Frequently Asked Questions (FAQ)
Basic FAQ’s
Who can trade in this market?
Any person above 18 years can trade as a client under us. There is no hard and fast rule regarding the qualification and experience to trade with us. Simply, the client needs to have a bank account in our banking partners.
How much do I need to invest?
You are to invest the Initial Margin for the particular commodity that you are about to trade for. This is the competitive advantage of Commodity Market that means you can take position to Buy or Sell with the initial margin which is very less than the actual price of the underlying assets. This is the leverage that you can enjoy.
Let us be more clear from an example below:
If you want to invest in Small Gold then, you can invest only 10,000 NPR and commission for Small Gold whereas the contract size is 100 gms of Gold and the price quoted for the contract is also per 100 gms of Gold. Thus, you can see from the small amount of money you can trade for the 100 gms of Gold which is the leverage that you can enjoy in the Commodity Market.
In which Bank do I have to open account as client?
Till date we have four banking partners. They are Laxmi Bank , Bank of Kathmandu Lumbini, Nepal Investment Bank and Century Commercial Bank. So, you can open bank account in any one of these.
What are the commodities that I can trade for?
Currently, there are 18 commodities that you can trade in MEX platform namely, Wheat, Corn, Soybean, Soybean Oil, Cotton, Coffee, Sugar, Cocoa, Crude Oil, Brent Crude Oil, Natural Gas, Heating Oil, Gold, Silver, Platinum, Palladium, Copper and delivery Silver.
What is the daily minimum return that I can earn from my investment?
Actually, the return for any investment will depend on the analysis that you do. There are basically two types of analysis that you need to do (Fundamental and Technical analysis).
What is the commission that you charge?
The lowest commission slab is 6 and the highest commission slab is 1200.
Do you provide training to new clients regarding the fundamental and technical analysis?
Yes, we provide training to our Clearing Member / Market Maker, Broker Member and they will further educate their clients. But we are also providing guest lectures, talk programs to the client level upon their request. Besides, we also provide Customer Education Kit and client handbook to our customers to educate and make them familiar with MEX policies and practices.
How can I associate with MEX?
In MEX you can introduce yourself as a client, for this you need to contact broker/sub broker/Clearing member of MEX available in market.
And if you want to be our broker /sub broker you need to contact the Clearing member of your choice.
If you want to be our Clearing Member/Market Maker you need to fulfill certain criteria for this you have to contact MEX.
Do you think Nepal gets benefited from this sector?
Nepal is a small country with small economy so any changes in the economy will hamper our economy. And as we can see today service sector is the most important sector of our economy around 45% of the economy is services sector and in service sector also banking and financial institution plays a vital role. And commodity market is an emerging sector in financial sector so we can say that Commodity Market will definitely benefit our country.
What is the fee and deposit structure for various categories of Membership of MEX?
The details are available at MEX Membership Rules and Notification under Rules and Bye Laws at our website www.mexnepal.com.
What should be the main objective clause in the Memorandum & Articles of Association to trade in trading in commodity derivatives?
"As an intermediary/ a Broker/a Member, to trade on the Commodity and Securities Exchange in national and international market".
How would contracts settle?
Client or Broker whoever enters the position, will be settled by the clearing and settlement department by matching with the intentions provided by the Market Makers.
What would be the settlement period?
Settlement period differs from one commodity to another commodity. Some of the Commodity has monthly contract expiration time where as some commodity has up to three months of period, within three months of contract there should be cash settlement one month prior to the final settlement.
Is there any delivery mechanism in MEX platform?
Yes, the Exchange has introduced a full-fledged delivery mechanism for the first time in the country in the product- Silver.
Why T.D.S is deducted? (Capital Gain Tax)
Whenever any specified type of income arises to anyone, the Income-tax Act enjoins on the payer of such income to deduct a stipulated percentage of such income by way of Income-tax and pay only the balance amount to the recipient of such income.
Who is the regulator for Commodity Exchanges in Nepal?
Securities Board of Nepal (SEBON) is the regulator for the commodity exchanges in Nepal.
How professionals predict prices in futures?
Basically there are two methods used for predicting futures prices. They are fundamental analysis and technical analysis.
The fundamental analysis is concerned with basic supply and demand information, such as, weather patterns, carryover supplies, relevant policies of the Government and agricultural reports. Technical analysis includes analysis of movement of prices in the past. Many participants use fundamental analysis to determine the direction of the market, and technical analysis to time their entry and exist.
