international finance project 5

8/9/2019 International Finance Project 5

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WTO & COMMODITY MARKET


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AGENDA y GATT & WTO : Functionsy TRIPs ,TRIMy FTA y Indian Tradey Commodity Markety NCDEX & MCX y Regulationy Unresolved Issues


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GATTy Outcome of the failure of negotiating governments to

create the International Trade Organization (ITO)

y GATT was formed in 1949 and lasted until 1993, when itwas replaced by the World Trade Organization in 1995

y It held a total of 8 trade rounds


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World Trade Organization (WTO)

y Commenced on January 1, 1995 under the MarrakechAgreement, replacing the General Agreement on Tariffs

and Trade (GATT)y Supervises and liberalizes International tradey WTO has 153 members representing more than 97% of

total world tradey WTO's headquarters is at the Centre William Rappard ,

Geneva, Switzerland.


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TRIPs Trade Related Aspects of Intellectual

Property Rightsy Negotiated at the end of the Uruguay Round of the

General Agreement on Tariffs and Trade (GATT) in 1994.y Sets down minimum standards for many forms of

intellectual property (IP) regulationy Contains requirements that nations' laws must meet like

copyright rights, geographical indications etc.y Copyright must be granted automatically, and not based

upon any "formality", such as registrations or systems of renewal.

y TRIPS also has a Most F avoured Nation (M F N) clause.


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TRIMs - Trade Related Investment Measures

y One of the four principal legal agreements of theWTO trade treaty.

y Applies to the domestic regulations which acountry applies to foreign investors, often as partof an industrial policy

y Enables international firms to operate more easilywithin foreign markets

y Includes Trade Related Investment Measuresy Provides Legal framework


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F ree Trade Agreements ( F TA)

y Trade treaty between two or more countries to reduceor completely remove tariffs to trade

y Increased remuneration from tradey Bilateral or multi-lateraly Types of trade agreements

o F ree Trade Agreements ( F TA's)o Preferential Trade Agreements (PTA's)o Comprehensive Economic Cooperation

Agreements (CECA's)


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Indian Trade Agreementsy India-ASEAN Trade Agreementy S outh Asia Free Trade Area ( S AFTA)y India-MERCO S UR preferential trade agreementy Asia-Pacific Preferential Trade Agreements (APTA)y BIMS TEC ( Bay of Bengal Initiative for Multi- S ectoral

Technical and Economic Cooperation)y India- S ri Lanka Free Trade Agreementy India-Thailand Free Trade Agreementy India-China Trade Agreementy India-Maldives Trade Agreementy India-Korea Trade Agreement


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y India-Nepal Trade Agreementy India-Japan Trade Agreementy India-Mauritius Trade Agreementy India-Bangladesh Trade Agreementy India-Mongolia Trade Agreementy India-Afghanistan Preferential Trade Agreementy India-Chile Preferential Trade Agreementy India-Bhutan Agreement on Trade, Commerce and Transity India-Singapore Comprehensive Economic Cooperation

Agreement

Indian Trade Agreements Cntd


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India -ASEAN F TA

y ASEAN F ree Trade Area (A F TA) - trade bloc agreement between Brunei , Indonesia , Malaysia , Philippines, Singapore ,Thailand, Vietnam, Laos, Myanmar and

Cambodiay ASEAN-India F ramework Agreement on Comprehensive

Economic Cooperation signed in 2003y Combined region comprising 1.7 billion peopley ASEAN-India investments reached US$ 5 billion in 2008y ASEAN-India Trade in Goods Agreement (TIGA) signed

on August 13, 2009 & came into effect in January 2010


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Objectives of ASEAN:y Strengthen and enhance economic, trade and

investment co-operation between the Partiesy

Progressively liberalize and promote trade in goodsand services as well as create a transparent, liberal andfacilitative investment regime

y Explore new areas and develop appropriate measures

for closer economic co-operation between the Partiesy F acilitate the more effective economic integration of

the new ASEAN Member States and bridge thedevelopment gap among the Parties

India -ASEAN F TA Cntd


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0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

