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Market Participants o Issuerso Investors

Retail Institutional Investors –

off market trade – cleared & settled without the participation of clearing corporation

Market Trade - settled through clearing agencyo Intermediaries/Trading Member – pool account with NSDL, CDSLo Stock Exchangeo Regulatorso Clearing Corporation

Clearing Bankso Depository

Current Structure – SEBI

Corporation Finance Department(CFD)

Market Regulation Department(MRD)

Investment Management Department (IMD)

Special Enforcement Cell (SEC)

Integrated Surveillance Department(ISD)

Enforcement Department(EFD)

Investigations Department(IVD)

Market Intermediaries Regulation and Supervision Department(MIRSD)

Enquiries and Adjudication Department(EAD)

Office of Investor Assistance and Education(OIAE)

Legal Affairs Department(LAD)

Parliament Questions (PQ) Cell

Department of Economic and Policy Analysis (DEPA)

General Services Department (GSD) , (FMD) , Estb., (T&A) and (P&S)

RTI-Appellate Authority

 Human Resources Development Division (HRD)

Board Matters Information Technology Department(ITD) 

Official Language Division (OLD)  Office of International Affairs(OIA) Regional Offices(ROs) FATF and KYC Related matters

Current Structure – FMC1) Market Division I

a. Policy Issues, Parliamentary Affairs, International Affairsb. Governance of Exchanges, New application for recognition of exchangesc. Spot Exchangesd. Warehousinge. Marginsf. Settlement Guarantee Fund

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2) Market Division IIa. New Contracts, Contract designs, Trading Permissionsb. Market Research, Surveys

3) Monitoring & Surveillancea. Monitoring & Surveillance of tradesb. Inspection & Audit of exchangesc. Complaintsd. Special Margins

4) Investor Protection Divisiona. Complaints against intermediariesb. Investor Protection Fund

5) Intermediary Divisiona. Inspection & audit of exchange membersb. Intermediary registration

6) Planning & Coordination a. Meeting with exchangesb. Budget related mattersc. New projects, training programmesd. Annual reports, bulletin, other reports

7) IT Division8) Legal Affairs Division

a. Amendment to FCRA9) Vigilance & Enforcement Division10) Administration Division

Market – Regulator, Products, Settlement

Market Regulator Products SettlementMoney Market RBI T Bills, CPs, CDs T+0, T+1, T+2Bond Market RBI G Sec T+2FX Market RBI Currency Futures T+1Commodity Market

FMC Agri Commodities, Metals, Energy, Bullions

T+2

Stock Market SEBI Stocks, IPO, FPO, Preferred Shares

T+2

Mutual Funds SEBI Fund UnitsPension Funds PFRDAInsurance IRDA

FSLRC – Financial Sector Legislative Reforms Commission (2010-11)o Constituted on 24.03.2011 to harmonise financial sector legislations, rules and

regulations

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o To simplify the old rules and regulations which has become complex over time due to many amendments. It aims to remove ambiguity and regulatory gaps and bring financial sector reforms

RBI Act 1935 – Banks, Debt, FX SEBI Act 1992 – Established in the year 1988, SEBI is a regulator for the

securities market in India and had been given statutory powers through the SEBI Act, 1992.

Chairman 8 Members – 1 Nominee each from MOF, MCA, RBI

PFRDA Act FCRA Act SCRA Act 1956 FEMA Depositories Act 1996 – NSDL & CDSL were formed – through depository

participants SEBI (Stock Broker and Sub-Brokers) Regulation 1992 – FMC – The Forward Markets Commission (FMC), established in 1953

under the Forward Contracts (Regulation) Act, 1952 is the agency which regulates commodity derivatives trading in India in the same way as SEBI does for securities markets

o List of Exchanges – 4 National, 6 Regional – MCX, NCDEX, NMCE (Ahmedabad), ICEL, ACE Derivatives & Commodity Exchange, Universal Commodity Exchange

Convergence at the level ofo Brokerage Firmso Policy Makingo Exchangeso Regulators

