Showing posts with label Commodity Trading Volume & CTT. Show all posts
Showing posts with label Commodity Trading Volume & CTT. Show all posts

Monday, February 29, 2016

What commodity markets want from FM

What commodity markets want from FM
Traders seek, among other things, CTT abolition to improve volumes
The Indian markets are gearing up for the big event today — the Union Budget. We take a look at what the commodity market participants expect from it.
Commodity Transaction Tax

If there is one wish that tops the list for almost all participants in the commodity sector, it is the removal of the commodity transaction tax (CTT) that was introduced in July 2013. This tax is levied on the sale transaction of the commodity futures except for exempted agricultural commodities such as chana, soyabean, turmeric, etc.
The introduction of this tax has taken trading volumes sharply lower in both the Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX). PK Singhal, Joint MD, MCX, says, “CTT has increased the cost of trading derivatives by almost 300 per cent and trading volumes have come down more than 50 per cent after its introduction.”
Singhal also adds that the increased trading cost has moved the domestic trading business to offshore markets like Dubai and Singapore. Data from MCX shows that trading volumes have declined from an average ₹149 lakh crore in 20011-12 to ₹54 lakh crore in 2014-15. In NCDEX, the volumes have slumped from an average ₹18.22 lakh crore in 2011-12 to ₹10.22 lakh crore in 2014-15.
Some of these volume declines are also a result of the commodity price meltdown. NCDEX too expects some relief on CTT for processed agri-commodities like sugar and soyaoil.
Import duty change demands

Hareesh V, Research Head, Geofin Comtrade, says the gold and gem industry is expecting a reduction in import duty on gold to 2 per cent from 10 per cent.
Increasing the gold import duty in August 2013 was one of the several measures the government had taken in order to bring down the current account deficit (CAD). India’s CAD has improved from $21.8 billion in June 2013 to $8.2 billion as of September 2015.
Other expectations

Hareesh adds that in order to protect domestic growers from cheap imports, the rubber industry is expecting an increase in the import duty on natural rubber to 40 per cent from 25 per cent. Similarly, an import duty cut to 5 per cent from 30 per cent is expected for oilseeds.
Sushil Sinha, Head of Karvy Comtrade, wants the Centre to introduce measures to help companies hedge their commodity exposure risk. He also wishes that the Centre allocates more fund and speeds up the process of setting up a national unified agri-commodity market.
He also wants improvement to infrastructure in terms of warehouses, testing labs, research, etc. Sinha believes participation in the commodity market will improve if a clearing and settlement corporation comes up for commodities, like the one prevailing for equities.
NCDEX wants the Budget to introduce measures to allow banks and asset management companies to invest in the commodity futures market.
Also, with commodity market regulation being taken over by the Securities and Exchange Board of India, NCDEX expects the introduction of new products like options and new indices, going forward.

Thursday, February 18, 2016

Taking stock of commodity trading

Better liquidity makes non-agri contracts less risky than agri commodity contracts
The recent rout in commodity prices has sent global markets into a tizzy. But the ongoing volatility could be a friend of a commodity trader. For traders in India, there are two categories of commodities available for trading.
The first is agri-commodities, such as cotton, cardamom, soybean and castor seed that are traded on the National Commodity and Derivatives Exchange (NCDEX) and the Multi Commodity Exchange (MCX).
The second is non-agri commodities, such as base metals, precious metals and energy commodities that are more actively traded on the MCX. Now, unless you know what really moves agri-commodity prices, the risk of burning your fingers is quite high. Also, the market depth is low.
Nithin Kamath, founder and CEO of discount brokerage firm Zerodha, says “agri commodities are riskier to trade and it is better to avoid trading them unless you know the factors that drive their prices”.
The risk is lesser with non-agri commodities.
There is better liquidity and the prices move in sync with global rates; so, the scope for market manipulation is low. Here’s a quick reckoner for trading in non-agri commodities on the MCX.
Trading features

Gold, silver, aluminium, nickel, lead, zinc, copper, crude oil and natural gas can be traded on the MCX. You can take bets on the price movements of these commodities by buying or selling futures contracts, the prices of which move in sync with the global prices of the commodities and the local currency movements.
The futures contracts on the commodities are available for trading on the MCX between 10 am to 11:30/11:55 pm on weekdays, much longer than the trading window for equity futures contracts.
The sizes of these contracts are generally huge, for instance, five tonnes of aluminium and 100 barrels of crude oil — that’s to suit the requirements of those who physically deal in these commodities.
But traders who seek smaller bets can make use of the mini contracts that come with smaller lot sizes of, say, one tonne of aluminium and 10 barrels of crude oil. So, a 10 barrel crude oil mini contract will currently have a notional value of about ₹21,500 against ₹2,15,000 for a normal 100 barrel contract.
Also, you don’t have to put up the ₹21,500 upfront. Futures contracts allow you to take bets by placing margin money — a portion of the notional value of the contracts.
For instance, by putting up ₹1,075 (5 per cent of ₹21,500), you can buy or sell one lot of the crude oil mini contract.
But note that you have to keep adequate money in your trading account to make up for the day-to-day price fluctuations in the contract until you exit your position — this is called mark-to-market provisioning.
So, if the contract price moves against your bet, your account will be debited and if it moves in your favour, you will get money in your kitty.
From a time perspective, you can trade either in short-term contracts or those with longer tenures.
Liquidity and price discovery may not be good in long-term contracts; so, it may be better to trade in those with shorter tenures.
Settlement modes

