, 2009 the turnover was Rs. 113 crores over 6,151 contracts
(retrieved from www.nseindia.com on September 3, 2009).

In spite of the market on interest rate futures being operational for over two years, the volumes failed
to pick up in the first couple of years. As reported in The Business Standard Mumbai, Aug 18, 2010;

The common concern among market men is that they could get “hit” with illiquid bonds. “If you
take delivery, there is always this fear of ending up with bonds that cannot be sold. If you look at
some of the overseas markets, the dealers can sell the bonds they don’t like. This is not the case
in India where the underlying market is not liquid.”

The above issue has engaged the attention of the RBI. As per the annual report for 2009-10 of the RBI,

The market has, however, been unable to sustain the liquidity and the open interest and trading
volumes have remained low. In the monetary policy statement 2010-11, it has been proposed to
introduce interest rate futures on 5-year and 2-year notional coupon bearing securities and 91-

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 days T bill. The product design and operational modalities for introduction of these products are
being worked out by the RBI-SEBI Standing Technical Committee (RBI Annual Report 2009-10,
pp-49).

IRF trading on 91-day treasury bills issued by the Govt. of India has been permitted by the RBI in March,
2011 with cash settlement and was introduced at the NSE on 4th July, 2011. Subsequently, IRFs for 2 and
5 years tenors have also been permitted.

The volumes during the period 2009-10 to 2011-12 (up to 31-12-2012) are given in Table 4 below,

Table 4: Volumes of Interest Rate Futures

Indicator 2009-10 2010-11 2011-12*

No. of Contracts 1,60,894 3348 215200
Trading Value ( Rs. crore) 2975 62 3959

Source: Economic Survey of India 2011-12, pp-122: http://indiabudget.nic.in/survey.asp (retrieved on

August 20, 2012).
* As on December 31, 2011.

2.3 Derivatives on Stocks

Stock (equity) derivatives came into being in the Indian securities market from June, 2000. First to be
introduced were index futures starting with the futures on SENSEX at the BSE followed by futures on
the NIFTY at the NSE-both in June 2000. The introduction of Index futures was followed by Index
Options which commenced in June 2001. This was followed by introduction of options on individual
stock from July 2001 and subsequently futures on Individual stock from November 2001. The turnover
data for all the four types of equity derivatives is given at table-5 below.

Table 5: Turnover in the Indian Equity Derivatives Market

Rs. in billions
Year/Month Index Futures Index Options Stock Futures Stock Options
2010 – 11 43,569 1,72,694 54,958 10,303
2011 – 12 37,564 2,33,384 40,849 9,785
2012 – 13 26,496 2,98,092 42,272 20,107
2013 – 14 9,853 1,25,037 15,708 8,824
June 2014 2,637 36,773 4,354 2,475

Source: adapted from the “Appendix Table 13: “Turnover in Indian Derivatives Market”; RBI Annual
Report, 2013-14, http://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/T13_AR22082013.pdf (Retrieved
on February 19, 2015).

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It can be seen from the above table that of the four categories of equity derivatives, index options have
an overwhelmingly large share, followed by individual stock futures, index futures and individual stock
options in that order.

Though index futures and options at the NSE started with that on the S&P CNX NIFTY, over the last ten
years futures and options on several other indices came to be introduced, namely, CNX IT, BANKNIFTY,
DJIA, MINIFTY, S&P 500, NIFTY MIDCAP 50, CNXINFRA and CNXPSE. Amongst these, there is no options
contract available on DJIA on which there is only futures contract. The turnover of index futures and
options at the NSE in the three completed years, i.e., 2009-10, 2010-11 and 2011-12 is given in Table 6
below.

Table 6: Turnover of Index Futures and Options at the NSE

Year Index Futures Index Options

Notional
Turnover (Rs. in
No. of contracts No. of contracts Turnover (Rs. in
crores)
crores)
2009-10 178,306,889 3,934,388.67 341,379,523 8,027,964.20
2010-11 165,023,653 4,356,754.53 650,638,557 18,365,365.76
2011-12 146,188,740 3,577,998.41 864,017,736 22,720,031.64

Source: retrieved from www.nseindia.com on August 20, 2012.

From the above table it can be computed that the total turnover of Index Futures and Options in 2011-
12 was of the order of Rs.26300000. However, not all the indices are heavily traded. Three indices viz.,
NIFTY, BANKNIFTY and MINIFTY take up more than 99% share. The turnover of these three is given in
Table-7 below:

Table 7: Options and Futures Trade details of NIFTY, BANKNIFTY and MINIFTY

Product No of Contracts Turnover (Rs. in crores)

973,945,670 25,600,013
NIFTY
20,618,220 514,284
BANKNIFTY
14,675,624 153,763
MINIFTY

Source: retrieved from www.nseindia.com on August 20, 2012.