India's total ExportsIndia's total Imports

India's total commodity import/export from year 2001 to 2010

Source: Department of Commerce All figures are in US million $


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-10

0

10

20

30

40

50

2002 -03 2003 -04 2004 -05 2005 -06 2006 -07 2007 -08 2008 -09 2009 -10

% increase in export over last year

% increase in import over last year

% Rise in India's total commodity Import/Export w r t pr. year


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16%

16%

4%4%

60%

NATURAL CULTUREDPEARLS, PRECIOUS OR SEMIPRECIOUSSTONES,PRE.METALS,CLAD WITHPRE.METAL AND ARTCLS

MINERAL FUELS, MINERAL OILS ANDPRODUCTS OF THEIR DISTILLATION

ELECTRICAL MACHINERY, SOUNDRECORDERS ANDREPRODUCERS, TELEVISION IMAGE

NUCLEARREACTORS, BOILERS, MACHINERY ANDMECHANICAL APPLIANCES; PARTSTHEREOF.

Others

India's Total Commodity Export for FY 2009 -10

Total Export: 1,78,745 US Million $

(INCLUDES MAJORLYDRUGS, COTTON, IRON OREETC.)


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33%

16%%

%

35%

MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIRDISTILLATION

NATURAL CULTUREDPEARLS, PRECIOUS ORSEMIPRECIOUS

STONES,PRE.METALS,CLAD WITHPRE.METAL AND ARTCLS

NUCLEARREACTORS, BOILERS, MACHINERY

AND MECHANICAL APPLIANCES;PARTS THEREOF.

ELECTRICAL MACHINERY, SOUND

RECORDERS ANDREPRODUCERS, TELEVISIONIMAGE

Others

India's Total Commodity Import for FY 2009 -10

Total Import: 2, ,403 US Million $

(INCLUDES MAJORLYGOLD, COAL, IRON AND STEEL)


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Major Agreements for Textile and Leather Industry

y Agreement of Market Access i.e. free market accessto products and reduction of tariff and non-tariff

barriers.

y Agreement to have S afeguard Measures: If there isan import surge and it is liable to affect the domesticindustries in the transition economies.

y D irect reduction of S ubsidies on Exportsy Counter Veiling Duties : These are supposed to have

a positive impact if they help the industries andnegative impact if they reduce the costcompetitiveness.


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Textile Sector y Textiles and clothing accounts for around 30% of

Indias total merchandise exports.y Exports go mainly to the European Union and the

United States, both of which maintain restrictions

under the Agreement on Textiles and Clothing (ATC).y To improve sectors competitiveness, a number of measures have been taken

1.These include removal of some textiles andclothing products from the list of items reserved for the small-scale sector, and removal of foreign equityrestrictions

2. The new Textile Policy also acknowledges theneed to restructure, or close down, non-viable units .


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Agriculture-WTO Agreements and GovernmentInitiatives

y Rules to govern agri trade which will lead to improved predictability andstability for importing and exporting countries.

y Provisions to encourage the use of less trade-distorting domestic support policies to maintain the rural economy.

y S pecial safeguard provision allows the imposition of additional dutieswhen there are import surges above a particular level

Government Initiatives:y Policy guided by domestic supply and self sufficiency considerationsy Price controls are maintained for staples to ensure remunerative prices for

farmers.y The Government also procures and subsidizes the sale of certaincommodities through the public distribution system.S ubsidies:(a) Exemption of export profit from income tax.(b) Subsidies on cost of freight on export shipments of certain products like

fruits, vegetables and floricultural products.


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B uyer CommodityExchange

S eller

Clearing HouseB ank e ository

Warehouse

ASS EYEAR

Order Order

Trade

CashS ettlement

Instructions

P hysicalS ettlement

Instructions

Commoditye osit

Quality Check

S eller

Cashe osit

Method of Settlement


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Turnover of Global Commodity Exchange


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Multi Commodity Exchange of India Ltd(MCX)

y Headquartered in Mumbai, Multi Commodity Exchange of India Ltd (MCX) is acommodity futures exchange started operations in November 2003 .

y The demutualised Exchange set up by F inancial Technologies (India) Ltd ( F TIL) has permanent recognition from the Government of India to facilitate online trading, andclearing and settlement operations for commodity futures across the country.

y MCX holds a market share of over 80% of the Indian commodity futuresmarket , and has more than 2000 registered members operating through over 100,000trader work stations, across India.

y Sixth largest and amongst the fastest growing commodity futures exchange in theworld, in terms of the number of contracts traded in 2009.

y MCX offers more than 4 0 commodities across various segments such as bullion, ferrousand non-ferrous metals, and a number of agri-commodities on its platform.