The trade position, whether buy or sell, automatically gets settled on the expiry date of the contract or it can be squared-off and closed even before by taking an opposite position.
As a seller, if you intend to settle on expiry instead of squaring-off before, take note of the dates and timeline by when you need to inform the exchange about specific settlement modes — whether physical or in cash.
Gold and silver are the only commodities that have to be compulsorily settled in physical form if the seller holds on till contract expiry.
In other commodity contracts, intimation to the exchange on or before the cut-off date will enable a seller to settle in cash on the contract expiry date.
What to factor in
Taking stock of commodity tradingWhether you profit or lose on a trade, the broker, exchange and the government must be paid their due.
So, factor in costs such as brokerage, commodity transaction tax (CTT), service tax and SEBI charges that add to the cost of your bet.
If you think silver price will go up over the next month, you could buy a silver mini contract with a lot size of 5 kg currently trading at around ₹34,000 per kg. The margin money will be ₹8,500 and you also have to account for brokerage and other charges.
If the contract moves up to ₹35,500 and you close the trade by taking a reverse position, that is selling the contract, you earn a profit of ₹7,500 (₹1,500 per kg) less brokerage and other charges, which will be credited to your account.
But if the contract falls to ₹32,500, you will have to pay up ₹7,500 plus brokerage and other charges.

Tuesday, February 2, 2016

Budget goodies for GIFT, markets likely

Budget goodies for GIFT, markets likely

Ministry considering tax sops for India's first global financial centre, steps to liberalise futures and options markets.

Finance Minister Arun Jaitley and his team are believed to be considering steps to attract big names in investment banks and global brokerage and trading firms to the Gujarat International Finance Tec-City, known as GIFT City. On the banks of Sabarmati in Gandhinagar, Gujarat, the city has been positioned as a "global financial centre".

Conceived in 2007 by Prime Minister Narendra Modi, then Gujarat's chief minister, the city has had a slow start. The coming Budget could offer substantial tax breaks and possibly a 10-year tax holiday, sources familiar with the developments said, adding exemptions from securities transaction tax (STT) and commodity transaction tax were among the incentives being considered for the GIFT City. However, a decision has not been taken, an official said.

The finance minister is also likely to announce a number of capital market-related reform measures, including removal of STT and stamp duties on trading futures and options, clarification on tax treatment in the exchange-traded currency derivative markets and regulatory positions on participatory notes. Removing regulatory constraints on banks and mutual funds to participate in commodity futures, among others, were also being discussed, a senior government official said.

Classified as a special economic zone (SEZ), GIFT city is being set up on the lines of global financial and information technology services hubs like Shinjuku (Tokyo), Lujiazui (Shanghai), La Defense (Paris) and the London Dockyards. It is aimed at attracting firms to open offshore banking as well as insurance and capital market intermediaries. According to existing provisions in the Act, SEZs are already allowed duty-free imports and are exempt from indirect taxes, besides 100 per cent income-tax exemption on export income for units for the first five years, 50 per cent for the next five years and 50 per cent of the ploughed back export profit for another five years.

The developers and co-developers are given an income-tax holiday for 10 years under section 80IAB.

"The government will definitely have to provide tax incentives to attract units in GIFT. Dubai International Financial Centre, for instance, provides zero tax rates. I am not sure if that will be possible, but that is the global benchmark for international financial centres," said Rakesh Nangia, managing partner, Nangia and Co. The DIFC offers zero per cent tax rate on income and profits (guaranteed for a period of 50 years), free capital convertibility and wide network of double taxation treaties for UAE incorporated entities.

The GIFT City comes at a time when the government has announced phasing out of corporate tax exemptions. It has said that after March 31, 2017, sunset clauses with regards to tax exemptions will not be renewed. After that, no weighed deduction will be applicable for operation, maintenance and development of export units in SEZs. "It is yet to be decided whether they can exclusively incentivise GIFT," said the official quoted above.

Apart from GIFT City, the budget-planners are said to be looking at measures to make India's equity, commodity and currency futures more competitive and liberalising them further. Some other measures could include lifting specific bans on any market segment, participant or product, making trading and clearing rules nationality-neutral and participant-neutral, allowing access to all foreign participants, as long as they meet financial action task force requirements, and over a longer-term period, getting in uniform know-your-customer norms, internationalising the rupee, and moving to a residence-based taxation regime.

The genesis of these suggestions is a report by the standing council on international competitiveness of the Indian financial sector. The council was set up in 2013 and its report was made public only in September. The finance ministry had requested various financial regulators, including the Reserve Bank of India (RBI) and Securities and Exchange Board of India, to examine the report. "The regulators are coming back to the finance ministry with suggestions on which recommendations can or should be implemented. The suggestions on which there is agreement among all stakeholders could be part of the Budget," said another official.

Regarding STT and stamp duty, the report had said that since the two levies add to transaction costs in equity derivatives, "STT should be removed. Stamp duty should not be applicable to cash-settled products such as index derivatives, as there is no delivery of the underling (product) taking place."