How can a client file complain against any issues while trading?
If the client has any issue while trading they can communicate to their respective Clearing Member through live chat facility in their Client Console.
What is the minimum system requirement for MEX platform?
The minimum system requirements for MEX platform are:
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Windows 8If a client needs to complain against their broker or CM what shall he do?
If a client has any complain against his/her broker or CM then s/he can forward it to the exchange through registered mail or phone call. How can we download the demo version of MEX platform? For the demo version of MEX platform, you have to visit our Clearing Member website. Demo Link: http://www.hclearcorp.com/webpages/download_demo.html
How does client's fund gets updated in trading platform?
The client needs to deposit the fund in the segregate account of his/her respective CM with the Narration [Client Code, Client Name].
What are the documents required for CM/MM to open bank account?
The required documents for CM/MM to open account are as follows:
- Power of Attorney
- Board Minute
- Recommendation Letter
How many accounts do Market Maker needs to open?
Market Maker has to open three accounts:
- MM Trading Account
- Member deposit Account [Collateral account]
- Operational Account
What is the procedure if the client wants to change the bank?
The client needs to fill Client Consent Form for this and needs to submit the form to his/her Clearing Member for further process.
Is there any limitation for profit?
No, there is no any limitation for profits. However, the profits are all based on the fundamental and technical analysis that you make. If your analysis is correct then the profits will be in your favor.
Do the broker and clearing member have same kind of rights?
No, both of our members are two different entities so they do not have same kind of rights.
Do you have brokers outside valley as well?
Yes, we do have members outside valley as well. We are not focusing to the capital city only. We do have members at Birgunj, Pokhara, Bhairhawa, Nepalgunj, Butwal, Morang, Sunsari, Chitwan, Dhangadi and Janakpur.
What is the process to withdraw profits?
To withdraw profits, you can do it from the Client Console directly for 5 times a day and if you need to withdraw more than 5 times a day then you can go for the offline support.
What are the various categories of membership offered by Mercantile Exchange Nepal Ltd (MEX)?
The membership of the Exchange shall be open to all market participants and depending upon their specific needs, we offer various categories of membership viz.
Institutional Clearing Member (CM)
Institutional Market Maker (MM)
What is the role of an Exchange?
An Exchange designs a contract, which alone would be traded on the Exchange. The contract is not capable of being modified by participants, i.e., it is standardized. An exchange provides trading platform with global standards to enable Nepalese investors to diversity their investment portfolio, have overall supervision, observation, super surveillance on the market and its participants.
Who can act as a Clearing Member (CM)?
Any institution, whose objectives in the Memorandum of Association and/or its constitution permits such institution to involve in trading in instruments, and who possess the minimum net worth prescribed by the Exchange, necessary infrastructure to effectively discharge its clearing and trading activities including experienced professionals and undertakes to comply with the financial and other requirements as may be specified by the Exchange from time to time shall apply for Clearing Membership.
Who can act as a Market Maker (MM)?
Market Maker can be defined as any institution, i.e., independent or appointed by CM, registered with the Exchange who quotes Bid and Ask prices for various contracts simultaneously with quantity within the parameters set by Exchange to effectively discharge market making activities. Market Makers need to comply with the financial and other requirements as may be specified by the Exchange from time to time.
Is there any difference between Clearing Member (CM) and Market Maker (MM)?
Yes, Clearing Member by default will also act as Market Maker and needs to be registered as an institution.
Who is responsible to introduce Brokers?
Clearing Member (CM) will be responsible to introduce a Broker. However, a Broker is required to register under Exchange as well.
Who is responsible to introduce a Sub-Broker?
Clearing Member (CM) or Broker, i.e., an Institutional Broker is permitted to introduce and register Sub-Brokers with the prior permission of the Clearing Member (CM). However Individual Brokers are not permitted to register any Sub-Broker under its category of registration.
Who is responsible to introduce Clients?
Clearing Members are responsible to introduce Brokers or Sub Brokers, who can then introduce Clients further. Moreover, Clearing Member also can introduce clients directly.
Are Market Makers (MMs) eligible to introduce Brokers/Sub Brokers/Clients?
No, Market Makers are not eligible to introduce Brokers/Sub Brokers/Clients.
Can Exchange introduce new Brokers?
