1. Training on Commodity Futures Trading Prepared by Neeraj Gupta – Vice President, NMCE

2. Introduction to Commodity Trading & Concepts  India has very rich tradition in Commodity Futures.  Futures Trading is popularly know as ‘Vaayda’.  Historically all the ‘Vaayda Bazaar’ were simply associations of persons.  Commodity Futures Markets attempts to perform two main function – Price Discovery and Price Risk Management

3. Derivatives  The word ‘derivative’ means – ‘that which is derived’. ‘To derive’ means – ‘to draw something from a source’. Derivatives are contracts, which derive their value from the spot price of the underlying asset.  The most popular derivatives contracts world wide are ‘futures’ & ‘options’.

4. History of Commodity Futures  The origin of commodity derivatives can be traced back to the need of farmers to protect themselves against fluctuations in the price of their crop. From the time it was sown to the time it was ready for harvest, farmers would face price uncertainty. Through the use of simple derivative products, it was possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These were simple contracts developed to meet the needs of farmers and were basically a means of reducing risk.  A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty.  On the other hand, a merchant with an ongoing requirement of grains too would face a price risk - that of having to pay exorbitant prices during dearth, although favorable prices could be obtained during periods of oversupply.  Under such circumstances, it clearly made sense for the farmer and the merchant to come together and enter into a contract whereby the price of the grain to be delivered in September could be decided earlier. What they would then negotiate happened to be a forward contract, which would enable both parties to eliminate the price risk.

5. 5 Evolution of Commodity Future Markets Internationally –In 1848, the Chicago Board of Trade (USA), or CBOT, was established to bring farmers and merchants together. A group of traders got together and created the 'to-arrive' contract that permitted farmers to lock in to price upfront and deliver the grain later. These to-arrive contracts proved useful as a device for hedging and speculation on price changes. –Today, derivative contracts exist on a variety of commodities such as corn, pepper, cotton, wheat, silver, etc. Domestically 5 Establishment YearCommodityExchange/Association 1875 CottonBombay Cotton Trade Association Ltd. 1900 OilseedsGujarati Vyapari Mandali 1913 WheatChamber of Commerce at Hapur 1919 Raw Jute & Jute GoodsCalcutta Hessian Exchange Ltd 1920 BullionBombay Bullion Association-Mumbai

6. Futures Trading Futures trade is an exchange-traded agreement to buy or sell a particular type and grade of commodity for delivery at an agreed price, place and time in future. The primary objectives for any futures exchange are effective price discovery and efficient price risk management

7. Difference- Forward & Futures Forward: - an agreement between two parties to buy and sell a commodity at a pre-determined future date at a price agreed when the contract entered into; traded at OTC market. Buyer Money Seller Commodity Futures: - a contract to buy or sell a standard amount of a standardized or pre-determined grade(s) of a certain commodity, at a pre-determined location(s), on a pre-determined future date at a pre-agreed price. BuyerExchangeSeller Money Commodity

8. 8 Forward V/s Futures Contract ForwardFutures 1) Parties are known to each other1 ) Parties are anonyms 2) A forward contract is an agreement to perform transaction of buy or sell of an asset on mutually agreed terms. 2) A futures contract is an agreement to buy or sell an asset at a certain time in the future at a certain price. 3) Customized contracts3) Standardized contracts 4) No Clearing house is needed for execution. 4) Trades are cleared through a Clearing house 5) No daily margins payment5) Daily Mark-to-mark settlement 6 Any party default Risk is there.6) There is no Party Default Risk as Exchange acts as counter-party. 7) Lack of Centralized trading and illiquidity 7) The contracts are traded nationwide through ODIN and TWS software with huge amount of liquidity. 8) Unregulated contract8) Regulated Contract 8

9. Role of Futures Market Price Discovery. Price Risk Management. Price Stabilization. Balance in Demand and Supply. Leads to integrated price structure. Market participants exchange risks by hedging in futures market. Speculators provide much needed liquidity in futures markets.