STT, announced by then finance minister P Chidambaram in the first Budget of the earlier government, is now levied on all sale transactions on futures and options. It is 0.01 per cent of the traded price of futures and 0.017 per cent on options premiums. A 0.125 per cent STT is payable on the settlement price by the buyer of an option that is exercised. If STT is paid, there is no long-term capital gains tax. But, if it is not paid, the latter is levied at 10 per cent.

The panel's report had divided its recommendations into three categories - short, medium and long-term - based on the nature of the reforms and the time that may be required to implement them. Longer term measures included internationalizing the rupee.

Internationalization refers to a state where exporters from other countries agree to take payment in rupees and where the currency risks in international borrowings are borne by lenders rather than borrowers in India. According to RBI, countries that can borrow in their own currency are less susceptible to international crises. "Consider a time-bound plan for internationalization of the rupee, in line with the plans of the Chinese government for internationalization of the renminbi," the report had stated.


  • FM may announce tax breaks, 10-year tax holiday for GIFT City on the lines of the existing special economic zone rules
  • Other capital market-related announcements aimed at further opening up of derivatives markets
  • Removal of securities transaction tax and stamp duty on futures & options being considered
  • Removal of constraints on banks and MFs to participate in commodity futures
  • Longer-term aim of internationalising the rupee could be announced

Monday, October 5, 2015

Why India Might Finally Begin To Get Its Commodities Game Together

Why India Might Finally Begin To Get Its Commodities Game Together
India is a commodity powerhouse. It is the largest producer or consumer for commodities that range from milk, pulses and spices to gold, edible oils and industrial crops. It is second largest producer of sugar, rice and cotton. And yet, instead of dictating terms, we follow the prices set overseas for them. What stops us from taking our rightful place in the global order? The feebleness of our market.

The power of any market comes from its ability to set the benchmark price that acts as the reference for all other trades around the globe, whether it is London for physical gold or New York for cotton. India's commodity markets have been illiquid, ill-equipped and ill-connected ever since their inception in 2003 due to a combination of outdated laws and ill-informed policymakers.
Now, 12 years later, this is set to change. SEBI has taken over as the new regulator and guardian of the commodity market, which will now be governed by the Securities Contracts (Regulation) Act, 1956, applicable to stock exchanges. India's commodity markets have a fighting chance to emerge from the shadows.
Here are five steps SEBI can take to make it happen.
1. Create policy stability
Commodity exchanges need a conducive ground created by surrounding institutions such as the government, the banking framework and corporate law. Commodity trading has been frequently disrupted by bans and mid-air changes in trading rules. This destroys market confidence despite a strong regulator. As an independent regulator, SEBI should seek a commitment from Central and state governments to adopt transparent and predictable rules for direct interventions, such as changes in trade policies, procurement operations and trading rules. To prevent panicky reactions, it has to rapidly educate the media, politicians, bureaucrats and the public about the role and mechanics of commodity exchanges.
"SEBI has a historic opportunity to create a wide and enduring economic moat around our commodity markets through sophistication and scale."
2.Consolidate volumes by expanding the network
Size begets power. Commodity exchanges benefit from strong "network effects". These mean that more members are better--the more trades exchanges handle, the more liquidity they can provide and the more activity they attract. By connecting hedgers, government companies such as FCI, and farmer bodies, to generate trade volumes that are in multiples of crop production, SEBI can improve price discovery and make the market more efficient.
3. Build scale by allowing better quality of investors and speculators
A large market to which producers, dealers, manufacturers, and speculators converge makes a contract as liquid as a stock certificate or a coupon bond. Allowing banks, mutual funds and large foreign investors to enter the commodity market will improve its risk-insuring function.
4. Connect to overseas markets
Today, no market is an island. In a hyper-connected world, India will only gain if its commodity contracts are listed on overseas exchanges reciprocally so that they are quickly accepted as a reference price.
5. Create a cost advantage
Compared to overseas markets, it is expensive to trade in India. The commodities transaction tax, local state taxes, high brokerage fees and high cost of physical delivery due to poor logistics have made costs a deterrent. SEBI will have to scrutinise each one so that market participants are attracted by favourable terms and remain loyal due to the high cost of switching business away from India.
In 2014-15, 10 out of the top 20 agricultural contracts by volume were traded on exchanges based in China, according to data from the US's Futures Industry Association. CME's Chicago Board of Trade was the leading agricultural futures market outside China. Precious metals are dominated by the Comex gold and silver contracts traded at CME's New York Mercantile Exchange. The Shanghai Futures Exchange is emerging as an important centre for gold and silver trading in Asia.
India has a natural competitive advantage in a wide swathe of this global commodity market. But it remains untapped because little attention has been paid on how to fight competition. SEBI has a historic opportunity to create a wide and enduring economic moat around our commodity markets through sophistication and scale. If it is successful, India--with its 52 million farmers and 1.2 billion consumers--can finally stand up to take its rightful place in the world of food and natural resources.