No, Exchange is not allowed to introduce any new Brokers.
What is the role of a Broker?
A Broker act as a market facilitator to traders, providing advisory services to clients, training and customer support etc. A Broker can trade under his/her own account and can introduce sub-brokers, traders/clients in the market as well.
Is Individual Brokership allowed by the Exchange?
No, only institutional Brokership is allowed.
Are Brokers required to be registered under Exchange?
Yes, Brokers need to be registered under Exchange as well. However, Brokers shall do an agreement with a particular Clearing Member, who has introduced him/her for brokership.
Can any individual be registered as Market Maker (MM)?
No, only institutions are allowed to register as a Market Maker given all the requirements, prescribed by an Exchange for Market Maker is satisfied.
Who will appoint Clearing Member (CM)/Market Maker (MM)?
An Exchange is responsible to appoint Clearing Member (CM)/Market Maker (MM). However, Clearing Member can also appoint Market Maker.
What should be the minimum age of an applicant to register as a client?
S/he should be at least 18 or above to apply as an individual client.
Can any individual having joint bank account apply to register as a client?
Yes, individuals having joint bank account can apply to register as a client, the additional document to be submitted is the letter authorizing one of the client to receive user and trade. There is a different format of Client Registration Form for these types of individuals.
What if a married woman is using her husband's surname while filling Client Registration Form and it doesn't match with the name mentioned in her citizenship card or bank statement?
If this is the case, she needs to provide marriage certificate in order to verify her name with the one mentioned in CRF and Bank records.
What are the other additional documents for a Non-Nepalese applicant to register as a client?
Following are the additional documents to be submitted by a Non- Nepalese applicant:
Proof of Identity issued by his/her country (citizenship card, registration card, PAN card, Ration card, Voter's I.D etc)
Passport of the applicant.
Registration card provided by the embassy in Nepal. (If any)
Can electricity or telephone bills or any utility bills be collected as an address proof for registering as a client?
Yes, it can be collected but such bills should not be of more than three months older.
Do Clients need to provide PAN certificate for registering as a client?
According to the law of land, any individual having yearly income of NPR 1,60,000 is required to register under PAN. But it's not a mandatory document for registering as a client.
Can institutions apply for registering as a client?
Yes, individuals as well as institutions can apply for registering as a client.
What can be done for the person whose one hand is injured and can't provide one of the thumb impressions?
If applicant can't provide any of the thumb print with some reason, he needs to provide a letter mentioning detail of his left/right hand operation and same should be signed by the authorized person of his concerned Broker and also provide the copy of operation papers from the doctor.
What if in the citizenship card of an individual, the date of birth (DOB) mentioned is in-complete?
If the applicant is having ID with incomplete DOB following methods can be used:
Applicant can provide other supporting documents like: passport, driving license, in which his/her DOB is mentioned.
If only the year is mentioned in his/her ID, like 2044 BS with no month and date mentioned, then s/he can mention the DOB as 01/01/2044. This is legally defined and if anything is mentioned in passport and other government issued documents then the same should be mentioned.
In the case of green saving account, what documents can be provided for proof of bank account number?
If bank statement is provided it is fine or else the applicant can get letter from Bank stating his/her bank account number and other details.
Can individual holding payroll account (salary account) apply for registering as a client?
Yes, they can apply and it's their responsibility to inform the exchange during the close down of their payroll account.
Are foreigners [residing out of Nepal] allowed to register as client or not?
Yes, they are allowed to register as client. They need to fulfill all the criteria required to be a client.
Can already registered client transfer his client code to another person?
No. Once a person is allotted with a particular client code, he can't transfer his code to some other person. The client code assigned must be used only by that particular client.
What is a Derivative contract?
Each commodity is different. There are even different delivery months of the same commodity. Understanding the futures contract specifications is at the heart of knowing the rules that govern trading a commodity futures contract, as well as the price movement value of each commodity. Trading can be done on futures contracts based on specification of quality, quantity, and price, trading procedures, delivery procedures and settlement mechanism. This comes all together as contract specification.
What are standardized contracts?
Futures contracts are standardized. In other words, the parties to the contracts do not decide the terms of futures contracts; but they merely accept terms of contracts standardized by the Exchange.
Is delivery mandatory in futures/spot contract trading?