Proposed Merger - The government has proposed to insert a new section 28A in FCRA, which shall allow the recognized associations to be recognized as stock exchanges under the Securities Contract (Regulation) Act (SCRA). The government has also proposed to insert new sections 29A and 29B, which shall deal in repealing the FCRA and transfer of FMC to SEBI, respectively. All legal actions initiated by FMC would be continued and enforced by SEBI.1

Behind the said merger is the unspoken intention of government is to recuperate the lost market confidence after the NSEL payment crisis which occurred in 2013 and affected the market including the small investors. It was also in the September 2013 that the FMC was shifted from the Consumer Affairs Ministry to the Finance Ministry for better monitoring of the NSEL crises.The merger will prevent the illicit off-market trades which is prevalent in many parts of the country. Such off-market trade involves trading in commodities and stocks which runs into thousands of crores. While the efforts have been constantly made by various regulators and enforcement agencies to restrain such practice, the proposed merger will definitely help in curbing such practice with SEBI being given the jurisdiction to regulate

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the commodity market in addition to its well managed capital market with a good experience with investigation, search, seizure and taking strict actions.

Initially, the FCRA (Forward Contracts Regulation Act) would be repealed and the definition of securities under the Securities Contracts (Regulation) Act and the SEBI Act would be amended to include commodity derivatives.

UFA (Unified Financial Regulatory Agency) – FSLRC proposal to merge SEBI, IRDA, PFRDA, FMC into a single entityIndian Financial Code (IFC), proposed by FSLRC

o Proso Economies of Scale –

Using the infrastructure of equities in the commodities Streamline Monitoring Reduce the cost of transaction and compliance for brokers

o Economies of Scope – Common clearing corporation for all segments – reduced risk for clearing

corporation from diversification, lower collateral requirement o Curb wild speculations – increasing liquidityo Can penetrate each other’s segment o Possibility of introduction of new productso Eliminate informal marketo Cons

Different State Taxes Regulation of spot markets

Other Budget Proposalso Financial Data Management Centero Financial Sector Appellate Tribunalo Public Debt Management Agencyo The Resolution Corporation

Services Provided by Brokerso Portfolio Management Serviceso Margin Tradingo Depository Serviceso IPO Applicationso Trading of Mutual Fund Units – ARN (AMFI Registration Number)

Portfolio Management Services – Portfolio advisory services were earlier allowed in commodities, but were banned by FMC in 2007.

o SEBI Guidelines – SEBI (Portfolio Managers) Regulations, 1993 Discretionary & Non-discretionary Procedure for obtaining registration

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Application Fee – 1 lac Registration Fee – 10 lac Validity – 3 years Renewal – 5 lac Net Worth – 2 crores Qualification

Agreement between Portfolio Manager & Investor – Investment Policy Statement

Minimum size – 5 lakhs No lock in period but exit fees allowed

o Foreign Portfolio Investor FII Sub Account QFI (Qualified Foreign Investor)

o Productso Alternative Investment Funds – Commodities, Real Estate, Private Equity (Equity

Linked Instrument), Hedge Funds, Infrastructure fund, SME, Social Venture Category I – SME, Social, Infrastructure Category II Category III – HF AIFs shall state investment strategy, investment purpose, and its

investment methodology Alteration to be made by approval of 2/3rd of unit holders Units may be listed on exchanges subject to a minimum size of Rs. 1 cr

o Commodities Not for retail investors Minimum investment amount should be high (Ex – 25 lacs – 1 cr) Net Worth should be high Managers should have a continuing interest of not less than 2.5% of the

corpus or Rs 5 cr whichever is less Taxation

o Commodity ETF - tracking o Common Features of Alternative Investment Funds:

Low Liquidity Diversification High Due Diligence Cost – individual characteristics Difficult to value Access to Information

o Rationale for investment in commodities: Low correlation with stocks & bonds Positive correlation with inflation – mostly precious metals and energy

o Commodity Index Benchmarking: S&PCI (S&P Commodity Index), DJ-UBSCI (Dow Jones-UBS Commodity Index)