Govt reviewing capital mkt reform measures

Govt reviewing capital mkt reform measures

A recent report on capital markets by a government appointed panel is being examined by the finance ministry and financial regulators, and some its suggestions could perhaps be incorporated in the upcoming 2016-17 Budget.

The report, by the standing council on international competitiveness of the Indian financial sector, was made public in early September and recommended a number of steps to reform derivatives markets for commodity, equity and currency.

Some of these recommendations include removal of securities transaction tax and stamp duties, especially for futures and options products, clarifying tax treatment in exchange-traded currency derivative markets and avoiding ban on any market segment, participant or product.

The report also suggests allowing access to all foreign participants as long as they meet financial Action task force requirements, clarifying regulatory positions on participatory notes, removing regulatory constraints on banks and mutual funds to participate in commodity futures, uniform KYC norms, internationalising the rupee, and a longer term move to a residence based taxation regime.

Senior government sources said that the finance ministry has asked all financial regulators to suggest which of the numerous suggestions, divided into short-term, medium-term, and long-term timelines, can be implemented. Once the government is in agreement with the likes of Reserve Bank of India and Securities and Exchange Board of India on which reforms can be implemented, these could be included in the Budget, they added.

"The various financial regulators have been asked to review these recommendations and suggest which can be implemented, and some of these cannot be carried out, then why not," said a senior official.

Sunday, March 1, 2015

No respite on transaction costs nor on taxes (STT or CTT)

No respite on transaction costs nor on taxes (STT or CTT)
While the Corporate India may have many reasons to celebrate – from lower rate of taxation to direct and indirect measures to support Make in India, stock brokers have got a raw deal in this Union Budget presented by finance Minister Arun Jaitley. 

Brokers were expecting some respite on security transaction tax, commodity transaction tax to cut down on the transaction tax. The logic was lower STT or CTT will lead to lower transaction costs and more investors and traders will participate in the stock and commodities market. This demand did not fructify. 

Brokers also did not get any favourable response on their prayer of reducing short term capital gain, which is charged at 15.45% on gains on equity investments held for less than one year. 

Brokers have to pay service tax on the brokerage charged to the client. This further inflates the transaction costs for the end traders and investors. Brokers demanded a cut in rate of service tax from extant 12.36%. In line with overall increase in service tax to 14%, brokers have to collect more from their clients, resulting into higher transaction costs.

Brokers were demanding lower transaction taxes and lower capital gains tax.

Wednesday, February 25, 2015

Budget 2015-16: Expect commodity transaction tax to be removed, says MCX

MCX Joint Managing Director Singhal says commodity trading volumes have come down significantly since the imposition of CTT, and this is also leading to grey market transactions in which the government gets no revenue at all

MCX is hoping that the commodity transaction tax will be removed in the upcoming Union Budget, according to PK Singhal, Joint Managing Director . 

Budget 2015-16: Expect commodity transaction tax to be removed, says MCX
In an interview with CNBC-TV18, Singhal says Taiwan is the only other country which levies a CTT. He says commodity trading volumes have come down significantly since the imposition of CTT, and this is also leading to grey market transactions in which the government gets no revenue at all. Average daily turnover on MCX has fallen from Rs 50,000 crore to Rs 30,000 crore since CTT was introduced, Singhal says. MCX has regained the market share it lost in the aftermath of the scam at NSEL, Singhal says. He feels the shifting of the Forwards Market Commission to the Finance Ministry from the Consumer Affairs Ministry is a positive step.

Latha: The prime purpose of getting you is to ask you what you are expecting from the Budget for your trade. 

A: If you ask me about expectation then our first basic expectation from the Budget is finance bill - either the Commodities Transaction Tax (CTT) is removed or it is reduced. However, world over nowhere other than Taiwan there is any transaction tax on commodity futures and after the imposition of transaction tax on commodity futures the volumes have fallen down. It is not a question of volume because basically the hedging efficiency has lost and out of top five exchanges in the commodity futures markets in the world three are in China. 

The present vision of our government is to make ‘Make in India’ story successful and for that you need a good hedging platform and that hedging platform is not available for small and medium enterprises (SMEs). Government has rightly exempted agri commodities from CTT but somehow there is a necessity to revisit the CTT on bullion as well as base metal at least because before the imposition of CTT the impact cost in Indian MCX bullion contract was lower than CME. So after the imposition of CTT the cost of transaction has increased manifold. Exchanges are charging Rs 183 per crore as a transaction cost as against that CTT is Rs 1,000 per crore on the sales side which results into the increase in the impact cost from Rs 183 to Rs 683 per crore. 

I think nowhere there is a tax where more than what you are paying to the exchange as a transaction cost you are paying by way of tax and this tax is basically not necessary.

Sonia: Can you give us a sense of how much the volumes have fallen because of the imposition of CTT? 

A: Yes, I can give you a very clear sense. In financial year 2011-12 and 2012-13 and as well as prior to CTT imposition i.e. 2013-14 the volume in MCX – I can tell you about MCX because almost 100 percent volume in base metal bullion and energy takes place in MCX. It was in the range of 52,000 to 55,000 crore per day on single side which after imposition of CTT was reduced to about 30,000 crore. So you can understand how much volume fall has taken place and after that there was National Spot Exchange Limited (NSEL) problem and that is a different issue. So, those volumes fall which was due to NSEL issue has come back. Now we are again having same market share, but you see in agri commodities there is no CTT. Even then there is not much increase in agri commodity volume because you know there are lakh of SMEs and as far as our gold contract is concerned you ask anybody even a small jeweller to the biggest jeweller or exporter in jewellery they hedge on our exchange.