10. 10 Role of Commodity Derivative Exchanges To provide a state of art electronic online trading platform to farmers, traders, consumers, importers, exporters etc for trading in commodity derivatives. To provide an efficient price discovery model of commodities through which price risk can be effectively managed. To reduce intermediation cost by creating a national level market wherein a farmer can sell its graded produce directly to the consumer. To guarantee all trades by acting as a counter-party to all the trades.

11. Regulatory Framework Ministry of Consumer Affairs (Govt. Of India) Forward Markets Commission (Regulator) National Multi-Commodity Exchange of India Limited (NMCE) Professional Clearing Member / Trading Cum Clearing Member Trading Member Franchisee or Branches of Trading Member Trader Terminals Clients

12. Regional Vs. National Exchanges There are basically two kinds of Exchanges Regional Exchanges : These are mostly Single commodity Exchanges having an Open Outcry System where Trading is carried out in a Trading Pit and the participation is limited to a particular area only. There are 19 Regional Exchanges in India recognized by Forward Markets Commission like IPSTA, NBOT, ACE etc. National Exchanges : These are Multi-Commodity Exchanges providing an Electronic Online Trading & Risk Management System providing the nation wide connectivity and participation. There are 5 National Exchanges in India recognized by Forward Markets Commission viz NMCE, MCX, NCDEX, ICEX & ACE

13. 13 Exchange Landscape National Exchanges NMCE, NCDEX, MCX, ICEX & ACE 3 more online commodity derivative exchanges are in the pipeline. Demutualized & Online (ODIN & TWS) Pan India presence Multi-commodity platform Transparency Regular reporting and accuracy of information Uniform dissemination of information Regional Exchanges 17 Regional Exchanges (only 14 are active) Open Outcry/Online Regional presence 1-3 commodity trade Lack of Transparency Information asymmetry 13

14. Benefits of Online Trading in Commodity Futures  Wider Participation : Trading no more limited to a trading floor or specific region. Can be done from anywhere in the world sitting at office or home itself. Participation of diverse interests like Importers, Exporters, Growers, Brokers, Traders, etc., using an electronic trading system providing a fair, efficient and transparent commodities market.  VSAT / Leased Line/ Internet Based connectivity.  Convergence of all the offers and bids emanating from all over the country in a Single Electronic Order Book of the Exchange ensuring equal access to all intermediaries.

15. Benefits of Online Trading in Commodity Futures  Real time price discovery & trade data dissemination on National/International basis.  Mitigates the risk of defaults through various measures of Risk Management & Online/Offline Market surveillance.  Delivery backed by sound & reliable warehouse receipt system ensuring the quantity/quality of the commodity delivered.

16. The farmers can derive benefit from these markets Farmers can be benefited by Futures Markets by using price signals for better bargaining capacity This requires creation of awareness and dissemination of price information  Awareness Programme  Media  Ticker Boards

17. The farmers can derive benefit from these markets Utilization of knowledge and information-  For taking pre sowing and post sowing decisions  For finalizing marketing strategy after harvest Direct Participation in the Market –  For selling the produce  For pure hedging

18. Economic Benefits to other Stake Holders 1.Exporters: Hedge against an increase in the price of their inputs at the time of meeting export commitments. 2.Stockiest: Hedge the value of his inventory against a price decline 3.Processors: Hedge against an increase in the price of raw material

19. Other Benefits 1.Price Stabilization 2.Auto Regulation of consumption and storage 3.Financing of Marketing Operations 4.Value addition to farmers.

20. 1. Price Stabilization If futures prices >> spot prices selling in futures and buying in spot If futures prices << spot prices buying in futures and selling in spot Both the processes reduce gap between spot and future Therefore gap between prices in season and off season reduces.

21. 2. Auto Regulation of consumption and storage High future prices indicate less availability of commodity in future. Therefore tendency to consume less and store more Low future prices indicate more availability of commodity in future. Therefore tendency to consume more and store less This process avoids over/under consumption and unnecessary hoarding of commodity

22. 3. Financing of the Marketing Operations Credit needs of primary producers are high and access to credit is tough. Farmer forced to sell in spot because of immediate need of money. If waits for higher prices then has to take finance on the basis of warehouse receipt but there is substantial haircut. Futures Contracts may provide better security to Bank. Federal Bank has started financing on the basis of futures contracts in Kerala.