It would be noteworthy to mention that in the two important stock indices, viz. SENSEX and NIFTY, SEBI
in Jan 2008, allowed options contracts of tenures up to 3-years and subsequently, in May 2010 allowed
options contracts on the same indices for tenures up to 5-years.

36
After index options and index futures, came options on individual stocks from July 2001 followed by
futures on these stocks from November 2001. The volume of all-India turnover of options and futures
contracts has already been provided in Table-5.

At the NSE stock options and stock futures are presently available on 208 stocks. The volume of
turnover of individual stocks and options in the last three years is provided at Table 8 below.

Table 8: Turnover of Stock Options and Stock Futures at NSE

Year Stock Options Stock Futures

Notional Turnover Turnover (Rs. in
No. of contracts No. of contracts
(Rs. in crore) crore)
2009-10 14,016,270 506,065.18 145,591,240 5,195,246.64
2010-11 32,508,393 1,030,344.21 186,041,459 5,495,756.70
2011-12 36,494,371 977,031.13 158,344,617 4,074,670.73

Source: retrieved from www.nseindia.com on August 20, 2012.

It would be relevant to mention that not all the 208 stock options and futures are traded on a regular
basis. For instance, on August 30, 2012, options on 163 stocks got traded at the NSE with the total
number of contracts being 259006 and the notional value being Rs. 7,514.71 crores. (Retrieved from
www.nseindia.com on August 30, 2012).

Futures on individual stocks were introduced in November 2001. At present futures on 208 stocks are
available at the NSE.

Unlike stock options, a larger percentage of stock futures seem to trade on a more regular basis. For
instance, on August 30, 2012, futures on all 208 stocks got traded with the total number of contracts
being 925968 and the total traded value being Rs. 24265.40 crores (retrieved from www.nseindia.com
on August 30, 2012).

3. Commodity Derivatives

3.1. Evolution and status

Though commodity derivatives in some form have been in existence in India since over a century, it has
had a rather blurred history till the recent past. As mentioned by the Forward Markets Commission
(FMC):

Organized futures market evolved in India by the setting up of “Bombay Cotton Trade
Association Ltd.” in 1875…Futures trading in oilseeds was organized in India for the first time
with the setting up of Gujarati Vyapar Mandali in 1900, which carried on futures trading in
groundnut, castor seed and cotton. Before the Second World War broke out in 1939 several

37
 futures markets in oilseeds were functioning in Gujarat and Punjab. Futures trading in raw jute
and Jute Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd.
in 1919…in case of wheat, futures markets were in existence at several centers at Punjab and
U.P. The most notable amongst them was the Chamber of Commerce at Hapur, which was
established in 1913. Other markets were located at Amritsar, Moga, Ludhiana, Jalandhar,
Fazilka, Dhuri, Barnala and Bhatinda in Punjab and Muzaffarnagar, Chandausi, Meerut,
Saharanpur, Hathiras, Gaziabad, Secundrabad and Barielly in U.P. Futures market in Bullion
began at Mumbai in 1920 and later similar markets came up at Rajkot, Jaipur, Jamnagar, Kanpur,
Delhi and Calcutta. In due course several other exchanges were also created in the country to
trade in such diverse commodities as pepper, turmeric, potato, sugar and gur (jaggery). (FMC,
“Evolution of Futures Trading and its Present Status”, retrieved from www.fmc.gov.in on
September 4, 2009).

However, subsequent to the enactment of the Defense of India Act, 1935, the derivatives market was
often subject to various restrictions and prohibitions on the apprehension of speculation on scarce
items. A major boost to the commodity derivatives market came with the enactment of the Forward
Contracts Regulation Act (FCRA) in 1952 and the establishment of the FMC in 1953. Under the aegis of
the FMC a number of regional exchanges came to take off. This was short lived however, since from the
1960s derivatives in many commodities came to be suspended or prohibited. As mentioned by Lokare,
S.M. (2007):

After independence, the market received a fillip with the enactment of Forward Contracts
Regulation Act (FCRA) in December 1952. The derivatives markets, which were once vibrant and
attracted huge trading volumes in commodities, particularly, cotton, oilseeds, bullion, and jute
were either suspended or prohibited during 1960s and 1970s. Concomitantly, the revival of this
industry in India had a slow and shaky start. It began with the setting up of the Dantwala
Committee (1966) and subsequently, the Khusro Committee (June 1980). In the post reforms
era, accepting partially the recommendations of Kabra Committee (1993), the Government of
India permitted derivatives trading in large number of commodities. A number of initiatives
were also undertaken subsequently to decontrol and develop the forward markets in
commodities. There are presently 21 regional exchanges in the country (Lokare, S.M., 2007,
“Commodity Derivatives and Price Risk Management: An Empirical Anecdote from India”, pp.4
the RBI Occasional Monsoon Papers, Vol. 28 (2); retrieved from
http://rbidocs.rbi.org.in/rdocs/Publications/ PDFs/82992.pdf on Sep 4, 2009).