Latha: Any other expectations, have you had conversation with the ministry. You have seen the movement of FMC to the finance ministry from the consumer affairs ministry and now possibly the eventual merger into Securities and Exchange Board of India (SEBI) as well. Is the longer term terrain in which you fight much cleaner now. Are you expecting therefore better business?

A: There are two issues. One issue is very relevant which is most necessary. As per the Nelson report prior to CTT it says that the ‘dabba trading’ or bucket shops volume is three times of the official volume in the exchanges and this bucket shops or dabba trading is all illegal trades. It happens in cash with no audit trail. So it is one of the biggest damage the country has because it is all black money transaction and after imposition of CTT because the cost of transaction has increased as per the market sources it is now about 10 times of the exchange volume. 

So, FMC presently in the present avatar does not have any infrastructure, they don’t have manpower, they don’t have any raid and panel provisions to take action against the dabba traders. So the biggest benefit in case the merger of FMC with SEBI takes place then that power will come, but I have my own doubts about whether the merger will be helpful because commodity basically other than gold all the other commodities are consumable and it is not asset class. Base metal is consumable, energy is consumable.

So basically I don’t think SEBI has a bandwidth or the merger will be the right step but at least if nothing is happening, people make compromise. They think, if FCR is not passed at least it is better that the regulator will have a strong panel action. 

However, one thing I fully agree that shifting of FMC from the ministry of consumer affair to the Finance Minister was a very positive step and it was basically because finance ministry that way is more responsive and I am not saying that consumer affair ministry was not responsible but the point is finance ministry is more clear about what is happening abroad in the commodity futures trade or securities market, so they are more updated.

Tuesday, February 24, 2015

How can options trading gain ground in commodities ?

How can options trading gain ground in commodities ?
The commodities futures market underwent changes in 2003 with many policy reversals. But option-based derivatives are yet to gain ground in commodities. Though the Forward Contract (Regulation) Bill, 2010, has provisions for option trading, its execution requires considerable attention from the regulator, commodity exchanges and market participants.
The government can replace the price support scheme with minimum guaranteed price (MGP). Policy makers are passive on the adoption of option-based trading despite the benefits.
Modus operandi
Option can be over-the-counter and exchange-traded. Similar to the futures, option requires at least two parties to exercise the contract. Exchange-traded option can help to mitigate counter-party credit risk as the contract will be more standardised in nature. Farmers can avoid distress sales if they can opt for a longer put option, paying a put premium. Commodity processors, on the other hand, can hold a long call option, paying a call premium. Intermediaries between farmers and processors can act as option writers holding a short put and a short call position. They can be market agencies that procure from farmers and sell to consumers or civil supplies agencies such as FCI, STC, NAFED, HAFED and several private agencies. The payoff and profit structure are different. While farmers might delimit their potential loss, processors may have unlimited loss if the commodity price falls below the strike or exercise price of the contract. Farmers could wait for a better deal to exercise the contract. Thus, a minimum guaranteed price can be embedded in the long put option. On the other hand, processors can reduce their exposure through dynamic or “delta” hedging that implies that number of call option bought is relative to number of stocks sold. Based on financial aptitude, financial knowledge, and financial behaviour, agents can leverage their risks or increase their spread by formulating several option trading strategies. In addition, they can mix futures/forward and option contract (if offered in identical commodities) to protect them from unexpected losses, such as, “covered call” or “protective put”.
Option pricing
Option pricing (call and put) is important for an efficient commodities market. It depends on several variables known as Option Greek, which includes delta, gamma, vega, theta and rho. For example, one per cent increase/decrease or any absolute in underlying commodity price seeks to impact the relative change in option price or premium. Similarly, market volatility, time of the contract and rate of interest (asset borrowing and storage costs) seek to determine the magnitude of change in that option price.
If option market needs to be efficient, call-put parity should hold. Therefore, there should be a small deviation between market offered rate and an implied rate. Pricing exercise may be accomplished using binomial option pricing, Black-Scholes pricing, KMV-Merton pricing based on the model parsimony and robustness.
Boost for producers
Introduction of option in commodities calls for a careful concern of the regulator and market agencies. It should be implemented in a phased-manner. Fundamental analysis of commodities is required on two fronts: pricing of commodities and variables influencing the option price.
Option need to be introduced in those commodities which are having liquid contracts and significant trade volumes in futures/forward and spot markets. However, speculative asset should be avoided. First, exchange-traded option may be introduced in non-MSP; and then in MSP-based commodities. Commodity exchanges need to work on the contract specification and spread for assessing liquidity. Option contract implementation is critical to encourage commercial users. The coming Budget may shed light on the fate of this derivative instrument, given the possibility of SEBI-FMC merger. Second, since the underlying asset is commodity, a comprehensive study needs to be undertaken with respect to economic fundamentals, price and non-price factors, stock-to-use ratio or carryover stock, crop management practices.
Farmer Producer Companies (FPCs) can work out the prospect of option market as they procure the produce from farmers’ interest groups at MSP or market offered rate and then, distribute to the Small Farmers’ Agribusiness Consortium (SFAC). Instead of procuring at MSP, SFAC through FPCs should offer minimum guarantee price to producer-members which might improve farmers’ marketing decisions and their risk-return metrics.
FPCs need to create or lease in storage space for holding farmers’ produce until they deliver in exchange platform. NCDEX may offer customised contract to FPCs and NABARD might act as clearing agent of commodity exchanges or could train or handhold FPCs for account opening and daily and final settlement.
Service providers need to be empanelled by exchanges to safeguard farmers from any unexpected margin call or mark-to-market loss. In other words, exchanges need to depute some third party to resolve any unwarranted default in the option market.
Can be introduced in goods which have liquid contracts, significant volumes in futures & spot markets