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Trading @ MCXy Monday to S aturday: 9:45 a.m. to 9:59 a.m.

Special Session (order cancellation session) is held to cancelthe pending orders prior to opening of market .

y N ormal S ession:Monday through Friday: 10:00 a.m. to 11:30 p.m.(up to 11:55 p.m. on account of day light savings typically

between every November and March of the following year)

S aturdays: 10:00 a.m. to 2:00 p.m.Agri-commodities are available for futures trading up to 5:00

p.m. whereas non agri-commodities (bullions, metals, energy products) are available up to 11:30 pm / 11.55pm.


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P ublic limited company registered under the CompaniesAct, 1956 with the Registrar of Companies, Maharashtra in Mumbaion April 23,2003.

Regulated by Forward Markets Commission in respect of futures trading in commodities and subjected to various laws of theland.

Provides a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives

Located in Mumbai and offers facilities to its members in about 91cities throughout India at the moment.


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To create a world class commodity exchange platformfor the market participants.To bring professionalism and transparency intocommodity trading.To inculcate best international practices like de-modularization, technology platforms, low cost solutionsand information dissemination without noise etc. into thetrade.To provide nationwide reach and consistent offering.To bring together the entities that the market can trust


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Structure of NCDEX Structure of NCDEX

Promoters

ICICIB ank, LIC, N AB ARD and N S E .

Governance

IndependentB oard of DirectorsAppoints anexecutivecommitteeResponsible formanaging andregulating all theoperations of theexchange andcommoditiestransactions .

Membership

Anyperson, association of persons, partnerships, co-

operativesocieties, companies etc . thatfulfills theeligibilitycriteria set bythe exchange .

Capitalrequirements

Member has todeposit B aseMinimumCapital ( B MC)with theexchange

N CDEX mayinitiate suitableaction includingwithdrawal of trading if minimumsecurity depositis not kept .


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Shall we Invest in commodity Market


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Shall we Invest in commodity Market


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TRADING

The trade timings of the NCDEX are 10.00 a.m. to 5.00 p.m.S upports an order driven market, where orders match automatically. Order

matching is essentially on the basis of commodity, its price, time and quantity .

CLEARING National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades executed on the NC D EX.After the trading hours on the expiry date, based on the available information, the

matching for deliveries takes place firstly, on the basis of locations and then randomly.

After completion of the matching process, clearing members are informed of thedeliverable/ receivable positions and the unmatched positions.

U nmatched positions have to be settled in cash. The cash settlement is only for theincremental gain/ loss as determined on the basis of final settlement price.


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Settlement

MTM settlement : On a continuous basis at the end of each day;cash settled by debiting/ crediting the clearing accounts of Clearing Members (CMs) with the respective clearing bank.

Final settlement : On the last trading day of the futures contract;the final settlement price is the spot price on the expiry day.The seller intending to make delivery takes the commodities tothe designated warehouse.Warehouse then ensures that the receipts get updated in thedepository system giving a credit in the depositor's electronicaccount.


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Role of regulatory bodies in Exports/Imports

D irectorate General of F oreign Trade ( D GF T)Responsible for implementing the F oreign Trade Policy or EximPolicy with the main objective of promoting Indian exports.

Key F unctions -To Implement F oreign trade policy of Indiacoordination with state governments and all the other departments of Ministry of Commerce and IndustryTo Grant Exporter Importer Code (EIC) Number to IndianExporter and Importers

permits or regulate Transit of Goods in accordance with the bilateral treaties between India and other countries.


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F orward Markets Commission ( F MC)Regulatory authority which is overseen by the Ministry of Consumer Affairs, F ood and Public D istribution, Govt. of India

KeyF

unctions To keep forward markets under observation and to take such actionin relation to them.To make recommendations generally with a view to improving theorganization and working of forward markets

To undertake the inspection of the accounts and other documentsto publish information regarding the trading conditions in respectof goods

Role of regulatory bodies in Exports/Imports


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Need for regulation in Commodities Markets

y Proper regulation is needed to create competitiveconditions.

