Risk management in sugar the need for new tools

Risk management in sugar the need for new tools

Sugar Futures in India 4,500 4,000 3,500 3,000 Banning of Sugar Futures Imposition of stock limits & 75% margin 2,500 2,000 1,500 1,000 500 0 Launch of Sugar M Kolhapur basis Relaunch of Sugar M Bumper production of 28 million MT Release of additional cash margins 2

Steps for market development SEBI taking over as the Regulator Reintroduction of delisted commodities Introduction of Options Establishment of Repositories 3

Steps for market development Increase in position limits Permitting new category of participants Cat III AIFs Committee for integration of Commodity Spot-Derivatives markets 4

New tools & instruments Options in commodities Market National E Repository Limited NCDEX Warehousing Exchange traded Forwards Hedge Passport NEML 5

Options - Key Features SEBI has permitted European Options with commodity futures as underlying One contract per exchange would be allowed Underlying futures will be among the top five futures contract for the exchange. On expiration, if exercised, In the Money (ITM) Option contract to Devolve in underlying Futures Contract. long call position shall devolve into long position in the underlying futures contract long put position shall devolve into short position in the underlying futures contract short call position shall devolve into short position in the underlying futures contract short put position shall devolve into long position in the underlying futures contract Position limits of options would be separate from position limits of futures contracts. Numerical value for client level/member level position limits shall be twice of corresponding numbers applicable for futures contracts.

Options - Advantages over Futures Limited Downside risk for Option Buyer. Buyer need to pay only premium hence No Mark to Market (MTM) and Margins to be paid. Higher leveraging. Commodity transaction Tax (CTT) and Transaction charges to be levied only on premium, hence lesser cost of transaction. Trading possible even without taking a price view in the market (Volatility trading). An option buyer can not only manage his risk but also capture the favorable price movement 7

Not for profit institution for Education and Research NICR A centralized repository for WDRA NERL NCDEX Group NeML E-auctions, Spot markets and Unified Market Platform ReMS NCCL Karnataka State Agricultural Market Equal Joint Venture Company of NeML with Govt. of Karnataka Clearing & Settlement house

NERL - Market for warehouse receipt finance Rs. 1.66 lakh crores No of Active Financial Institutions (WR business) 75 Rs. 9 lakh crores Total Farmer Producer Companies 4,000 Rs. 35,000 crores Total No. of Primary Agriculture Cooperative societies 93,000 Total Primary Agri lending Potential Warehouse Receipt Financing Business * Actual Warehouse Receipt Financing Business *NABCONS Total no. of bank branches 102,343 7 9

NERL - Benefits of e-nwr 10

Exchange Traded Forwards inefficiencies in existing market Limited market Storage and delivery hassles Inability to capitalize on better quality of produce Delayed Payment Lack of assurance of payment Inability to get fair price Terms favoring financially stronger party 11

Forwards - Solutions Provided by Exchange Takes care of counterparty risk Trading on regulated platform Takes care of default compensation Takes care of operational difficulty Multiple delivery modes, flexibility in delivery Exchange Traded Forwards Compensation guarantee to the extent of margin collected Takes care of access to Wider market Time-bound deliverysettlement schedule Online Trading Access to pan- India market Takes care of timely settlement/ payment Option of Assaying Assured quality 12 Takes care of Fair Price For higher quality

Hedge Passport Benefits It gives banks opportunity to manage agricultural commodity price risks embedded in their assets. It will help banks to comply with RBI notification that requires banks to encourage hedging of agricultural commodity. It will unleash the potential benefits for the rated entities in terms of funds cost and access to better business counterparties. Hedging on NCDEX leads to lowering of risk and stabilizing of cash flows helping sustainable profits. 13

NeML Gamut of services Unique customized web based trading system Continual Market Development Updated Price information of Physical market- Relevant commodities Funds clearing and settlement Risk Mitigation Better Price Transparency Pan India Geographical Reach (Market share) Local Cartelization avoided 14

NeML Sugar Capacity Statement Total 7,000 members across the country. Successful association with HBL (Government sugar mills), Co-operative sugar mills, Private sugar mills. NeML conducts auctions for Antyodaya Anna Yojna for five states Gujrat, Kerala, Maharashtra, Jharkhand, and Karnataka. NeML has conducted auctions for various governments, public & private organisations in last three year. Indian Sugar Exim Corporation Ltd. and NeML will work in collaboration for e -Markets. NeML Sugar - Last 3 Financial Year Financial Year Trade Quantity (MT) Trade Value (in Cr.) FY.2014-15 2,24,994 632.31 FY.2015-16 4,75,008 1,261.22 FY.2016-17 6,94,737 2,644.85 15

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Options - Process flow on Expiry All option contracts belonging to CTM option series shall be exercised only on explicit instruction for exercise by the long position holders of such contracts. All In the money (ITM) option contracts, except those belonging to CTM option series, shall be exercised automatically, unless contrary instruction has been given by long position holders of such contracts for not doing so. All Out of the money (OTM) option contracts, except those belonging to CTM option series, shall expire worthless. CTM Options - ATM option series and two option series having strike prices immediately above and below this ATM strike is referred as Close to the money (CTM) option series. All exercised contracts within an option series will be assigned to short positions in that series in a fair and non-preferential manner. 17