Pre-Budget expectations for commodity markets: Religare Retail Research

Pre-Budget expectations for commodity markets: Religare
According to Religare Retail Research, traders and investors from commodity derivatives market are expecting the government to announce steps to restruc-ture the Forward Contracts Regulation Act (FCRA). This would increase depth in the market and will help in efficient price discovery, says the report.

Pre- Budget Expectations for Commodity Markets: Religare Retail 

The market, like every time, has huge expectations and this time, hopes are revolving around lowering of subsidy burden, widening the tax net, supportive policies for the industry and rational allocation of funds. Also, some key points present in the agenda of the new government which should form part of the union budget should be to re-invigorate investment cycle and reviving Indian economy on a priority basis.

With lower crude prices, government is now in a better position in terms of its fiscal balances as oil imports occupies a major chunk in our im-port bill. Commodity futures trading also deserves attention this time, keeping in mind government’s agenda of Make in India. A large number of measures are required to bring back liquidity and to make market more efficient. 

Union Budget Expectations for Commodity Trading 

Amendment of FCRA: Traders and investors from commodity derivatives market are expecting the government to announce steps to restruc-ture the Forward Contracts Regulation Act (FCRA). This would increase depth in the market and will help in efficient price discovery. There is a need to increase market participation by allowing banks, MFs, FIIs which will also help in preventing price manipulation and help hedgers to efficiently hedge their exposure in physical markets. 

Abolition of CTT: Market participants are expecting the government to re-duce the Commodities Transaction Tax (CTT) which was levied in year 2013 on metals, bullion and a few processed agri commodities. 

Levy of CTT was strongly opposed by commodity exchanges, traders, bro-kers and investors. Commodity trading in India is just 10-year old and get-ting away with CTT may lure more participants, thereby increasing the over-all turnover. In India, more than 80% of the trade volumes take place in bul-lion, metals and energy and CTT has resulted in a significant drop in trading volumes in these segments. Unlike in stocks or agri commodities, daily movement in the above mentioned commodities are generally very low, re-sulting in most of the profits that a trader makes, being lost in the existing charges. FMC needs to take up with the Finance Minister on the need to reduce CTT to bring back liquidity and market depth in the commodity futures trading in the country. The CTT should be reduced to Rs. 1 per crore of trading to encourage the markets and the amount collected should be diverted to improve warehousing and infrastructure facilities. 

Union Budget Expectations for Base Metals Industry 

A reduction in excise duty on copper is widely expected this time, in order to improve the cost competitiveness of Indian capital goods companies. 

The government’s plan to turn India into a manufacturing hub will need a big budget boost. For this, a lot of metal will have to be imported into the country and hence import duty on ores and metals require a slash in import duty. This will likely boost metals’ market in India. 

Union Budget Expectations for Energy Industry 
Finance Minister Arun Jaitley may look at re-imposing five per cent customs duty on crude oil imports to shore up revenues by $3 billion and create a level-playing field for domestic producers. 

Presently, the government does not levy any import or customs duty on crude oil imports. On the other hand, domestically produced crude oil attracts two per cent central sales tax, something which imported oil is exempted from.

Union Budget Expectations for Agri Commodities 

Exemption of CTT for processed agricultural commodities to ensure a pickup in volumes in the futures market 

Passing on benefits of a fall in petrol/diesel prices to ensure reduction in freight charges 

Investment funds in warehousing sector to prevent wastage of food 

Bank accounts for farmers for each and every household for direct transfer of subsidies and loans 

Subsidized loans to farmers and safeguarding them from crop losses through crop insurance 

Availability of quality agri inputs like fertilizers, seeds and advanced technology inputs 

Providing irrigation facilities and electricity at cheap rates to farmers 

Upgrading weather forecasting system – IMD, for accurate monsoon forecasts which could enable farmer to take informed decisions. 

