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Introduction • MEX is the first Multi Commodity Exchange. • First fully automated Exchange of Nepal. • Provides world class services for online trading of futures contracts. • MEX is the only Exchange in Nepal to have technical and investment support from the commodity relevant sectors.
Objective of MEX • To establish fair price discovery mechanism. • To stand for market integrity and price transparency. • To help EXIM, Processor and Grower by providing risk mitigation system. • To establish global standard in exchange trading. • To establish efficient Clearing and guaranteed settlement system. • Development and implementation of hedging needs.
Economic Benefits • Futures Exchange serves for EXIM, Processor, producer and Investors. • Hedging is essential for current international trade. • Trade risk can be mitigated by trading futures. • Processor shall be benefited by participating in Futures trade to mitigate price fluctuation risk. • Producer shall be benefited to choose cropping pattern, production season and implementation of commercial manner in cultivation, production. • Quality backed warehouse shall be developed.
Economic Benefits Contd. . . • Warehouse Receipt shall be accepted as negotiable instruments. • Banking sector shall be benefited for secured lending on contract notes and warehouse receipt. • State shall be benefited by additional revenue generation sector. • Social utility of futures markets to be mainly in the transfer of risk, and increase liquidity between traders with different risk and time preferences, from a hedger to an investor.
Futures • A market products falls under derivatives segments traded as negotiable instruments. • futures contract is a standardized contract, traded on a futures exchange, to buy or sell a standardized quantity of a specified commodity of standardized quality at a certain date in the future, at a price determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract. The future date is called the final settlement date. • A futures exchange is an organized marketplace where people can trade standardized futures contracts.
Pricing of Futures • Pricing follows theory of net-present-value. • Carry return shall be deducted with cash flows. • Demand supply shall determine contango and backwardation. • Dividend paying asset and non-dividend paying asset shall be segregated for pricing.
Basis • Provides arbitrage opportunity in market. • Reflects futures market demand supply in particular underlying commodity. • Informed market participants to decide for selling and buying opportunity. • Contango reflects demand in futures is high than supply. • Backwardation reflects supply in futures high than demand. • Basis shall not reflects state tax and transportation costs.
Market Participants • Member – Divided in 2 category. – Clearing Member: acts as market maker to maintain liquidity in market. Also acts as central counterpart for its trading members and their customers. – Non-Clearing Member: acts as facilitator for trader. S/he should be ultimately liable to serve end users.
Market Participants • Hedger: wishes to mitigate risk from adverse price fluctuation. Making an investment to reduce the risk of adverse price movements in an asset. • Arbitrageur: A type of investor who attempts to profit from price inefficiencies in the market by making simultaneous trades that offset each other and captures risk-free profits. • Investor: wishes to make profit from the fluctuation of the prices. These class of market participants enables liquidity in market.
Products • Products of futures trade namely known as underlying asset. • Financial Products: Indices, cash settled commodities contracts, warrants, bond, equity, ETF etc. • Non-financial products: agro products, energy, base metals, precious metals, live stocks etc.
Products Offered by MEX Commodity Contract Size Margin (NPR) Price Quoted at MEX Wheat (WHT) 20, 000 kg 35, 000 NPR/Kg Soybean (SOY) 20, 000 kg 35, 000 NPR/Kg Crude Soy Oil (SBO) 22, 000 Liters 70, 000 NPR/Kg Cotton (COT) 10, 000 kg 35, 000 NPR/Kg Coffee (COF) 5, 000 kg 45, 000 NPR/Kg Crude Oil (CRU) 250 US Barrels 60, 000 NPR/Kg
Products Offered… Commodity Contract Size Margin (NPR) Price Quoted at MEX Natural Gas (NAG) 2500 Mmbtu 60, 000 NPR/Kg Heating Oil (HEA) 10, 000 Liters 80, 000 NPR/Kg Gold (GOL) 1 Kg 60, 000 NPR/Kg Silver (SIL) 30 Kg 60, 000 NPR/Kg Copper (COP) 1000 Kg 35, 000 NPR/Kg
Trading • Market Functionality: – Trading hours – Order matching and its principles, – Trading phases – Trading ethics – KYC principles.
Trading… • Contract Specification – Products details, – Final Settlement month, – Launch of contract, – Expiry of contract, – Quotation base value – Quality and grading details in non-financial contracts, – Settlement option, – Basis, – Settlement logic, – Trading unit (contract size) – Delivery calendar, – Delivery location.
Trading • Automated Trading system – Minimize time and costs for trader. – Facilitates for instant order execution. – Helps to keep e-records for all trading related activities. – A method of trading exchange traded derivatives electronically. It uses information technology to bring together buyers and sellers through electronic media to create a market place. – Publish market depth, enables traders to identify for market trend by volume and open interest.
Fund Segregation • Trading fund segregation – Member to member level – Member to client level – Client to client level • Enables effective methods for MTM settlement for debiting and crediting of the trade resultant obligations. • Banking sector should involve for to be custodian, clearing and segregation of funds.