No, the delivery is not always mandatory in the futures contract trading. In the international scenario, the clients are given two choices- they can either choose to take the delivery of the contract product or they can go ahead with the cash settlement.
In the case of Nepal, physical delivery depends upon the contracts that traders are trading. As per the current situation, MEX has introduced DSILVER contracts with compulsory physical delivery whereas other contracts are cash settled as infrastructure and legal provision is lacking.
What is a futures contract?
Futures Contract is specie of forward contract. Futures are exchange - traded contracts to sell or buy standardized financial instruments or physical commodities for delivery on a specified future date at an agreed price. Futures contracts are used generally for protecting against rich of adverse price fluctuation (hedging). As the terms of the contracts are standardized, these are generally not used for merchandizing propose.
What are the commodities suitable for futures trading?
All the commodities are not suitable for futures trading and for conducting futures trading. For being suitable for futures trading the market for commodity should be competitive, i.e., there should be large demand for and supply of the commodity - no individual or group of persons acting in concern should be in a position to influence the demand or supply, and consequently the price substantially. There should be fluctuations in price. The market for the commodity should be free from substantial government control. The commodity should have long shelf-life and be capable of standardization and gradation.
How are futures prices determined?
Futures prices evolve from the interaction of bids and offers emanating from all over the country - which converge in the trading floor or the trading engine. The bid and offer prices are based on the expectations of prices on the maturity date.
How is it possible to sell, when one doesn't own commodity?
One doesn't need to have the physical commodity or own a contract for the commodity to enter into a sale contract in futures market. It is simply agreeing to sell the physical commodity at a later date or selling short. It is possible to repurchase the contract before the maturity, thereby dispensing with delivery of goods.
What is long position?
In simple terms, long position is a buy position of a commodity.
What is short position?
Short position is a sell position of a commodity.
What is bull spread (futures)?
In most commodities and financial derivatives market, the term refers to buying contracts maturing in nearby month, and selling the deferred month contracts, to profit from the wide spread which is larger than the cost of carry.
What is bear spread (futures)?
In most of commodities and financial derivatives market, the term refers to selling the nearby contract month, and buying the distant contract, to profit from saving in the cost of carry.
What are the trading hours?
Trading hours take place on all days of the week (except Sundays and holidays declared by the Exchange).
What is a Spot contract?
A Spot contract is an agreement between two parties to buy or sell a specified quantity and defined quality of a commodity at a certain time as specified in the contract. The spot contract is of one day duration and the open position at the end of the trading session results into the compulsory delivery.
What is the benefit of Spot trading in commodities?
The biggest advantage of commodities trading in spot exchange is to mitigate the counter party risk and the quality risk of the commodities traded in the physical market. Exchange also provides the quality certification, grading and warehousing facilities for the commodities to be traded on the Exchange. Exchange is also issuing the Warehouse Receipt (WR) for the depositor which can be used for warehouse receipt financing from the banks.
What happens if an open position of a spot contract is not squared off (closed out) before the end of the trading day?
If an open position of a spot contract is not closed out on or before the end of the trading day, depending on the long position, the trader will have to take/give delivery of the underlying commodity respectively. It will come to effect as per the settlement mode mentioned in the position.
What do you understand by a contract specification?
A contract specification is a document, which provides detailed guidelines and parameters of any relevant commodity traded on the exchange. The contract ensures the standards of commodity spot through various parameters such as trading details, contract duration or expiry date, quality parameters, delivery mode and its details.
It includes every possible detail for the successful execution of the trade conducted on the exchange. These include trading lot, price quote, order size, tick size, limits of daily price, margin and open positions, delivery centers, settlement price and procedure, tender/delivery period, taxation, legal obligation, etc.
What is the life of a commodity spot contract?
The life of a commodity spot contract is the period when the contract will be available for trading.
Who can trade on commodity exchanges?
Commodity exchanges have a membership framework. Members of the exchange and registered, approved/ authorized users (i.e. clients) of the members can trade on commodity exchanges.
What is a Market Order?
Market Order is an order initiated in the current market price.
What is a Limit Order?
It is a contingent order placed by a trader.
Buy Limit: The order which can be executed at current or below the ongoing market price.
Sell Limit:The order which can be executed at current or above the ongoing market price.
What is a Stop Order?
It is also a contingent order placed by a trader.
Buy Stop: The order which can be executed at current or above the ongoing market price.