The major landmark period in India with respect to commodity derivatives was 2002-03. The year 2002
witnessed the establishment of the first national level commodity exchange, viz., National Multi
Commodity Exchange (NMCE), Ahmadabad. The first of April 2003 witnessed a revolutionary
development when the Government of India (GoI) issued notifications which practically permitted
futures trading in all commodities. This was shortly followed by the establishment of two other national
level commodity exchanges- the Multi Commodity Exchange (MCX) and the National Commodity and
Derivatives Exchange of India Ltd. (NCDEX) in August and October, 2003 respectively. The significance of
this development has been aptly brought out in the report of the “Expert Committee to Study the
Impact of Futures Trading on Agricultural Commodity Prices”, which is quoted below.

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 The year 2003 is a watershed in the history of commodity futures market. The last group of 54
prohibited commodities was opened up for forward trading, along with establishment and
recognition of three new national exchanges with on-line trading and professional management.
Not only was prohibition on forward trading completely withdrawn, including in sensitive
commodities such as wheat, sugar, and pulses which earlier committees had reservations about,
the new exchanges brought capital, technology and innovation to the market. These markets
notched up phenomenal growth in terms of number of products on offer, participants, spatial
distribution and volume of trade. Starting with trade in 7 commodities till 1999, futures trading
is now available in 95 commodities. There are more than 3,000 members registered with the
exchanges. More than 20,000 terminals spread over more than 800 town/cities of the country
provide access to trading platforms. The volume of trade has increased exponentially since
2003-04 to reach Rs. 36.77 lakh crore in 2006-07. Almost all of this (97.2%) now accounted for
by the three national exchanges. The other 21 Exchanges have a miniscule share in the total
volume (Sen, Abhijit et al., 2008, pp. 6; The Expert Committee Report, Ministry of Consumer
Affairs, Food & Public Distribution, New Delhi, retrieved from
http://www.fmc.gov.in/htmldocs/Abhijit%20Sen%20Report.pdf on September 4, 2009).

After 2003, proposals for new commodity exchanges came about in the recent past, as a result of which
three more national level commodity exchanges have come into being namely; Indian Commodity
Exchange Ltd. (ICEX), Gurgaon, ACE Derivatives and Commodity Exchange, Ahmadabad and Universal
Commodity Exchange, Mumbai. The Universal Commodity Exchange is currently awaiting approval from
the Forwards Market Commission. As per the Annual Report 2011-12 of the Ministry of Consumer
Affairs Food, and Public Distribution, Department of Consumer Affairs, there are 21 commodity
exchanges recognized by the FMC which includes the four National level Commodity Exchanges.
It would thus be apparent that anything of relevance and significance in the Indian derivatives market
on commodities can be taken from the year 2003 and with respect to the operations at the three
national level exchanges, NMCE, MCX and NCDEX. Before dealing with the relevant information on this,
it would be noteworthy to mention that the earlier era of frequent ban on derivatives trading in a large
number of commodities, seems to be a matter of the past. In agricultural commodities, consequent on
the lifting of ban on derivatives trading on chana, soy oil, rubber, potato, wheat and sugar presently ban
exists on three viz., rice, tur and urad. Further with effect from August 23, 2010, the Forward Markets
Commission (FMC) has banned futures trading on electricity, apparently due to very low volume of
trade.

Within two years of the major policy initiatives of allowing futures trading in all commodities and that of
establishment of the national level commodity exchanges, the volume of commodity futures contracts
has witnessed a substantial spurt. The data is presented in Table 9 below.

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 Table 9: Commodity Derivatives: Volume of Trade
(Rs. in lakh crores)
Year Volume of Trade
2004-05 5.71
2005-06 21.55
2006-07 36.77
2007-08 40.67
2008-09 52.49
2009-10 77.65
2010-11 119.49
2011-12 (up to December 2011) 137.23

Source: Annual Reports, 2005-06, 2006-07, 2007-08, 2008-09 and 2009-10 Ministry of Consumer Affairs,
Food and Public Distribution, New Delhi, retrieved from www.fcamin.nic.in on September 5, 2009,
September 11, 2010 and a brief overview of the major developments in the commodity futures during
2010-11.

Retrieved from:
http://www.fmc.gov.in/docs/press%20note/A%20brief%20overview%20of%20the%20major%20develo
pments%20in%20the%20commodity%20futures%20April%202011.pdf
On September 6, 2011, and

Annual Report 2011-12 of the Ministry of Consumer Affairs, Food and Public Distribution, Department of
Consumer Affairs
http://consumeraffairs.nic.in/consumer/sites/default/files/userfiles/AR2011-12-Eng.per
On August 20, 2012.