Investments in transportation and infrastructure like roads and railways to reduce transportation costs for farmers for their produce 

Wednesday, February 18, 2015

Confusion over CTT on new agri-commodities cleared

Confusion over CTT on new agri-commodities cleared
The confusion over commodities transaction tax (CTT) on 38 new agricultural commodities is clear now. The government has neither levied as such any CTT on the trading of any new agricultural commodities nor removed it from the any commodity already covered in the list under CTT. In fact, the Central Board of Direct Taxes (CBDT) has expanded its list of the commodities exempting CTT; a finance ministry official source cleared the confusion. He added, the commodities included in this list will remain out of the ambit of CTT or CTT will not be levied on these commodities.
Previously, the news appeared in the media that the commodities transaction tax (CTT) would be levied on 38 new items of agricultural commodities as the Finance Ministry has expanded the list of agricultural commodities coming under CTT by adding 38 commodities to the existing number of 23. This created confusion in the market.
After including several agricultural commodities in the Non-CTT list, the government has opened a new window for new contracts in the agricultural commodities which exchanges now can initiate.
Commodities included in Non-CTT list  
The new commodities included in the list are rice, bajra, ginger, sesamum, small millets, tur, tur dal, urad, urad dal, onion, groundnut, moong dal, methi, ragi , betelnuts, cinnamon, nutmeg, jowar, linseed, gram daland sunflower seed. Presently, some of the new items added to the list are not traded on commodity exchanges.

Tuesday, February 17, 2015

Government exempts oilseeds, raw cotton, 36 other products from commodity transaction tax

Government exempts oilseeds, raw cotton, 36 other products from commodity transaction tax
The government has added 38 more products to the list of commodities exempt from commodity transaction tax (CTT), raising hopes among commodity exchanges and a section of brokers that the Centre might favourably consider a regulatory recommendation to reduce the levy, if not withdraw it altogether, in the Union Budget. 

Twenty three commodities like oilseeds, raw cotton, spices, etc, were exempt from CTT, introduced in July 2013. The government has exempted 38 more commodities from the levy. Many of these, onion, seedlac, ginger, gram dal, gram husk, masur, methi, safflower, rice, paddy, sesamum, moth, small millets, etc, are either not traded or are illiquid and some like urad and tur have been banned from futures trading. 

However, the move drew praise from leading agri commodity bourse NCDEX and a few brokers. 

"....... it (the development) reflects the growing recognition and confidence in the government that markets are taking a very crucial role in the agricultural economy through our efforts such as developing smart mandis, digital e-procurement platforms for government bodies, warehousing finance at the farmer's doorstep and efficient collateral management," said Samir Shah,MD and CEO, NCDEX. Chirag Shah, head of commodities & global futures, Phillip-Capital, said the move "boosted" sentiment that the government was on the "right track" to grow the nascent commodity futures market. 

The development on February 10 came days after Forward Markets Commission, or FMC, which regulates the 11-year-old commodity futures market, recommended to its parent — the finance ministry —to either withdraw or reduce the levy from the current 0.01% on the seller FMC data show that volume shrank 41% to Rs 101.4 lakh crore in FY14 (Apr 2013 - Mar 2014), the fiscal year the tax was introduced on non-farm and processed farm contracts such as gold, silver, crude oil, cotton, soya oil and sugar. In the fiscal year through January 2015, volume has fallen 42% toRs 51.3 lakh crore from the same period last year. 

Moreover, CTT collection has been significantly lower than from securities transaction tax (STT) on stock market transactions. On MCX, the country's largest commodity exchange with 90% market share, collection in the fiscal year through December was Rs 374.35 crore against Rs 4,940 crore in STT over the same period.

Source : ET

Monday, February 16, 2015

Commodities transaction tax expanded to cover 38 more items

Commodities transaction tax expanded to cover 38 more items
The Finance Ministry has expanded the list of agricultural commodities on which the commodities transaction tax (CTT) is currently levied. As many as 38 items have been added to the existing list of 23 commodities.
For this purpose, the Central Board of Direct Taxes has amended the CTT Rules notified in July 2013. The new items that have been added include rice, bajra, ginger, sesamum, small millets, tur, tur dal, urad, urad dal, onion, groundnut, moong dal, methi, ragi , betelnuts, cinnamon, nutmeg, jowar, linseed, gram daland sunflower seed.
Currently, some of the new items added to the list are not traded on commodity bourses. This CBDT move is significant as it comes a fortnight before the Budget for 2015-16 is to be presented. The Forwards Market Commission – the regulator for commodity futures market in India – had recently suggested to the Finance Ministry that the CTT should be either done away with in the upcoming Budget or the quantum of the levy should be reduced.
The Centre had imposed a 0.01 per cent CTT on primarily non-agricultural commodities from July 2013, resulting in the volume of trade on the commodity exchanges dropping.
According to the Forward Markets Commission's market report, the volume of trade till January during the current fiscal dropped to ₹51.26 lakh crore against ₹89.03 lakh crore during the same period a year ago. The trade value dropped to ₹101.44 lakh crore in the 2013-14 fiscal against ₹170.46 lakh crore in 2012-13.

Source: Business Line

Friday, February 13, 2015

FMC urges finance ministry to reduce commodity transaction tax

FMC urges finance ministry to reduce commodity transaction tax
The Forward Markets Commission(FMC) urged the finance ministry to remove or reduce the commodity transaction tax (CTT) in the forthcoming budget because it has severely hit trade volume in the decade-old commodity futures market.

Brokers said the tax of 0.01% on the seller along with lack of volatility has hit futures volume by 40% since it was imposed in July 2013. FMC data show that volume shrank 41% to Rs 101.4 lakh crore in FY14, the fiscal year the tax was introduced on non-farm and processed farm contracts such as goldsilvercrude oilcotton, soya oil and sugar.