Sell Stop: The order which can be executed at current or below the ongoing market price.
What is "Trade Ticket"?
Trade Ticket is a window to facilitate the trade for the clients. It contains the details on the type of products, its order types, validity, time in-force, market depth, etc.
What is Validity?
Validity is the duration of a particular contract.
What is a "Regular" validity?
The position that can be settled at any time prior to expiry of the contracts represents Regular positions or validity.
What is an "Intraday" validity?
The contracts or positions which are valid only during a day's trading period, i.e., prior to a single day's MTM.
What is a Market Depth?
In MEX Trading platform, the market depth shows the best five bid and offer prices.
What would be the settlement period?
All contracts settling in cash i.e. MTM would be settled on the following working day after the contract expiry date. The exact settlement day would be specified for each commodity contract. Each day, after MTM, profit is transferred from the clearing house account to brokers' account which ultimately goes to clients' account and then the loss amount is transferred to clearing house account from the operational account of clients.
What is the purpose of collecting margin?
The purpose of collecting margin money by the exchange is to avoid the counter party risk of defaulting by its members or their clients in fulfilling their obligations. It is part of the risk management system.
What is cash settlement?
It is a process for performing a futures contract by payment of money difference rather than by delivering the physical commodity or instrument representing such physical commodity (like, warehouse receipt).
What is settlement price?
The settlement price is the price at which all the outstanding trades are settled, i.e., profits or losses, if any, are paid. The method of fixing Settlement price is prescribed in the Bye laws of the exchanges; normally it is a weighted average of prices of transactions both in spot and futures market during specified period.
Can one give delivery against futures/spot contract?
No, an individual cannot provide delivery against the traded contracts. However, in the case of DSILVER contracts, the banking partner provides silver delivery.
Advanced FAQ’sWho can be a Sub Broker/AE?
Sub Brokers can be an Individual or an Institution.
What are the criteria to become an AE?
S/he should fulfill any one of the below mentioned criteria:
S/he must be a bachelor's degree holder.
S/he must have a trading experience of the exchanges registered in Nepal or abroad exchanges.
S/he must have passed "MEX Certified Derivative Basic [MCDB]"
S/he can give AE examination
What should be the minimum age of an applicant to register as a Sub Broker/ AE?
S/he should be at least 21 or above to apply for a Sub Broker/AE.
Can already registered Sub Broker/AE become a client?
Yes, s/he is allowed to register as a client but s/he cannot be client under himself/herself (AE).
Whether Sub Broker/AE is allowed to trade on behalf of the clients registered under him?
There are 5 rights for the use of trading console of the clients by a Sub Broker:
Trade Right to trade and access client statement
CloseOnly Right to close the open position of the client, set limit/stop against client's open position and also cancel the contingent orders placed by client.
ViewTrade Right to view the trades executed by the client and client statement [Sub Broker cant place orders for client]
ViewMarket Right to view the trades executed by the client and client statement [Sub Broker cant place orders for client]
None No right to trade or access client statement/summary
Can already registered Sub Broker/AE transfer his AE code to another person?
No. Once a person is allotted with a particular AE code, he can't transfer that code to some other person.
Who can register as a Broker?
Broker can be any institution who fulfills the norms prescribed by the Exchange.
Can a registered broker participate in trading?
Registered Brokers, can participate in trading by registering itself as a client.
Should Broker be registered with Exchange as well?
Yes, Brokers should get registered with the Exchange by filling the form available in MEX website for registration.
Do Brokers need to open any Bank accounts?
Yes, they are required to open operational a/c in the designated bank as prescribed by the Exchange. This account shall be used to transfer the commission.
Who can be a Market Maker?
Any Institution who possesses adequate financial resources and credit to assume the responsibilities required for Market Maker Membership
Who can be a Clearing Member?
Any institution, whose objectives in the MOA and/or its constitution permits such institution to involve in commodity market.
Can an individual become a Clearing Member?
No, an Individual cannot become a Clearing Member. Only Institutional can become a Clearing Member.
Can a Clearing Member introduce Client, Sub-Broker and Broker?
Yes, Clearing Member can introduce Client, Sub-Broker and Broker.
Can a Clearing Member introduce Market Maker?
No, Clearing Member cannot introduce Market Maker.
How many times a member [Clearing Member/Market Maker] is required to provide net worth certificate of his company to the Exchange?
