commex commodity exchange and commodity futures

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VOL 20 NO 157 REGD NO DA 1589 | Dhaka, Tuesday, December 18 2012

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Commodity exchange and commodity futures

Published : Tuesday, 18 December 2012

M S Siddiqui concluding his two-part article on commodity exchange

A multilateral trading environment allows all stakeholders the same view of the

market and the same opportunity to trade at the same prices. A considerable volumeof trading takes place in the over-the-counter (OTC) market of a commodity

exchange, in which eligible parties enter into contracts directly, without using an

exchange.

On the other hand, a commodity futures is an agreement between two parties to buy

or sell a specified and standardised quantity of a commodity at a certain time in

future at a price agreed upon at the time of entering into the contract on the

commodity futures exchange.

Futures contracts are like forward contracts, but they are highly standardised,publicly traded and cleared through a clearing house. Whereas forward contracts

usually take place in the OTC, the futures contracts are traded on organised

exchanges such as Dojima Rice Exchange in Osaka, Japan established in 1710 and

the Chicago Produce Exchange established in 1874. The contracts are so

standardised that they can be substitutes for each other. This facilitates trading

because all traders know the contents of the identical contracts and the netting of

contracts bought and sold reduces margin requirements and counterparty risk. The

result is a greater trade volume and greater market liquidity. Liquidity, in turn,

improves the way the relevant market information is reflected on market prices-a

process known as the price discovery process.

A cash market involves the negotiation or trading of a physical commodity where

buyers and sellers agree to the specific terms of a contract. Cash markets often

consist of localised markets where local supply and demand factors dictate the

contract terms. Contract terms can be in many forms and the prices are usually

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quoted based upon a relevant futures contract month.

A futures market involves the trading of standardised contractual agreements known

as futures contracts, which are bought and sold under the terms of a recognised

commodity exchange. These contracts may be trades in an open, auction-type

environment with bids and offers cried out by the participants or they may be tradedin an electronic form.

On the other hand, a futures contract is an obligation between a buyer and a seller to

make or take delivery of a set quantity of a commodity having a particular quality on

a specific future date and with delivery terms under set rules and regulations of the

commodity exchange.

The exchange system of trading in commodities is of an ancient origin. Trading in

organised markets existed in China as early as in 1200 B.C., and earlier markets in

India, Saudi Arabia, and Egypt had some of the characteristics of exchange trading.As early as in the fourth century B.C., the city-state of Athens supervised its markets

to assure food supplies and to prevent manipulation of prices. In the modern era, a

commodity exchange is an association or a company or any other corporate body

organising futures trading in commodities.

Bangladesh has a cash market for agricultural commodities. Crops such as paddy,

red chili, and vegetables are either collected by farias or commission agents from the

producers and take the produce to nearby markets for selling it directly. Wholesalers

purchase it from rural markets through agents and send the produce to the

commission agents in big urban wholesale markets, or sell to processors. The fariasor commission agents thus earn a bad name in the society.

Farias are traders who buy directly from the growers and sell to other traders or to

the local markets. They are mostly small-scale seasonal floating traders, and some

combine farming with trading. Paikars are small wholesalers who collect products

from small markets and send them to big markets, or sell to nearby aratdars (big

stockist and wholesalers). Beparies are rural assemblers who collect the produce

from growers or local markets and export to wholesale-cum retail markets or distant

urban wholesale markets.

A commodity futures market is based on inputs regarding specific market

information, the demand and supply equilibrium, weather forecasts, expert views

and comments, inflation rates, government policies, market dynamics, hopes and

fears while buyers and sellers conduct trading at futures exchanges. This is

transformed into a continuous price discovery mechanism.

commex commodity exchange and commodity futures

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