Risk Associated with Commodities Markets

No risk can be eliminated, but the same can be transferred to someone who can handle it better or to someone who has the appetite for risk. Commodity enterprises primarily face the following classes of risks, namely: the price risk, the quantity risk, the yield/output risk and the political risk. Talking about the nationwide commodity exchanges, the risk of the counter party (trading member, client, vendors etc) not fulfilling his obligations on due date or at any time thereafter is the most common risk.

This risk is mitigated by collection of the following margins: - 

·         Initial Margins

·         Exposure margins

·         Market to market of positions on a daily basis

·         Position Limits and Intra day price limits

·         Surveillance 

Commodity price risks include: - 

·         Increase in purchase cost vis-�-vis commitment on sales price

·         Change in value of inventory

·         Counter party risk translating into commodity price risk 

Key Factors for success of commodity market

The following are some of the key factors for the success of the commodities markets: - 

·         How one can make the business grow?

·         How many products are covered?

·         How many people participate on the platform? 

Key Factors For Success Of Commodities Exchanges

The following are some of the key factors for the success of the commodities exchanges: -

Strategy, method of execution, background of promoters, credibility of the institution, transparency of platforms, scaleable technology, robustness of settlement structures, wider participation of Hedgers, Speculators and Arbitrageurs, acceptable clearing mechanism, financial soundness and capability, covering a wide range of commodities, size of the trade guarantee fund, reach of the organisation and adding value on the ground. In addition to this, if the Indian Commodity Exchange needs to be competitive in the Global Market, then it should be backed with proper "Capital Account Convertibility".

The interests of Indian consumers, households and producers is most important, as these are the people who are exposed to risk and price fluctuations.

Key Expectations Of Commodities Exchanges

The following are some of the key expectations of the investor's w.r.t. any commodity exchange: - 

·         To get in place the right regulatory structure to even out the differences that may exist in various fields.

·         Proper Product Conceptualization and Design.

·         Fair and Transparent Price Discovery & Dissemination.

·         Robust Trading & Settlement systems.

·         Effective Management of Counter party Credit Risk. 

Self-Regulation to ensure: Overview of Trading and Surveillance, Audit and review of Members, Enforcement of Exchange rules.