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Given the zero-sum nature of futures, the indices cannot use a market-cap method of weighing

Arithmetic/Geometric averaging to calculate component return Two methods of weighing

World production of the underlying commodity Importance

o Only for commodities driven by international market (bullion, base metal, energy) to avoid any influence by large domestic player

o Diversification Benefit – The addition of commodity futures pushes the efficient frontier up and to the left

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Organisation Structure

FMC-SEBI Mapping – differences in structureDifferences in existing products/services

Equity CommodtiyShort Selling Yes NoSettlement T+2 T+2Options Yes NoMargin Funding Yes NoCredit Rating Agencies YesExchange Traded Funds – listing/non-listing

Yes No

Custodian Services – STPDepository Participants NSDL, CDSL NSDL, CDSLWDRA No YesAppellate Tribunal Securities

Appellate TribunalFiling RequirementsUniform Transaction Cost, Taxes

Securities Transaction Tax

Commodities Transaction Tax

Research Analyst

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RegulationAudit of the brokersPosition LimitsForeign Investments (FIIs)

Yes No

Clearing Agency NSCCL, BOISL, MCX-SXCCL

NCCL

Bad DeliveryVAR Margin

Margin Trading – trading with borrowed funds/securities. Client shall not avail this facility from more than one broker at a time. Only for Group 1 securities. Cap on the margin trading.

New Products Introduction – o Combined Margin for equity & commodity (Initial, M2M, Extreme Loss)o Commodity Linked Notes o Freight Indices –

Freight Indices & Futures Committee Baltic Index – Index measures the demand of shipping capacity

o Weather Derivatives – Catastrophe Bonds Heating Degree Days (for Winter) Cooling Degree Days (for Summer) World Bank, CMRG – 2003 – Insurance for groundnut and cotton farmers

in Andhra Pradesh Rainfall insurance

o Indices Can be based on weights in the inflation index

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o

Warehouse developmento Lending against Warehouse Receipts

Free trade in many agricultural commodities items is restricted under the Essential Commodities Act (ECA), 1955 and Agriculture Produce Marketing Committees (APMC) Acts of various State Governments. The forward and futures contracts were, till April 2003, limited to only a few commodity items under the Forward Contracts (Regulation) Act (FCRA), 1952. However, in 2003, GOI removed all restrictions on commodities, which could be traded on commodity exchanges.

Order to Trade Ratio – The algorithmic orders entered and/or modified within 1% of the last traded price (LTP) of the respective contract shall not be included in the calculation of the Order-to-Trade ratio, prescribed

III. TO ESTABLISH FINANCIAL REDRESSAL AGENCY

It has been proposed to set up a Task Force to establish a 'sector-neutral' Financial Redressal Agency (FRA) with a view to address grievances against all financial service providers.

Also, the Indian Financial Code is likely to be introduced in the Parliament soon, which is currently being reviewed by the Justice Srikrishna Committee.

Index-based derivatives

As I have argued in one of my previous articles in these columns last year, as also in a paper in Commodity Vision journal, India needs to have trading in water futures and options. I have argued in the detailed paper that water futures index can reduce the scarcity value of

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water, thereby helping in water conflict resolution. Such derivatives products cannot be delivery-based, but should be index-based.

Delivery is a costly affair, and completely defeats the purpose for which such a product is conceived. Many of these sustainability-related products such as weather derivatives, which can also be linked to crop insurance products floated by banks in the markets are index-based, are non-deliverable.

In the previous regulatory regime governed by the FCRA 1952, such products were not allowed to be traded, as the statute governing commodity markets mandates every derivative product to be delivery-based.

Carbon credit derivatives that were floated in India also failed, and there were two reasons for that: the improper timing of product launch as carbon markets were moving down from 2009 onwards, and it proved unattractive for speculators due to the delivery clause.