Members are required to provide their net worth certificate once in a year which should be in the format prescribed by the exchange and in the letter head of the registered auditor.
Are the members required to appoint an Auditor?
Yes, they are required to appoint an Auditor formally and they are also required to have the board minute for the same.
Why the Clearing Members need to display their segregate account detail in notice board/ website?
It is important to disclose their segregate account information as the clients should be aware of the details of the accounts in which their money is deposited.
Can a member undertake Portfolio Management Activities?
Yes, anyone involved in portfolio management activities are allowed to become a client, sub broker, broker as well as a member of the exchange.
Are Members allowed to accept cash from their clients, brokers & sub brokers?
No, members are not allowed to accept cash from clients, brokers & sub brokers for trading or any other purpose. This is totally against AML policy of the exchange.
What is third party transfer and whether it is allowed?
Third party transfer can be defined as any fund transfers or deposits made from the accounts other than the one registered with the exchange for that particular client or member. It also refers to the transfers or deposits made by third person.
Third party transfer is not allowed.
What if the third party transfer is made?
Third party transfer is not at all accepted at the exchange level and it's totally against MEX AML policy. But sometimes third party transfer happens mistakenly. At that time, the amount transferred needs to be reverted back to the account from where the fund had come.
Who can be the authorized person of an Institutional Member/Broker?
The Board of Directors of the company is allowed to be the authorized person.
Can a person who is not a board member become an authorized person of a Member/Broker?
In case of an institutional Member/Broker, an employee can become the authorized person for 3 months maximum. If the institutional Member/Broker wishes to continue the authorization of that employee, it will have to send a request for extension of authorization for next 3 months.
Within how many days a member/broker is required to inform about any changes in company related information like phone no. , change in directors, change in share holding pattern, etc?
They are required to inform within 3 days of such changes.
What are the requirements for sending a mail/ letter/request?
All mails/letters/requests addressed to the exchange by Members/Brokers should contain the authorized person's signature, name and full address of the company with telephone number and email address. The exchange shall accept all communications only from the authorized person of the member/broker. Moreover, all mails received by the exchange shall only be from the registered email id of the member/broker. Any mail from the unauthorized email id shall not be entertained.
What are the documents required to be submitted by a member to the Exchange on annual basis?
Audited financial report and the Board minutes of their elected Board members for that year.
Can suspended/debarred brokers, sub-brokers and other entities of Capital Market participate in Commodity derivative market?
No, such person can't participate in commodity derivative market.
Are there any guidelines with respect to use of MEX logo?
Prior approval from MEX is required if any of the member/broker wants to use MEX logo.
In what form payment can be received / made by members/brokers from/to clients?
All payments can be received/ made by the members/brokers from/to the clients strictly by Cheque /demand drafts or by use of online banking, or any other mode allowed by MEX and NRB.
What is the need of inspection?
To make sure that all the rules and regulation formulated and regulated by MEX and law of land are being regularly followed and complied by members of the exchange and there is no discrepancy.
How often inspection will be conducted for members of the exchange?
As per the rules and regulation of the exchange, a member will be inspected twice in a year but it may be more than that as per the requirement.
Who can inspect members?
Any member of the inspection team from Compliance department can conduct the inspection at the member's premises under the instruction from the management or as per mentioned in Bye laws and rules of exchange.
What is the reason behind maintaining the back office related documents?
The main reason for maintaining back office related documents at members & brokers level is for back up purpose and also in the case of internet crash or power cut or any disputes between member and clients such documents can be viewed in later dates.
What are the statutory documents that are mandatory to be maintained by Members & Brokers?
All Company related documents
Documents related to the Company such as:
Change of any company related documents: Email, Website, Address, Telephone/Fax/ P.O.Box, Tax registration, Authorized person, Shareholding pattern, Company name, Logo change, Seal change, etc.
Appointment of Auditor
Information to ROC about the office address
Information of segregated account in clearing member's notice board/ website [For CMs only]
Details of change of Director
Records of all Brokers, Sub Brokers & Clients
Records of payment of TDS and PAN/VAT
Can clearing members inspect their respective Brokers?
Yes, the Clearing Members can inspect the Brokers registered under it.
Can Exchange inspect the Broker?
As per the need, the Exchange may inspect the registered Brokers premises, books of account, bank statements, etc.
Who can inspect the exchange?