23. 4. Value Addition to Farmer Farmers go for sale of ungraded produce. Emphasis on grading in futures market increasing awareness about grading Grading may increase overall realization. Some share of value addition goes to farmer

24. 24 NMCE 24

25. 25 The Company Company: National Multi commodities Exchange of India Ltd (NMCE) Inception: 2002 Head Office: Ahmedabad Branch Offices: Delhi, Mumbai, Kolkata, Bangalore, Cochin 25

26. 26 Promoters Central Warehousing Corporation (CWC) Gujarat State Agricultural Marketing Board (GSAMB) National Institute of Agricultural Marketing (NIAM) Reliance Money Punjab National Bank Gujarat Agro-Industries Corporation Limited (GAICL), National Agricultural Cooperative Marketing Federation of India Neptune Overseas Ltd (NOL) 26

27. NMCE was the first to…  Started at Online Multi Commodity exchange in India  Get the ‘National’ Status  Introduce Online Trading and Settlement Software using state-of- the-art technology capable of national reach  Be a Demutualised Commodity Exchange  Introduce futures trading in Rubber in India  Start Cardamom futures in the world  Introduce Warehouse Receipt System for deliveries in graded and standardized commodities.  Establish Trade Guarantee Fund – Guaranteed settlement by assuming counter-party risks.  Initiate and implement Price Dissemination project by installing Price Ticker boards in various APMC of Gujarat. 27

28. Products traded at NMCE Agri Products Non-Agri Products 1.Rubber 2.Pepper 3.Cardamom 4.Castor Seed 5.Turmeric 6.Cumin Seed 7.Isabgul seed 8.Menthol Crystal 9.Rape Mustard Seed 10.Guar Seed 11.Guar Gum 12.Soyoil 13.Kapas 14.Copra 15.Coffee REP bulk 16.Coffee Arabica 17.Raw Jute 18.Sacking 19.Aluminium 20.Copper 21.Lead 22.Nickel 23.Tin 24.Zinc 25.Gold 26.Kilo Gold 27.Silver

29. Sample Contract Specification for PEPPER Contract

30. Various terminologies used in Commodity Futures Trading ASSET Asset is the actual commodity which is traded (Example : Cardamom, Rubber, Pepper, Castor Seed) PRODUCT Each Asset can have various derivative products (Example : Cardamom Futures, Cardamom Options, Cardamom Spot, Cardamom Weekly) SERIES Each Futures Product has various contracts of different maturity (Example : Cardamom Futures – Jan 05, Cardamom Futures- Feb 05, Cardamom Futures – Mar 05, Cardamom Futures Apr 05 Cardamom Options Call Feb 300, Cardamom Options Put Feb 300, Cardamom Options Call Feb 325, Cardamom Options Put Feb 325, Cardamom Options Call Mar 325, Cardamom Options Put Mar 325, Cardamom Options Call Mar 350, Cardamom Options Put Mar 350)

31. Various terminologies used in Commodity Futures Trading Before commencement of Futures Trading in any Commodity, the exchange issues the Contract Specifications for the Commodity. The Contract Specification contains the following details for standardization Asset Code – CDM (Cardamom) Product Code – CARDAMF (Cardamom Futures) Series Code – CDMAPR2005 (Cardamom Futures April 05 Contract) Trading Unit – The quantity for each trade unit (100 Kg in case of cardamom, 1 ton in case of Rubber & Pepper etc.) Price Quotation Factor – The quantity for which the price is commonly quoted in the market and on the trading screen (1 Kg in case of cardamom, 100 Kg in case of Rubber & Pepper etc.) Note :Though the trade done is for 1 unit of cardamom I.e. 100 Kg, the price is still quoted for 1 Kg only. Trading system internally multiplies it with 100 at the time of trade to derive value of 1 trading unit in case of cardamom. Multiple Factor – In the above example 100 is called the Multiple Factor. Other specifications include Delivery Centre, Quality specification, Maturity date, Trade timings etc.