Risk products for agriculture commodities

In the face of climate change and with increasing frequency of extreme events, there are various risk management products that are needed for the country's agriculture. Worldwide, there are various risk management instruments such as crop-yield insurance (linked to the productivity), crop-hail insurance (covers against hailstorm in US), multi-peril crop insurance (covers against multiple extreme events like floods, droughts, hail, etc), crop-revenue insurance, etc. Further even, weather derivatives products such as heating degree day and cooling degree days are also in vogue. While insurance companies or banking institutions worldwide have conceived of such products, globally these institutions access futures or derivatives markets for their own risk management.

However, the statute does not allow access to the commodity derivatives market in India. Even the Banking Act 1948 prohibits institutional access to commodity markets, though banks can access stock markets. One of the reasons often cited is that commodity markets regulator was not autonomous and did not have enough teeth to regulate such products and institutions.

Issue – Pricing

Portfolio Management Services Guidelines

A portfolio manager advises or undertakes on behalf of his client to manage a portfolio of securities or the funds of the client. He may either be a discretionary portfolio manager or a non-discretionary portfolio manager. A discretionary portfolio manager individually and independently manages the funds of each client in accordance with the needs of the client, whereas a non-discretionary portfolio manager manages the funds in accordance with the directions of the client.

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The applicant has to be a body corporate and must have necessary infrastructure like adequate office space, equipment and the manpower to effectively discharge the activities of a portfolio manager. The principal officer of the applicant should have professional qualifications in finance, law, and accountancy or business management from an institution recognised by the Government.

The applicant should have in its employment a minimum of two persons who, between them, have at least five years of experience as portfolio managers, stock brokers, investment managers, or in areas related to fund management. The applicant also has to fulfil the capital adequacy requirements etc. The portfolio manager is required to have a minimum net worth of Rs 50 lakhs. The certificate of registration by SEBI remains valid for three years.

The portfolio manager, before taking up an assignment of management of funds or portfolio of securities on behalf of the client, enters into an agreement in writing with the client. It should clearly define the relationship and set out their mutual rights, liabilities and obligations relating to the management of funds or portfolio of securities. It should contain the details as specified in Schedule IV of the SEBI (portfolio managers) Regulations 1993. The regulations have not prescribed any scale of fee to be charged by the portfolio manager to its clients. However, the regulations provide that the portfolio manager will charge a fee as per the agreement with the client for rendering portfolio management services. The fee may be a fixed amount or a return-based fee or a combination of both.

A portfolio manager is permitted to invest in derivatives, including transactions for the purpose of hedging and portfolio rebalancing, through a recognised stock exchange. However, leveraging of portfolio is not permitted in respect of investment in derivatives. The total exposure of the client in derivatives should not exceed his portfolio funds placed with the portfolio manager and the portfolio manager should basically invest and not borrow on behalf of his client.

He should provide to the client a disclosure document at least two days prior to entering into an agreement with the client. The document , inter alia, contains the quantum and manner of payment of fees payable by the client for each activity for which service is rendered by the portfolio manager directly or indirectly, portfolio risks, complete disclosures in respect of transactions with related parties as per the accounting standards specified by the Institute of Chartered Accountants of India in this regard, the performance of the portfolio manager and the audited financial statements of the portfolio manager for the immediately preceding three years.

o As was first noted by John Maynard Keynes in 1930, commodity futures prices tend to be priced at a discount to spot prices in order to induce speculators to provide price insurance to commodity inventory holders. Investors in commodity futures essentially earn a risk premium for bearing the volatile commodity price risk that inventory holders and producers wish to lay off.

o The other factor driving commodity returns is the continuation of just-in-time inventory policies, which cause temporary shortages in individual commodities,

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leading to temporary spot commodity price spikes. By continuously investing in front-month futures contracts, one captures these returns.

o Roll-yield – when a commodity is in Backwardation

Risks in Commodity Fundso General Market Risk – country/regiono Regulation Risk – taxes, restrictions o Commodity Specific Risko Derivatives Risk – positions more volatile than normal spot market position

Baltic Dry Index

Chartering – Chartering is an activity within the shipping industry. In some cases a charterer may own cargo and employ a shipbroker to find a ship to deliver the cargo for a certain price, called freight rate.