Sugar Futures in India Parameter Specifications Moisture Polarization (Sucrose) ICUMSA Grain Size Sulphur Dioxide Dirt, Filth, Iron filings, and Added Coloring matter Extraneous matter Delivery Center Additional delivery centers Delivery Logic 0.08% Max 99.80% Min < or =150 ICUMSA as determined by GS9/1/2/3-8 prescribed in Sugar Analysis ICUMSA Method Book Medium(Sugar M) with > or = 85% retention on 1.18 mm sieve size as determined by the methods prescribed in IS:498-2003 Small (Sugar S) with > or = 70% retention on 600 micron sieve size as determined by the methods prescribed in IS:498-2003 70 ppm maximum It shall be free from dirt, filth, iron filings, and added coloring matter Extraneous matter shall not exceed 0.1 per cent by weight Kolhapur (up to 100 km from municipal limits) Erode, Belgaum, Delhi, Kolkata, Pune, Sangli and Solapur (Within a radius of 100 km from municipal limits) Compulsory Delivery & Staggered Delivery 18

Structure of Commodity Exchanges in India Ministry of Finance ( Department of Economic Affairs) Securities and Exchange Board of India (SEBI) 4 National Commodity Exchanges 4 Regional Commodity Exchanges MCX 84%* NCDEX 15% NMCE 1% * Market share across all commodities 5

Overview of NCDEX Launched in 2003 Product Offering Trading in 30 commodities Network 472 members 2.3 million client base 40,000 terminals more than 1,000 towns and cities. Logistics 315 approved warehouses Cumulative storage capacity of 1.15 million tonnes. Now India s most vibrant platform for price discovery and risk management for agricultural commodities. 26 agricultural 2 precious metals 2 base metals 6

NCDEX: National agri barometer NCDEX provides price signals for 50% of food grains, 48% of pulses and 56% of spices produced in India Impact NCDEX disseminates prices as extensively as possible: 600 ticker boards installed across 9 states NCDEX rates available on Bloomberg and Reuters terminals, mainline and regional dailies, business TV channels and websites NCDEX price signals have facilitated informed decisionmaking for industry participants of different commodities including Sugar. NCDEX has launched free SMS service for farmers 17

NERL - Value Propositions Establish fiduciary trust among depositor and bank by promoting safe and secure e-nwr/e-wr creation, storage and management. Pragmatic dispute settlement mechanism. Reliable and real time MIS to help stakeholders in timely decision making Promote scientific warehousing in the country. Reduce cost of WR financing and bring efficiency in the agri supply chain e-nwr will act price risk management tool by allowing hedging and settlement on Commodity exchange. Robust warehouse inspection, stock audit and risk management practices to generate trust and confidence in the Repository mechanism Value added features like off-market transfer, e-auction of NPA stock and e-trading of e-nwr/ewr Seamless Integration with Commodity Exchange and electronic spot market to increase the liquidity in the rural area. 22

NERL - Negotiable warehouse receipts as tradable instrument Negotiable warehouse receipts as tradeable instrument WDRA Warehouse Company Insurance and bonding guarantees Tracking system NERL Issued on the basis of commodities in stock Negotiable warehouse receipts Bank guarantees Sale on secondary market 23

NCDEX warehousing NCDEX has uplifted Indian warehousing industry COMTRACK More than 315 NCDEX approved warehouses Aggregate capacity close to 1.15 million metric tonnes Average monthly delivery 72,000 tonnes WSPs NCDEX Warehouses Grading and Assaying Commodity Funding 20

NCDEX warehousing Online commodity accounting and management system Gives a transparent view of stored commodity COMTRACK NCDEX reforms helped establish a high service standard (ambience, service and governance) for WSPs Enhanced warehousing standards across India. NCDEX Logistics 4.0 A first-of-its-kind initiative in India Real time service enhances ease of doing business Brings transparency and efficiency to the warehousing system. Savings in time and money for registered clients Can be accessed on app from comfort of home or office. Book My Warehouse 21

Integration of Spot & Futures Market Government has started Electronic National Agriculture Market (also known as enam) Formation of expert committee on integration of Spot & Futures Location Based Spreads Location based spreads will enable buyers and sellers from across the country to come and hedge on platform. Spot + Futures 26

Options - Introduction of Commodity Options SEBI-FMC Merger announced in Budget 2015-16 In budget 2016-17 Hon ble Finance Minister announced that new derivatives will be developed by SEBI in Commodity Derivatives Market September 2016, SEBI has permitted Commodity Exchanges to introduce trading in Options June 2017 SEBI announced further detailed guidelines setting the scene for launch 27

Options For Sugar Industry The right, but not the obligation to buy or sell an asset at a fixed price on or before a given date. SEBI has approved European Options for agriculture commodities. Options will devolve into futures on the expiry. Cost Efficiency More Strategic Alternatives Benefits of Trading in Options Less Risk Higher Returns 28