ISO (International Standardization Organization) can inspect exchange in half yearly basis or as per the requirement by ISO or any regulatory body.
How can futures trading be successful when the cash markets of the underlying commodities are fragmented?
It is however not a bad idea to introduce futures trading in commodity without waiting for the cash market in the commodity to become geographically integrated. Existence of futures/derivatives market as well as wide use of derivatives in commodities to manage price risk would create conditions for the Government to consider dilution/withdrawal of Administered price mechanism. Access to finance is necessary and that is there in the economy, so starting up the trend and then government coming up with a policy to intervene the irregularities is always a good idea.
Why the proportion of futures contracts resulting in delivery is so low?
The reason is, futures contracts may not be suitable for merchandising purpose, mainly because these are standardized contracts; hence various aspects of the contracts, viz., quality/grade of the goods, packing, place of delivery, etc. may not meet the specific needs of the buyers/sellers.
Why do we need speculators in futures market?
Participants in physical markets use futures market for price discovery and price risk management. In fact, in the absence of futures market, they would be compelled to speculate on prices. Futures market helps them to avoid speculation by entering into hedge contracts. It is however extremely unlikely for every hedger to find a hedger counterparty with matching requirements. The hedgers intend to shift price risk, which they can only if there are participants willing to accept the risk. Speculators are such participants who are willing to take risk of hedgers in the expectation of making profit. Speculators provide liquidity to the market; therefore, it is difficult to imagine a futures market functioning without speculators.
How should a futures contract be designed?
The most important principle for designing a futures contract is to take into account the systems and practices being followed in the cash market. The unit of price quotation, unit of trading should be fixed on the basis of prevailing practices. The "basis" - the standard quality/grade - variety should generally be that quality or grade which has maximum production. The delivery centers should be important production or distribution centers. While designing a futures contract care should be taken that the contract designed is fair to both buyers and sellers and there would be adequate supply of the deliverable commodity thus preventing any squeezes of the market.
What are the benefits from Commodity Futures Trading?
Futures trading performs two important functions, namely, price discovery and price risk management with reference to the given commodity. It is useful to all segments of the economy. It enables the 'Consumer' in getting an idea of the price at which the commodity would be available at a future point of time. He can do proper costing and also cover his purchases by making forward contracts. It is very useful to the 'exporter' as it provides an advance indication of the price likely to prevail and thereby helps him in quoting a realistic price and secure export contract in a competitive market. It ensures balance in supply and demand position throughout the year and leads to integrated price structure throughout the country. It also helps in removing risk of price uncertainty, encourages competition and acts as a price barometer to farmers and other functionaries in the economy.
What is hedging?
Hedging is a mechanism by which the participants in the physical/cash markets can cover their price risk. Theoretically, the relationship between the futures and cash prices is determined by cost of carry. The two prices therefore move in tandem. This enables the participants in the physical/cash markets to cover their price risk by taking opposite position in the futures market.
Can the loss incurred on the futures market be set off against normal business profit?
Loss incurred in futures market by entering into contracts for hedging purposes can be set off against normal profit. The loss incurred on account of speculative transactions in futures market cannot be set off against normal business profit. This loss is however allowed to be carried forward for eight years, during which it can be set off against speculative profit.
How professionals predict prices in futures?
Two methods generally used for predicting futures prices are fundamental analysis and technical analysis. The fundamental analysis is concerned with basic supply and demand information, such as, weather patterns, carryover supplies, relevant policies of the Government and agricultural reports. Technical analysis includes analysis of movement of prices in the past. Many participants use fundamental analysis to determine the direction of the market, and technical analysis to time their entry and exist.
What is 'Contango'?
Contango means a situation, where futures contract prices are higher than the spot price and the futures contracts maturing earlier.
When is futures contract in 'Contango'?
It arises normally when the contract matures during the same crop-season. In a well-integrated market, Contango is equal to the cost of carry viz. Interest rate on investment, loss on account of loss of weight or deterioration in quantity etc.
What is 'Backwardation'?
When the prices of spot or contracts maturing earlier are higher than a particular futures contract, it is said to be trading at Backwardation.
When is futures contract at 'Backwardation'?
It is usual for a contract maturing in the peak season to be in backwardation during the lean period.
What is 'basis'?
It is normally calculated as cash price minus the futures price. A positive number indicates a futures discount (Backwardation) and a negative number, a futures premium (Contango). Unless otherwise specified, the price of the nearby futures contract month is generally used to calculate the basis.