A time charter is the hiring of a vessel for a specific period of time; the owner still manages the vessel but the charterer selects the ports and directs the vessel where to go. The charterer pays for all fuel the vessel consumes, port charges, commissions, and a daily hire to the owner of the vessel

Shipbroking – Shipbroking is a financial service, which forms part of the global shipping industry. Shipbrokers are specialist intermediaries/negotiators (i.e. brokers) between shipowners and charterers who use ships to transport cargo, or between buyers and sellers of ships.

The BDI contains route assessments based only on time-charter hire rates "USD paid per day per Metric Ton". Fuel (="Bunkers") is the largest voyage dependent cost and moves with the crude oil price. In periods where bunker costs fluctuate significantly, the BDI will move more than the shipowners' realised earnings

Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various marketsThe supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and the cost of laying up a ship is too high to take out of trade for short intervals,[6] the way you might park a car safely over the winter. So, marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly. e.g. "if you have 100 ships competing for 99 cargoes, rates go down, whereas if you've 99 ships competing for 100 cargoes, rates go up. In other words, small fleet changes and logistical matters can crash rates..."[7] The index indirectly measures global supply and demand for the

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commodities shipped aboard dry bulk carriers, such as building materials, coal, metallic ores, and grains.The BDI is termed a leading economic indicator because it predicts future economic activity.[8]

Major bulk carrier size categories

NameSize in

DWT[18]

Ships[19]

Traffic[20]

Newprice[21]

Usedprice[22]

Handysize

10,000 to 35,000

34%

18% $25M $20MHandymax

35,000 to 59,000

37%

Panamax 60,000 to 80,000

19% 20% $35M $25M

Capesize 80,000 and over

10% 62% $58M $54M

Routes selection – representative of the bulk cargo trades, Geographical balance, Liquidity (not seasonal routes), Standard terms,Baltic Exchange Dry Index

The Baltic Dry Index (BDI) is the successor to the Baltic Freight Index (BFI) and came into operation on 1 November 1999. Since 1 July 2009, the index has been a composite of the Dry Bulk Timecharter Averages. The following formula is used to calculate the BDI:

(Capesize5TCavg + PanamaxTCavg+ SupramaxTCavg + HandysizeTCavg)/ 4) * 0.110345333

TCavg = Time charter average

Deadweight tonnage is a measure of how much weight a ship can safely carry.

How Baltic market information is produced

The index model used by the Baltic Exchange was established in 1985 with the launch of the Baltic Freight Index (today’s Baltic Dry Index) and used to

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settle trades on the world’s first freight futures exchange, BIFFEX. Although there have been a few minor modifications along the way, the model has essentially remained unchanged since its introduction and relies on panels of independent shipbrokers around the world giving their professional judgement as to the prevailing level of the open market within the parameters of the route they have been asked to assess. The numbers produced by the Baltic Exchange are based on an underlying understanding of what is actually happening in the freight markets.

The routes reported are as representative as possible of the world’s principal bulk cargo trades and reflect trades within the Pacific and the Atlantic, as well as trades between the oceans, maintaining a balance between front haul and backhaul routes.

All the routes reported have a steady and significant turnover of fixtures, while trades subject to seasonal closures such as the Great Lakes or Goa are avoided. Trades dominated by a limited number of charterers are also avoided and voyage routes where business is largely concluded on standard terms are favoured.

The Baltic Exchange’s indices are widely used and completely trusted by ship owners, charterers and freight derivative traders as an honest, independent assessment of the market. They are not only used to settle multi-million dollar FFA trades but are also the basis for index linked affreightment contracts and period charters

Neither ship owners nor charterers are allowed to make assessments and all the brokers providing assessments are audited to ensure they are fully active on the trades they are assessing. No shipbrokers will have "money in the market."