In the fiscal year through January 2015, volume has fallen 42% to Rs 51.3 lakh crore from the same period last year. Moreover, commodity transaction tax collection has been significantly lower than that from securities transaction tax (STT) on stock market transactions.

On MCX, the country's largest commodity exchange with 90% market share, collection in the fiscal year through December was Rs 374.35 crore against Rs 4,940 crore in securities transaction tax over the same period.

"There has been a recommendation to remove or reduce the tax," said a government official. "Introduction of commodity transaction tax has drastically affected volumes and since the commodity futures market is nascent, it's imperative to either wholly remove the tax or to reduce it substantially," said Suresh NairdirectorAdmisi Commodities.

The previous UPA government, which introduced the tax at a rate of Rs 10 per Rs 1 lakh on the sell side, justified it on the ground that a huge number of transactions on the commodity futures market did not result in delivery. Officials from leading exchanges such as MCX and NCDEX - specialising in farm and non-farm contracts respectively - argued that physical market constituents used the market to hedge their price risk and not necessarily to give or take delivery.

Further, they pointed out that speculators provided the market with liquidity by taking a contrarian position to that of hedgers. Some of these market participants, who squared off their positions on a daily basis, would be forced out of the market because of commodity transaction tax as the narrow spreads they trade on are being squeezed by the tax.

In the current fiscal year through January, bullion (gold and silver) volumes are down 53% to Rs 18.3 lakh crore, energy by 39% to Rs 13.1 lakh crore and base metals by 32% to Rs 10.6 lakh crore. Bullion accounted for 70% of the overall turnover, followed by energy (26%) and base metals (21%).

Is Commodities Transaction Tax removal in the offing?

Is Commodities Transaction Tax removal in the offing?
The Commodity Transaction Tax (CTT) was introduced in the 2013 Union Budget on non-agricultural commodities traded on futures exchanges.
This was based on the premise that commodity exchanges have matured; and there is no difference between stock and commodity derivatives trading.
Therefore, the very existence of Securities Transaction Tax (STT) in stock exchanges justified the CTT, as was stated during the time of the tax announcement.
Since then, and even before that, several arguments have been put forward on the differences between the commodity and the stock exchanges; but that is immaterial now as the impact of CTT on the commodity futures markets is quite perceptible in the non-agricultural segment.
The CTT of 0.01 per cent that was levied on the sale transaction of commodity futures on non-agricultural commodities from July 1, 2013 increased the cost of transaction almost six times.
The drying of the liquidity as traders deserted the market has had a compounding effect as the impact cost of trading rose, thereby making the exchange-traded commodity market costlier still. The most perceptible impact is on the hedging efficiency. That the futures market was set up for the purpose of hedging needs no reiteration.
Hedging efficiency
Hedging efficiency measures the degree to which physical market risk can be covered by taking appropriate opposite positions in the futures market. One of the good measures of hedging efficiency is given by the Ederington’s Formula.
Following this formula, the Hedging Efficiencies of four commodities traded on the largest non-agricultural commodity exchange are given in Table 1.
Despite hedging efficiency numbers being good (to the extent of being world class) during the pre-CTT phase, there has been a substantial drop in hedging efficiency after the imposition of commodity transaction tax (CTT).
Table 2 shows the decline in liquidity caused by CTT. Liquidity is measured by the Hui-Heubel Ratio, or HH Ratio; higher the number, more illiquid is the market. Table 2 shows that HH Ratio increased, i.e. liquidity dried up, for commodities in all segments: bullion, base metals and agricultural commodities between the periods before and after the imposition of CTT.
Market buzz has it that a number of large trading firms shifted their commodity trading desks overseas following the steep increase in transaction cost due to CTT.
Lower revenue
A number of corporate hedgers also are now finding hedging in global exchanges more attractive to manage their risks rather than hedging in India, notwithstanding the currency risks they encounter in hedging abroad.
Those that are not able to trade abroad possibly are shifting to the illegal (‘dabba’) markets, as trading interest is a significant function of trading costs.
Significantly, as I had argued in a co-authored paper published in the Economic and Political Weekly (“Commodity Transaction Tax: A Recipe for Disaster, EPW, September 27, 2008), even the revenue generated from CTT would be much lower than the direct and indirect revenue loss due to the lower volumes of trade.
There is a clear case of existence of a Laffer Curve (which states that tax revenues increase with initial increases in tax rates but diminishes thereafter), and the critical point might be reached at between 10 and 15 per cent volume loss.
As we might have noted by now, the volume loss is to the tune of around 60-70 per cent. Hence, there is a high chance of revenue loss than garnering revenue.
The government is contemplating creating an International Financial Centre, which will surely have to offer tax incentives to entice international traders to trade in the country.
One such policy reform should be the removal of transaction taxes such as the CTT, as they do not exist anywhere else in the world, except for Taiwan.
Policy reforms in the field of taxation in the commodity futures market is of critical significance as various taxes and levies are a significant component in the overall cost of transaction. We can look forward to the forthcoming budget now, maybe to witness such changes.