32. Short Position- The party which sells the contract expecting the price to do down is said to hold a short position. Long Position – The party which buys the contract in the expectation that price will go up is said to hold a long position in the market. Open Interest -– The sum of all long or short futures contracts in one delivery month that have been entered into and not yet liquidated. Open Position –The difference between the open long contracts and the open short contracts held by a trader in any one commodity. Contango – It is a situation where the Far month Futures price is higher than a Near month Backwardation- It is a situation where the Near month Futures price is higher than Far month. Spread – This refers to the difference between the price of two futures contract of the same commodity. Various other terminologies used in Commodity Futures Trading

33. Arbitrage – It involves locking in a risk free profit by entering simultaneously into transactions in two or more markets or contracts of the same commodity having Spread. Tick Size – The smallest allowable increment of price movement for a contract Order Types –Limit order – It is an order to buy/sell at a specified price, or better price, at the time of execution. –Stop loss order – It is an order to buy/sell which appears on the Trading Screen only when the Last Trade price hits the Trigger price. This is used by the traders to arrest the maximum amount of loss within limits. –Market Order – No specific price is stated. The buy/sell order gets executed at the prevailing market price. Order Retention Period –GFD- It is good only for one day, the day the order is placed –GTD – It is good only for the specified number of days from the day the order is placed –GTC – It is an order to buy or sell the contract at a specified price and remains active until the order is filled in or cancelled by the client or the contract gets expired.

34. Various other terminologies used in Commodity Futures Trading Base Price – The Initial Opening price for the derivative contract introduced by the Exchange. This is the opening price for the first day of the contract. Sessions – There are various sessions in the system like Login Session – 9:30 AM to 10:00 AM – The Traders can login to server but cannot put any orders or trades. Trading Session – 10:00 AM to 10:00 PM – This is regular session for putting orders and trades. Client Code Modification Session – 5:00 PM to 5:15 PM – Traders can modify the wrongly entered Client Codes. Closing Session – 10:00 PM to 10:15 PM - For calculation of Daily Settlement Price / Close Price for various contracts. Margin Session – 10:15 PM to 10:30 PM - For calculation of MTM & IM on various contracts at Members & Client Level. Query Session : For downloading the various Files by Members like Order & Trade File VaR – Value at Risk - Initial margin is based on worst scenario loss to cover 99.9% VaR over one day horizon. SPAN – Standardized Portfolio Analysis of Risk : A technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatilities Pay-in & Payout - The debit & credit of various Member Accounts in the Clearing Bank for the purpose of MTM, IM & Delivery is called the Pay-in and Pay-out process. Clearing & Settlement – For all open positions information for delivery is sought from the members. The exchange matches delivery information and the settlement takes place as per the delivery and settlement schedule of the exchange

35. Delivery Mechanism NMCE’s Physical Delivery period is last 4 days before expiry date Members of the Exchange can not create any fresh position in the expiring contracts during this period. They can either square up their position or have to take or give delivery depending upon their open position on the Exchange; except as provided under the circular issued from time to time.

36. Steps to follow 1.Sellers and buyers have to convey intention on or before three days of the contract expiry date 2.The intentions are then matched and assigned by the Exchange with the corresponding buyers. As is the case universally, seller has freedom to tender delivery during the delivery period at any approved delivery centers. In other words, buyer cannot demand delivery at delivery center of his choice. When the seller gives intimation, a call is made to the corresponding buyer to whom the delivery is assigned by the Exchange. Delivery margin is collected from both the buyer and seller 3.After matching the open positions of relevant buyer and seller, the same is transferred from the system and settled at the closing price of the preceding day, so that mark to market (MTM) is not levied or paid to the member 4.Within three days from the position transfer, the buyer has to maintain the required funds in their clearing & settlement account while the seller has to tender the warehouse receipts to the exchange along with the computation of warehouse charges. On the 3rd day, the exchange makes pay-in & payout simultaneously after retaining the warehouse charges margin and sales tax margin from the buyer and seller respectively 5.After the completion of pay-in and payout, duly endorsed warehouse receipts are sent to the buyer immediately 6.Settlement of warehouse charges, margins and sales tax margins take place soon after receipt of relevant documents (copies of sales bill, sales tax form) from the member