y

To avoid manipulation of pricesy To ensure that the market has appropriate risk

management system.y To ensure fairness and transparency in

trading, clearing, settlement and management of theexchange


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Warehousing Sector y Economic losses upto Rs.50,000 crore per annum due to

foodgrain damage.y 30-40% of annual horticulture produce is wasted annually due

to inadequate storage.y To overcome this, Central Warehousing Corporation to give

1.18 lakh tonnes of additional space to F CI.y Almost 50 lakh tonnes of total foodgrain stored in open under

cover and plinth(called CAPS) for years, which should notexceed 6 months.

y All this due to lack of Regulation in this sector.y Structure of Warehousing:

1.Government controlled organizations like CWC and F CI2.Private players and Unorganized storage providers


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The Warehousing sector y Till 2007,there were no specific regulations for the warehousing sector in

India.y But recently 3 laws were introduced by the government to boost this

industry.

Concept of negotiable warehouse receipts andregistration of warehouses.These receipts help farmers in lowering accessbarriers to the market and against this they can get loans.

WarehousingDevelopment andRegulation Act of

2007

Favorable law for growth of warehousingindustry.

Part of S EZ Act

Free Trading Warehouse Zones

regulation

To reform the warehousing model inthe country, due to its positive effectson the revenue of the industry.

Goods and S ervicesTax Framework


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Unresolved Issuesy Commodity Options: Trading in commodity options contracts

banned since 1952y Warehousing and S tandardization :y Cash Versus P hysical S ettlement: 1% to 5% of the total

commodity derivatives trade in the country are settled in physical delivery.y The Regulator: need of a strong and independent

regular, similar to SEBI.y Lack of Economy of S cale: too many commodity exchanges.

Over 80 commodities . D erivatives popular for fewcommodities.

y Tax and Legal bottlenecks: restrictions on the movement of certain goods from one state to another.


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Commodities and Business Cycley

Late Expansion: Expectations of profit are at their high point andstock prices are sky high. Banks approve loans easily. Generallyduring this period, energy and metals outperform other commodities.

y Early Recession: Uncertainties arise in the market and the marketfor physical investment gets saturated and people get less profit. A

few commodities, including sugar, coffee, soybeans etc., performwell due to their higher demand. In recession during 2008 also, itwas seen that sugar gave good returns

y Late Recession: Markets moves on the hope that the economy willrevive and some immediate monetary measure like interest rate cuts,tax cuts etc. provides liquidity in the market. Some commodities,such as maize, soybeans, sugar and gold outperform other commodities and other investment avenues, which was seen in 2009.


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y Early Expansion: In early expansion, stocks and bonds outperformcommodities. A recovery in the equity market offers support to thecommodities market. The market witnesses spontaneousmovements, optimism, and higher-than-expected profits during theearly expansion phase

y In general, commodities perform better during late recession and lateexpansion phases, with the decline in interest rate and fresh inflow of money. Base metals get more returns in the early recession phase ascompared to the late recession phase, while agro futures display

patterns quite strongly even in the recession time.

Commodities and Business CycleCntd


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The F uture of Indian Commodity Market

Some features of the emerging scenario as far as thecommodity market is concerned are:

y Expansion of commodity trade : Trade volumes, demand for awide variety of commodities covering food, fiber, metals and

energy is expected to expand. India is likely to produce manyof the aforesaid commodities. There is a possibility that Indiamay export certain commodities in large volumes in future.

y Competition from imports : Competition will result ininefficient domestic units falling by the wayside, but willeventually lead to greater efficiency among domestic producers

y Role of M N Cs : In the Indian commodities sector, globalcompanies will increasingly play a role as

producers, suppliers, traders and service providers. Indian

producers will have to learn to face competition from MNCs.


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y Consolidation of fragmented capacities : F ragmentation of business that is resulting in scale-diseconomies and other infirmities is likely to give way to consolidation.

y Dominance by a few large firms :y

Waning role of government : The government's role ischanging from controller to facilitator.y U se of information technology: IT will be used for delivering

price and market information to primary producers (farmers).y S trong cash market: Initiatives are already underway to

launch electronic spot trading in farm commodities that willhelp growers and others not only discover prices almost realtime, but also help capture value by taking trading positions.

The F uture of Indian Commodity MarketCntd


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Referencesy www.ncdex.comy www.mcxindia.com

y www.commodityonline.comy Commodity Derivatives Market in India: Development

Regulation and Future Prospects by Narender L. Ahuja


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international finance project 5

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