The assessment is not reporting the “last done” fixture but takes into consideration a professional’s view of the market based on the cargoes and tonnage currently available as well as recent fixtures.

Governance – Overall responsibility for the administration of the Baltic Exchange's benchmarks belongs to the Board of Baltic Exchange Information Services Ltd (BEISL). This Board currently comprises a number of directors who also serve on the Board of the Baltic Exchange Ltd (BEL).

The BEISL Board meets at least once a quarter to review matters related to the benchmarks and to make any necessary decisions, conduct reviews of the accuracy and suitability of the benchmarks, and will review annually the independent auditors' reports on compliance with the rules for index production.

The Board receives advice from staff of BEISL and BEL and invited representatives from the marketplace. BEISL and BEL staff, together with the market representatives, attend

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in an advisory role.

At this time those representatives are the Chairmen of the Freight Market Information Users’ Group (FMIUG) (dry) and the FMIUG (wet) as well as the Chairman of the Forward Freight Agreement Brokers’ Association (FFABA) for each of the dry and wet markets and the Chairmen of the Panellist Working Group.

These groups are informally constituted bodies which seek to represent the views and interests of market participants

Warehouse Capacity

NABCONS maintains a directory of all warehouses.

II. PROPOSAL TO SET UP PUBLIC DEBT MANAGEMENT AGENCY

Considering the fast developing Indian equity market, the need of an hour requires to a well-developed Bond market to serve the funding needs of infrastructure sectors. With intent to promote investment in India and deepening the Indian Bond market, the Budget has come up with a proposal to set up a Public Debt Management Agency (PDMA) to bring India's external borrowing and domestic debt under one roof. However, all eyes will be on the functioning of this Agency along with the impact which it might likely have on the bond market.

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The move to set up a separate PDMA to manage market government borrowings and public debt may cause reduction in the powers of the Central Bank, the same is in line with the trend which most of the Countries follow.

Setting up a separate PDMA will definitely help the RBI focusing on its core functions along with deepening the bond market and facilitating better planning and management of domestic and foreign market borrowings. All in all it will be a win win situation for both the authorities.

IV. PROPOSED OPTIONS TO EMPLOYEES FOR EPF

The budget has come up with something called employee-friendly since Finance Minister has proposed changes under Employees Provident Fund (EPF) and Employees State Insurance (ESI). Under the EPF, it has been proposed to make the employees share contribution towards the Provident Fund an option for the employees having monthly income below certain threshold although the employer will continue to contribute his share of the PF irrespective of the employee opting not to pay his contribution. Furthermore, employees will be given an option to choose between EPF and the New Pension Scheme (NPS).

Under the current structure, all employees are mandatorily required to contribute 12 % of their basic wages including basic salary and DA as contribution towards PF. The employers also make contribution at the same rate, with 8.33% going towards pension, 0.5% towards Employees Deposit Linked Insurance (EDLI) scheme and remaining towards PF.

With respect to ESI, it has been proposed that the employee should be given an option of choosing between ESI and Health Insurance product as recognized by the Insurance Regulatory Development Authority (IRDA).

The above mentioned step is surely a welcome step and will be beneficial for the low paid workers who suffer deductions greater than high paid workers.

Catastrophe Bonds – It is usually issued by insurance companies to reduce their risk. Insurance companies issue bonds which usually have maturities less than 3 years. If no catastrophe occurs then company pays coupon and at the maturity pay principal to the investors. On the other hand if a catastrophe occurred then principal would be forgiven and insurance company would pay money to their clients.

General Insurance Corporation

http://articles.economictimes.indiatimes.com/2014-05-02/news/49578470_1_catastrophe-bonds-cat-bonds-gic-re

http://www.artemis.bm/blog/2014/05/02/indias-gic-re-making-progress-on-potential-catastrophe-bond-issue/

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Insurance – Agriculture Insurance Company of Indiao Weather Insurance (RABI)

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