37. Delivery Mechanism

38. Trading Entities of Commodity Futures Trading Trading cum Clearing Members (TCM) : The members who can trade and can even do clearing & settlement for their own trades including the trades of their Trading members, Traders etc. Institutional / Professional Clearing Members (ICM / PCM) : The members who cannot trade but can do clearing & settlement on behalf of other Trading cum Clearing members, Trading Members, Traders etc. Trading Members (TM) : The members who can only trade but have to do their clearing & settlement through some TCM or ICM. Traders : They are the various branches or franchisee of TCM, ICM or TM. Clients : They are the actual producers, consumers, importers, exporters etc.

39. Network & Online Operations of NMCE Central Trading Server Trading Terminals V-Sat Service Provider INTERNET

40. Software Application Distribution

41. Trader Workstation Application

44. Electronic Order Book Cardamom Futures Mar 12 Contract Buy Price Buy QtySell PriceSell Qty 550.50 25 551.00 10 549.25 10 551.50 15 549.00 15 552.25 20 548.50 15 553.00 25 547.00 30 554.00 15 In above example., the 550.50 is the Best Buy Price & 551.00 is the Best Sell Price available in the order book This is displayed on the Trading screen against each series. Similarly the order book displays best 5 bids & offers for each series.

45. Buying / Selling Futures Contracts Example : Today : 9th October 2011 Spot Price of Cardamom : Rs. 500/- per kg Futures Price for Jan 2012 – Rs. 515/- Futures Price for Feb 2012 – Rs. 519/- Futures Price for Mar 2012 – Rs. 525/-

46. Buying / Selling Futures Contracts Example : On 9th October 2011 Suresh sells 1unit in Cardamom March 2012 contract to Bhavesh @ Rs. 525/- per Kg. Entering into above contract means Suresh has to deliver 1 unit i.e. 100 Kg of Cardamom to Bhavesh on 15th March 2012 @ Rs 525/-per kg 15th March 2012 is called the Maturity date of Contract. Suresh may square up his sell position by buying the same Qty before 5 days of Maturity date i.e. Upto 10th March 2012.

47. Buyer Default in Forward Contract Example : Continued..... On 15th March 2012, say Spot Price of Cardamom is Rs. 515/- per kg. As per the contract entered on 9th October 2011, Suresh can still sell 1 Qty of Cardamom to Bhavesh @ Rs. 525/- per kg. Thus Suresh makes a profit of Rs. 10/- per kg by selling @ Rs. 525/- kg. Bhavesh makes a loss of Rs. 10/- per kg by buying @ Rs. 525/- kg. In such cases, if it is a Forward Contract the chances of default of Bhavesh (Buyer) are high. He may deny to take delivery @ Rs.525/- per kg.

48. Seller Default in Forward Contract Example : Continued..... On 15th March 2012, say Spot Price of Cardamom is Rs. 535/- per kg. As per the contract entered on 9th October 2011, Bhavesh can still buy 1Qty of Cardamom from Suresh @ Rs. 525/- per kg. Thus Suresh makes a loss of Rs. 10/- per kg by selling @ Rs. 525/- kg. Bhavesh makes a profit of Rs. 10/- per kg by buying @ Rs. 525/- kg. In such cases, if it is a Forward Contract the chances of default of Suresh (Seller) are high. He may deny to tender delivery @ Rs. 525/- kg.