Futures contracts are available in 113 commodities. A major classification can be made into four groups,
viz., bullion and other metals, agriculture, energy, and others. This group-wise value of futures trade
from 2009-10 to 2011-12 (up to January 2012) is given in Table 10 below.

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 Table 10: Commodity Group-wise Value of Futures Trade
(Volume in lakh tonnes and value in Rs. crore)
2011-12 (up to January
Name of the 2009-10 2010-11
2012)
Commodity
Volume Value Volume Value Volume Value

3,991.21 1,217,949 4,168 1,456,390 3,878.45 1,695,550.8

Agricultural
(39.3) (15.7) (32.6) (12.2) (33.2) (11.2)

4.73 3,164,152 7.38 5,493,892 8.86 8,758,384.3

Bullion
(0.05) (40.8) (0.10) (46.00) (0.1) (57.7)

982 1,801,636 1,410 2,687,673 1,081.10 2,311,689

Metals
(9.7) (23.2) (11.00) (22.5) (9.3) (15.2)

5,163 1,577,882 7,220.12 2,310,959 6,714.96 2,423,261.2

Energy
(50.9) (23.2) (56.4) (19.3) (57.5) (15.9)

2.12 3,134 0* 29.04 0.01* 5.9

Others
(0.02) (0.04)

15,188,891.
10,143 7,764,754 12,805.57 11,948,942 11,683.38
Total 3
(100.00) (100.00) (100.00) (100.00) (100.00)
(100.00)

Source: Economic Survey of India, 2011-12. pp: 200, http://indiabudget.nic.in/survey.asp

(Retrieved on August 20, 2012). Category wise share in percentage is given in parentheses under each
column.

*Volume of certified emission reduction (CER), electricity, heating oil and gasoline not included in the
total volumes of other commodities.

Till recently almost the entire share of commodity futures was held by the national level exchanges, viz.,
NMCE, MCX and NCDEX. Data with respect to value of trade at these three exchanges and their
respective market share is presented at Table 11 below:

41
 Table 11: Value of Futures Trade at the National Exchanges

Calendar Year Market Share, 2010

Name of the Exchange
2008 2009 2010* (In %)

MCX, Mumbai 42,84,653 59,56,656 78,95,404 83.16

NCDEX, Mumbai 6,28,074 8,05,720 9,73,217 10.25

NMCE, Ahmadabad 37,272 1,95,907 1,80,738 1.90

Others 83,885 1,32,173 4,45,366 4.69

Total 50,33,884 70,90,456 94,94,725 100.00

Source: data compiled from Economic Survey of India, 2010-11, pp-214. *As on Nov 2010.

As can be seen from the above table, MCX had the largest share of 83.16 % in 2010 followed by 10.25%
and 1.90% of NCDEX and NMCE, respectively. All other exchanges together accounted for a paltry 4.69%
share.

3.2. Commodity derivatives-recent initiatives and products

The recent past i.e. the period from 2008-09 has witnessed the introduction of unique new commodity
products and innovations. New products introduced include futures trading in almonds, imported
thermal coal, carbon credits and platinum. Salient innovations have been the introduction of Exchange
of Futures for Physicals (EFP) and Alternate Futures Settlement Mechanisms (AFS). These two
innovations have occurred at the instance of the FMC to enable better participation by hedgers and to
encourage delivery in agricultural commodities. Another significant innovation has been the recent
setting up of Electronic Spot Exchanges by NCDEX, MCX and National Agriculture Produce Marketing
Company of India Ltd (NAPMC). In addition a “Price Dissemination Scheme is currently being
implemented by the Forward Markets Commission and the National Commodity Exchanges to make
available spot as well as futures prices of agricultural commodities to farmers and other stakeholders
through price ticker boards placed at APMCs. During 2011-12 till December 2011, 157 Price Ticker
Boards were installed. The cumulative number of Price Ticker Boards installed till 31-12-2011 stood at
925”. (Annual Report 2011-12 of the Ministry of Consumer Affairs, Food and Public Distribution,
Department of Consumer Affairs, pp.12-13
http://consumeraffairs.nic.in/consumer/sites/default/files/userfiles/AR2011-12-Eng.per

42
Retrieved on August 20, 2012). These partly are measures to deal with better price discovery and for
efficient market linkages among different market participants.

4. Concluding Remarks

Almost all significant developments with respect to derivatives in India can be said to have occurred in
the last decade, with the last seven years or so witnessing the positioning of major products and
exchanges, both with respect to financial instruments and commodities. However, though futures are
now available on both financial instruments and commodities it needs to be recognized that conceptual
aspects notwithstanding, the latter segment has nuances distinctly of its own. Unlike derivatives on
financial instruments, that on commodities involves the additional issues of quality, grading,
warehousing and storage and the consequent logistics.

43
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