Risk management in sugar –

the need for new tools

2

Sugar Futures in India

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Launch of Sugar M

Kolhapur basis

Banning of

Sugar Futures

Relaunch

of Sugar M

Bumper

production

of 28

million MT

Imposition of stock

limits & 75% margin

Release of

additional

cash

margins

3

• SEBI taking over as the Regulator

• Reintroduction of delisted commodities

• Introduction of Options

• Establishment of Repositories

Steps for market development

4

• Increase in position limits

• Permitting new category of participants – Cat III AIFs

• Committee for integration of Commodity Spot-Derivatives markets

Steps for market development

5

New tools & instruments

Options in commodities Market

National E Repository Limited

NCDEX Warehousing

Exchange traded Forwards

Hedge Passport

NEML

• 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 - Key Features

7

• 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

Options - Advantages over Futures

NCDEX

Group

Not for profit institution for

Education and Research

E-auctions, Spot markets

and Unified Market

Platform

Clearing & Settlement

house

A centralized repository

for WDRA

NICR

NeML

NCCL

ReMS

Karnataka State Agricultural

Market

Equal Joint Venture Company

of NeML with Govt. of

Karnataka

NERL

9

NERL - Market for warehouse receipt finance

Total Farmer Producer Companies

4,000

Total No. of Primary Agriculture Co-

operative societies

93,000

Total no. of bank branches

102,343

No of Active Financial Institutions

(WR business)

75

*NABCONS

Rs. 9 lakh crores

Rs. 1.66 lakh crores

Rs. 35,000 crores

Potential Warehouse Receipt Financing Business *

Total Primary Agri lending

Actual Warehouse Receipt Financing Business

7

10

NERL - Benefits of e-NWR

11

Exchange Traded Forwards – inefficiencies

in existing market

Inability to get fair price

Lack of assurance of

payment

Inability to capitalize on

better quality of produce

Limited market Storage and

delivery hassles

Delayed Payment

Terms favoring financially

stronger party

12

Forwards - Solutions Provided by Exchange

Trading on regulated platform

Compensation guarantee to the extent of margin

collected

Online Trading – Access to pan-India market

Option of Assaying – Assured quality

Time-bound delivery-

settlement schedule

Multiple delivery modes, flexibility in

delivery

Takes care

of operational

difficulty

Takes care

of timely

settlement/

payment

Takes care

of Fair Price

For higher quality

Takes care

of access to

Wider market

Takes care

of default

compensation

Takes care

of counterparty

risk

Exchange

Traded

Forwards

13

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.

14

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

15

NeML – Sugar Capacity Statement

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

• 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 f ive 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.

Thank You

17

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.

All exercised contracts within an option series will be assigned to short positions in that series in a fair and non-preferential manner.

Options - Process flow on Expiry

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.

18

Sugar Futures in India

Parameter Specifications

Moisture 0.08% Max

Polarization (Sucrose) 99.80% Min

ICUMSA < or =150 ICUMSA as determined by GS9/1/2/3-8 prescribed in Sugar Analysis ICUMSA

Method Book

Grain Size 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

Sulphur Dioxide 70 ppm maximum

Dirt, Filth, Iron filings, and

Added Coloring matter

It shall be free from dirt, filth, iron filings, and added coloring matter

Extraneous matter Extraneous matter

shall not exceed 0.1 per cent by weight

Delivery Center Kolhapur (up to 100 km from municipal limits)

Additional delivery centers Erode, Belgaum, Delhi, Kolkata, Pune, Sangli and Solapur (Within a radius of 100 km

from municipal limits)

Delivery Logic Compulsory Delivery & Staggered Delivery

5

Ministry of Finance

( Department of Economic Affairs)

Securities and Exchange Board of India

(SEBI)

4 National Commodity

Exchanges

MCX

84%*

NCDEX

15%

NMCE

1%

4 Regional Commodity Exchanges

* Market share across all commodities

Structure of Commodity Exchanges in India

6

Overview of NCDEX

Launched in 2003

Now India’s most vibrant

platform for price discovery

and risk management for

agricultural commodities.

Product Offering

Trading in 30 commodities

26 agricultural

2 precious metals

2 base metals

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.

17

NCDEX: National agri barometer

NCDEX provides price signals for 50% of food grains, 48% of pulses and 56% of spices

produced in India

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 has launched free SMS service for farmers

NCDEX price signals have

facilitated informed decision-

making for industry participants

of different commodities

including Sugar.

Impact

22

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.

23

NERL - Negotiable warehouse receipts as tradable instrument

Negotiable warehouse receipts as tradeable

instrument

Warehouse

Company WDRA

Insurance and

bonding guarantees

Negotiable

warehouse receipts

Tracking

system NERL

Bank guarantees

Sale on secondary

market

Issued on the basis of

commodities in stock

20

NCDEX warehousing –NCDEX has uplifted Indian warehousing industry

More than 315 NCDEX approved warehouses

Aggregate capacity close to 1.15 million metric

tonnes

Average monthly delivery 72,000 tonnes

NCDEX Warehouses

COMTRACK

Grading and Assaying

Commodity Funding

WSPs

21

•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

NCDEX warehousing

26

Futures

+

Spot

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.

27

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

28

• 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.

Options – For Sugar Industry

Cost Efficiency

Less Risk

Higher Returns

More Strategic

Alternatives

Benefits of

Trading in

Options