49. Clearing

50. Introduction Most futures traded contracts do not lead to the actual physical delivery of the underlying asset. The settlement is done by closing out open positions, physical delivery or cash settlement. All these settlement functions are taken care of by Clearing & Settlement department. NMCE also maintains settlement guarantee fund. The settlement guarantee fund is intended primarily to guarantee completion of settlement up to the normal pay-out for trades executed in the regular market

51. Clearing Clearing of trades that take place on an exchange happens through the exchange clearing department. Clearing of trades is a system by which exchanges guarantee the faithful compliance of all trade commitments undertaken on the trading floor or electronically over the electronic trading systems. The main task of the clearing department is to keep track of all the transactions that take place during a day so that the net position of each of its members can be calculated. It guarantees the performance of the parties to each transaction. Typically it is responsible for the following: 1.Effective timely settlement. 2.Trade registration and follow up. 3.Control of the evolution of open interest. 4.Financial clearing of the payment flow. 5.Physical settlement (by delivery) or financial settlement (by price difference) of contracts. 6.Administration of financial guarantees demanded by the participants. The clearing house has a number of members, who are mostly financial institutions responsible for the clearing and settlement of commodities traded on the exchange. The margin accounts for the clearing house members are adjusted for gains and losses at the end of each day (in the same way as the individual traders keep margin accounts with the broker).

52. Clearing Banks

53. Risk Management in Online Trading In Forward contracts as show in the previous slide, the contracts are bilateral & mutual and therefore vulnerable to counter party defaults. To overcome such defaults taking place on final settlement date in Forward Contracts, the Futures contracts in an Online Exchange are protected by strict Upfront Margining & Mark to Market Margins. Online exchanges take daily margins like Initial Margin (IM) & MTM (Mark to Market Margin) for Risk Mitigation

54. Daily Settlement in Online Trading Example : On 9th October 2011, Suresh sells 1 Qty in Cardamom March 2012 contract @ Rs. 525/- to Bhavesh. (Mark To Market Margin) DateClose PriceSureshBhavesh (Seller)(Buyer) 9th Oct 2011Rs. 527/-- Rs. 2/-+ Rs. 2/- 11th Oct 2011Rs. 526/-+ Re. 1/- - Re 1/- 12th Oct 2011Rs. 529/-- Rs 3/-+ Rs 3/- 13th Oct 2011Rs. 530/-- Re.1/-+ Re.1/- 14th Oct 2011Rs. 528/- + Rs.2/-- Rs. 2/- 15th Mar 2012Rs. 535/--Rs.2/-+Rs.2/- Total-Rs.10/-+Rs.10/- The daily MTM is credited/debited to/from Bank account using online banking.

55. Final Settlement in Online Trading If Seller is not defaulting 15th March 2012 – Price Rs. 535/- per kg (Contract Price entered on 9th Oct 2011 : Rs.525/- per kg) Bhavesh (Buyer) has got Rs. 10/- as MTM from the exchange. Suresh (Seller) has paid Rs. 10/- as MTM to the exchange. On 15th March 2012 -> If Suresh (Seller) tenders delivery, he would be paid Rs. 535/- per kg. i.e. Closing price of 15th March 2012. Rs 10/- more than contract price - which he had paid to the exchange as MTM. Bhavesh (Buyer) has to pay Rs. 535/- per kg and take delivery. Rs. 10/- more than contract price - which he got from the exchange as MTM.

56. Final Settlement in Online Trading If Seller is defaulting 15th March 2012 – Price Rs. 535/- per kg (Contract Price : Rs.525/- per kg) Bhavesh (Buyer) has got Rs. 10/- as MTM from the exchange. Suresh (Seller) has paid Rs. 10/- as MTM to the exchange. On 15th March 2005 -> If Suresh (Seller) fails to tender delivery, Bhavesh (Buyer) can buy from ready market @ Rs. 535/- per kg. Rs. 10/- more than contract price, which he already got from the exchange as MTM.

57. Risk Management & Settlement in Online Trading Thus, Final Settlement Risk is covered using Daily MTM. To cover the daily risk i.e. Default in MTM, Exchange takes Initial Margin (IM). Initial Margin is charged upfront and is deducted from the deposits of the Member. The initial margin percentage keeps on changing depending upon the market volatility. Daily Cap : The daily cap is defined on each series by the exchange to control the price fluctuations. It is the maximum difference between the previous close price and today’s close price of the series. For maximum risk management, the minimum IM percentage is kept more than Daily Cap. (Ex : Min IM –> 4%, Daily Cap –> 3%)

58. Risk Management & Settlement in Online Trading Trading cum Clearing Member is responsible for all above Daily & Final Settlement as well as Risk Management on behalf on his clients, Trading Members, Franchisee & Branches.