Clearing & Settlement • Novation is the heart of Clearing and settlement procedure. • Clearing of trade occurs by transferring of contractual obligation. • Clearing Member shall be counter-part for its NCM and their customer. • Exchange Clearing house acts as central counter-part for Clearing members.
Clearing Mechanism EXCHANGE CLEARING MEMBER NCM (PROFESSIONAL) Institutional Trader NCM (INDIVIDUAL) NCM (INSTITUTIONAL) Institutional and Individual Trader
Settlement • Daily settlement • Final settlement • Daily settlement occurs during closing time of Exchange based on established Close price of the contracts. • Final settlement shall occur during the last trading day of the contracts. • Daily settlement shall follow MTM settlement norms and value. • Final settlement shall follow DDR. – Due date rate (DDR) is the final settlement price for a particular futures contract based on which the outstanding positions on expiry will be settled off.
Settlement Option • As specified in contract specification of particular contracts settlement occurs respectively. • Final settlement follow: – Cash settlement in cash settled contracts. – Delivery in Deliverable contracts.
Settlement Logic • Settlement logic stand with deliverable contracts. • Seller's option: seller has prerogative right to impose delivery. • Buyers Option: buyer has prerogative right to ask delivery.
Risk Management • What is Risk? – Risk is multidimensional Market Risk Credit Risk Financial Risks Operational Risk Reputational Risk Business and strategic risks
Best Practiced Risk Management • With US METHO DOLOG IES POLIC INFRASTRUCTURE » Policies » Methodologies » Infrastructure
Framework of Risk Management can be Benchmarked in Terms of: Proactive Risk Management METHO DOLOG IES POLIC INFRASTRUCTURE » Policies » Methodologies » Infrastructure
Risk Management @ MEX • Complete segregation – cornerstone • Initial Margins determined using Va. R – No netting-off between clients • Pre-Trade Check • Spot Month Credits – Intra commodity spreads – Inter commodity spreads • Daily Mark – to - Market of Positions • Variation Margin in Cash only • Position Limits • Exposure Limits • Daily Settlement Price Process • Risk mitigated in line with SPAN
Other Tools & Measures • Market Monitoring up to Client Level in real-time – To counter front running, wash trading, trading opposites, etc. • Unambiguous default provisions • Misconduct, un-business like conduct and unprofessional conduct clearly defined • Each and every participant has to follow the Regulations, Circulars, Notices and Guidelines • Granting Exemptions or making exceptions shall not be in our vocabulary
Position Limits • Position Limits – Members & Clients • To counter excessive speculation and manipulation – Limits the number of contracts that can be entered, at a time, into: • Gross across all clients • Gross across mentioned contracts • Grossed up to the Member level • Open contracts held by one individual investor with different Members are combined using Client ID’s
Attainment of MEX • Be able to establish 1 st automated futures exchange with emergency solution. • Establishment of AML policy in trading participation. • Round the clock market operation along with guaranteed clearing and settlement facility. • Market participants: – Members: • Clearing Members: 2 CM as Market maker as well as for clearing & Settlement. • Non - Clearing members: 32 NCMs, planning to work across the Nepal.
Training Institute • Tie up with National College to conduct certified training on “Derivative market”. • Developed course module for Basic and Advance level.
Customer Service • Have established round the clock technical service to assist the clients by Kapp Soft. • Tied up with Laxmi Bank to maintain segregated account of the members, the very first in the country. • Training facility for our members as per their requirements. • Assist member to solve their queries effectively. • Provide status update as and when required.
Future Plan • Market Expansion • International Tie up • Product Expansion • Effective price collection • Warehouse Development
Market Expansion • 1 st year of operation trying to expand market out of Kathmandu. • Coming year we will have existence across the country. • Creation of market awareness shall be continued. • Objective of market expansion: targeted class of people should feel the Exchange is for themselves. • Market Expansion also follow international tie up. • Plan to tie up minimum 2 major international exchanges in coming year.
International Relation • Planning to tie up with reputed International Futures Exchanges. • Tie up should be done for the benefit of processors, merchandiser and EXIMs. • Tie up provides global recognition of futures market of Nepal.
Product Expansion • Some more products shall be added. • Focus based on agro related products, imported base metals and edible oil. • Rice, Lentils, mustard seed/oil, aluminum, crude palm oil etc. mostly watched products. • More effective price collection method of local commodity shall be developed. • System of Price dissemination to/from local market to be established.
Effective Price Collection • Focus on 4 major cities of terrain. • Collection of prices from local markets/mandies shall be root of price discovery for local commodities. • Planning to be benchmark for pricing of commodities. • Pricing system should be beneficiary for merchandiser and farmer to plan their business accordingly.
Warehouse Development • Seeking involvement of banking sector to manage quality backed warehouses. • Management of warehouse shall be followed basically approved warehouse system. • Public participation to store commodities shall be developed. • Standardization of commodity shall bring uniformity in market availability. • Planning minimum 2 warehouses in coming year.
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