Who are the participants in futures markets?
Participants in futures markets are hedgers, speculators, day-traders/scalpers, market makers, and, arbitrageurs.
Who is hedger?
Hedger is a user of the market, who enters into futures contract to manage the risk of adverse price fluctuation in respect of his existing or future asset.
What is arbitrage?
Arbitrage refers to the simultaneous purchase and sale in two markets so that the selling price is higher than the buying price by more than the transaction cost, so that the arbitrageur makes risk-less profit.
Who are day-traders?
Day traders are speculators who take positions in spot, futures or options contracts and liquidate them prior to the close of the same trading day.
Who is floor-trader?
A floor trader is an Exchange's associates or its employee, who executes trade by being personally present in the trading ring or pit, floor trader has also place in electronic trading systems.
Who is speculator?
A trader, who trades or takes position without having exposure in the physical market, with the sole intention of earning profit is a speculator.
Who is market maker?
A market maker is a trader, who simultaneously quotes both bid and offer price for a commodity.
What is the role of an Exchange in futures trading?
An Exchange designs a contract, which alone would be traded on the Exchange. The contract is not capable of being modified by participants, i.e., it is standardized. The Exchange also provides a trading platform, which brings together the bids and offers emanating from geographically dispersed locations. This creates competitive conditions for trading. The Exchange also provides facilities for clearing, settlement, arbitration facilities. The Exchange may also provide financially secure environment by putting in place suitable risk management mechanism (margining system etc.), and guaranteeing performance of contract through the process of novation
Why does Exchange collect margin money?
The aim of margin money is to minimize the risk of default by either counter party. The amount of initial margin is so fixed as to ensure that the probability of loss on account of worst possible price fluctuation, which cannot be met by the amount of ordinary/initial margin, is very low. The Exchanges fix rates of ordinary/initial margin keeping in view need to balance high security of contract and low cost of entering into contract.
What are the different types of margins payable on futures?
Different margins payable on futures contracts are:
Ordinary/initial margin, additional margin, maintenance margin, mark-to-market margin, special margin, variation margin, intraday margin, overnight margin, and delivery margin.
What is initial/ordinary margin?
It is the amount to be deposited by the market participants in his margin account with clearing house before they can place order to buy or sell a futures contract. This must be maintained throughout the time their position is open and is returnable at delivery, exercise, expiry or closing out.
What is Mark-to-Market margin?
Mark-to-market margins (MTM or M2M) are payable based on closing prices at the end of each trading day. These margins will be paid by the buyer if the price declines and by the seller if the price rises. This margin is worked out on difference between the closing/clearing rate and the rate of the contract (if it is entered into on that day) or the previous day's clearing rate. The Exchange collects these margins from buyers if the prices decline and pays to the sellers and vice versa.
What is offset?
It refers to the liquidation of a futures contract by entering into opposite (purchase or sale, as the case may be) of an identical contract.
What is convergence?
This refers to the tendency of difference between spot and futures contract to decline continuously, so as to become zero on the date on maturity.
Why is Mark-to-Market margin collected daily in commodity market?
Collecting mark-to-market margin on a daily basis reduces the possibility of accumulation of loss, particularly when futures price moves only in one direction. Hence the risk of default is reduced. Also, the participants are required to pay less upfront margin - which is normally collected to cover the maximum, say, 99.9%, of the potential risk during the period of mark-to-market, for a given limit on open position. Alternatively, for the given upfront margin the limit on open position would have to be reduced, which has the effect of restraining the trade and liquidity.
What is Volatility?
It is a measurement of the variability rate (but not the direction) of the change in price over a given time period. It is often expressed as a percentage and computed as the annualized standard deviation of percentage change in daily price.
What is a Client Account?
Client Account is an account maintained for any individual or entity being serviced by an agent (Member), for a commission. A customer's business must be segregated from the Member's /principal's own business and clients' money should be kept in segregated accounts.
What is a client agreement?
It is a legal document entered into between the Member and the client setting out the conditions of their relationship and meeting the requirements of the relevant self-regulatory organization and the Regulator.
What is the role of clearing House?
Clearing House performs post trading functions like confirming trades, working out gains or losses made by the participants during the course of the clearing period - usually a day-collecting the losses from the members and paying out to other who have made gains.