59. Margining System – Financial safeguards What are Margins? –Margin in the futures industry, is a financial guarantee by both the buyers and sellers of futures contracts and sellers of option contracts, to ensure fulfillment of contract obligation. Margins are mechanism for managing the risk that the trades that customers make pose to the markets and to firms. There are three levels of Margins –Initial Margin –Mark-to-Market margin –Additional margin in volatile times

60. Initial Margin Initial margin is based on worst scenario loss to cover 99.9% VaR over one day horizon. Daily volatility of the futures prices is considered for the computation of VaR. Initial margins are collected upfront from the members. All the positions of the members and the margins are monitored by the Exchange on a real time basis.

61. Mark-to-Market Margin All open positions in any contract are open to price risk [Open positions are defined as positions which have not been squared off.] Downward price movements will mean losses for clients with long open positions. Upward price movement will mean losses for clients with short open positions. MTM profit is debited from one member and credited to another member However if one member defaults the Exchange will have to pay-up the counter party. For calculation of MTM, all the open positions are marked to the Daily Settlement Price.

62. Daily Settlement Price for MTM Daily settlement price is arrived based on Average trade price during last 30 minutes of trade. If number of trades are less, then the Average Trade Price for the whole day is considered to arrive at close price. If there are no trade volume in any particular series, the close price is arrived based on cost-of-carry model and backwardation model.

63. Close Price Calculation for various Contracts The Close Price Calculation for the various contracts listed at NMCE is fully automated and uses the below algorithm / steps. For calculation of Close Price for a particular Contract / Series, the Trading System takes Weighted Average Price of all the trades executed during last 30 minutes of the Trading Session in that particular Contract / Series, provided there are minimum 5 Trades in last 30 minutes for that particular contract. If minimum 5 Trades are not found for that particular Contract during last 30 minutes of the Trading Session, the system goes back till the time it finds 5 Trades in that particular contract, and then takes the Weighted Average Price of last 5 Trades

64. Close Price Calculation for various Contracts If minimum 5 Trades are not found for that particular Contract during the complete Trading Session, the system takes the Weighted Average Price of all the Trades executed in that particular contract during the whole day If no trades are found for that particular Contract during the whole day, the system adopts Cost of Carry Model for calculation of Contract Close Price for the day. Using the Cost of Carry model, the system calculates the Close Price for the Futures Contract based on the Spot Price, Interest Rate & Remaining days for the expiry of the contract i.e. based on Time value of the money.

65. Close Price Calculation for various Contracts The Cost of Carry Model has been adopted from the Equity market, where Futures price is mostly higher than the Spot Price. However, in Commodity Markets, the Futures price may not be always higher than the Spot Price. For example, the Commodity Prices are higher during the lean season ; whereas the prices drop on arrival of new Crop.The Cost of Carry Model has been adopted from the Equity market, where Futures price is mostly higher than the Spot Price. However, in Commodity Markets, the Futures price may not be always higher than the Spot Price. For example, the Commodity Prices are higher during the lean season ; whereas the prices drop on arrival of new Crop. The Close Price calculated, using Cost of Carry model for the Futures Contracts which are not traded during the whole day, would be always higher than the Spot Price. However, when the Futures Contracts are running in Backwardation instead of Contango, the Cost of Carry model fails in deriving the realistic Close Price.The Close Price calculated, using Cost of Carry model for the Futures Contracts which are not traded during the whole day, would be always higher than the Spot Price. However, when the Futures Contracts are running in Backwardation instead of Contango, the Cost of Carry model fails in deriving the realistic Close Price.

66. Close Price Calculation for various Contracts Therefore, in order to effectively handle such situations, when Cost of Carry Model fails to derive the realistic Close Price for a Futures Contract, the system provides for a Manual Override Option. The Market Monitoring & Surveillance team of the Exchange calculates the Futures Prices in such cases manually after considering the Futures Price for the similar contracts traded on other National Exchanges or Open outcry exchanges.

67. Thank You