NISM Series XVI cheat sheet

Commodity derivatives in India are regulated under the Securities Contracts (Regulation) Act, 1956 (SCRA) after the 2015 amendment; the Securities and Exchange Board of India (SEBI) is the regulator.

Commodity spot markets are regulated by state governments under the APMC Acts; the Forward Markets Commission (FMC) was merged with SEBI in 2015.

A commodity futures contract is a standardized agreement to buy or sell a specified quantity and quality of a commodity at a future date and price, traded on a recognized exchange.

Commodity options give the buyer the right, but not the obligation, to buy (call) or sell (put) the underlying futures contract at a strike price on or before expiry.

Major commodity exchanges in India: Multi Commodity Exchange (MCX), National Commodity & Derivatives Exchange (NCDEX), and Indian Commodity Exchange (ICEX); regional exchanges also exist.

Commodity market participants: hedgers (transfer price risk), speculators (take risk for profit), arbitrageurs (exploit price differences), and investors.

Key commodity sectors: agricultural (e.g., wheat, cotton, soybeans), energy (crude oil, natural gas), base metals (copper, aluminium, zinc), and precious metals (gold, silver).

Basis = Spot price – Futures price; a positive basis (contango) occurs when futures trade above spot, negative basis (backwardation) when futures trade below spot.

Commodity prices are influenced by supply (weather, production, inventories), demand (industrial growth, consumption), currency movements, and government policies.

Futures contract specifications include: underlying commodity, contract size (lot), quality specification, delivery month, delivery location, tick size, and price limits.

Mark-to-market (MTM) is the daily settlement of gains/losses based on the daily settlement price; it ensures no accumulation of losses.

Initial margin is the minimum deposit required to open a futures position; maintenance margin is the minimum equity that must be maintained; a margin call occurs if equity falls below maintenance margin.

Options premium = intrinsic value + time value; intrinsic value for a call = max(0, underlying price – strike price); for a put = max(0, strike price – underlying price).

Option Greeks: Delta (change in option price per unit change in underlying), Gamma (change in delta), Theta (time decay), Vega (volatility sensitivity), Rho (interest rate sensitivity).

In-the-money (ITM): call if underlying > strike; put if underlying < strike. At-the-money (ATM): underlying = strike. Out-of-the-money (OTM): call if underlying < strike; put if underlying > strike.

Futures contracts are linear payoffs with symmetric risk; options have asymmetric payoffs (limited loss for buyer, unlimited loss for seller).

Contract expiry: Indian commodity futures typically expire on the 20th of the delivery month (or previous business day); options expire on the same day as the underlying futures.

Hedging effectiveness = (price change of hedged position) / (price change of underlying) ; a perfect hedge has effectiveness of 1.

Order types: market order (execute immediately at best available price), limit order (execute at specified price or better), stop-loss order (becomes market order when trigger price is hit).

Trading hours on Indian commodity exchanges are typically from 10:00 AM to 11:30 PM (or 11:55 PM during US daylight saving) for internationally referenced commodities; agricultural commodities may have different hours.

Tick size is the minimum price movement; for most commodities it is 1 paisa (₹0.01) or as specified by the exchange.

Price limits (circuit limits) are the maximum allowable price movement in a day; they vary by commodity and may be relaxed after a cooling-off period.

A trader must maintain sufficient margin; failure to meet a margin call can lead to forced liquidation of positions by the broker.

Arbitrage between spot and futures: if futures price > spot price + carrying cost, buy spot and sell futures (cash-and-carry arbitrage); if futures price < spot price, reverse cash-and-carry.

Open interest is the total number of outstanding futures contracts (long or short) that have not been closed or delivered; it indicates market participation and liquidity.

Trading strategies: day trading (open and close within the same session), positional trading (held overnight), spread trading (simultaneous long and short positions in related contracts).

Brokerage and transaction charges: brokerage (negotiable), exchange transaction charges, SEBI turnover fees, stamp duty, and GST apply to commodity trades.

The clearing corporation (e.g., MCX Clearing Corporation, NCDEX Clearing) acts as the central counterparty (CCP) to every trade, guaranteeing settlement.

Settlement can be cash-settled (difference between final settlement price and trade price) or physically settled (delivery of the commodity).

Daily settlement: mark-to-market gains/losses are credited/debited to the member's account; final settlement occurs on expiry.

Clearing members maintain a clearing account with the clearing corporation; they must deposit margins (initial, maintenance, and additional) as per exchange norms.

Delivery process: seller initiates delivery intention, buyer gives delivery request, exchange assigns delivery, and warehouse receipts are transferred; quality and quantity are verified.

Settlement guarantee fund (SGF) and investor protection fund (IPF) are maintained by exchanges to cover defaults and investor claims.

T+1 settlement cycle is common for commodity futures in India (trade date plus one business day for pay-in/pay-out).

Clearing banks facilitate funds settlement between clearing members and the clearing corporation.

Position limits: exchanges set limits on open positions for members, clients, and near-month contracts to prevent market manipulation.

SEBI regulates commodity derivatives under the SEBI Act, 1992, SCRA 1956, and the Securities Contracts (Regulation) Rules, 1957.

The Forward Contracts (Regulation) Act, 1952 was repealed and the FMC merged with SEBI in 2015; SEBI now regulates both securities and commodity derivatives.

SEBI (Stock Exchanges and Clearing Corporations) Regulations, 2018 govern exchange and clearing corporation operations, including commodity exchanges.

Eligibility criteria for commodity derivatives: the commodity must have sufficient liquidity, price volatility, and a robust spot market; SEBI approves contracts.

SEBI mandates KYC (Know Your Customer) and AML (Anti-Money Laundering) compliance for all clients trading in commodity derivatives.

Client registration: clients must be registered with a SEBI-registered broker; brokers must obtain PAN, address proof, bank details, and income proof (for higher risk categories).

SEBI (Intermediaries) Regulations, 2008 govern brokers, clearing members, and other intermediaries; they must maintain records for at least 5 years.

Investor grievances: SEBI's SCORES platform and exchange investor grievance redressal cells handle complaints against intermediaries.

Commodity derivatives are not covered under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations unless specified; participation by FPIs is regulated by SEBI.

Risk management framework includes: margin requirements, position limits, price limits (circuit breakers), and surveillance systems.

Initial margin covers potential loss over a one-day horizon; maintenance margin is typically 75-80% of initial margin; margin calls are triggered when equity falls below maintenance.

Exposure margin is an additional margin for open positions beyond a threshold, covering potential default risk.

Client protection: brokers must segregate client funds from their own; client funds cannot be used for proprietary trading.

SEBI mandates brokers to provide a risk disclosure document (RDD) to clients before trading, explaining risks of derivatives.

Investor Protection Fund (IPF) compensates clients up to a specified limit (e.g., ₹10 lakh per client) in case of broker default, subject to exchange rules.

Dispute resolution: clients can approach the exchange's arbitration mechanism for claims against brokers; SEBI's SCORES is for regulatory complaints.

Brokers must issue contract notes within 24 hours of trade execution and statement of accounts periodically.

Surveillance: exchanges monitor abnormal price movements, open interest concentration, and insider trading; SEBI conducts investigations for market manipulation.