In India, Spot Exchanges refer to electronic trading platforms which facilitate purchase and sale of specified commodities, including agricultural commodities, metals and bullion by providing spot delivery contracts in these commodities.
This market segment functions like the equity segment in the main stock exchanges. Alternatively, this can be considered as a guaranteed direct marketing by sellers of the commodities. Spot Exchanges leverage on the latest technology available in the stock exchange framework for the trading of goods. This is an innovative Indian experiment in the trading of goods and is distinct from what is commonly known as “commodity exchanges” which trade in futures contracts in commodities.
A restrictive definition of Spot Exchange is provided in the Regulation 2 (1) (ix) of the Warehousing Development and Regulatory Authority (Electronic Warehouse Receipts) Regulations, 2011. Here “Spot Exchange” means a body corporate incorporated under the Companies Act, 1956 and engaged in assisting, regulating or controlling the business of trading in electronic warehouse receipts.
However, present day spot exchange deals with not just warehouse receipts. This is an electronic market where a farmer or a trader can discover the prices of commodities on a national level and can buy or sell goods immediately to anyone across the country. All contracts on the Exchange are compulsory delivery contracts.i.e., here all outstanding positions at the end of the day are marked for delivery, which implies that seller has to give delivery and buyer has to take delivery, but on a net basis. ( i.e., intra-day squaring off is allowed.). This permission for squaring off, however, ceased to exist from September 2014 onwards.
The facilities provided by the spot exchange, like a normal stock exchange, include clearing and settlement of trades on multilateral netting basis. Trades are settled on guaranteed basis (i.e., in case of default by any person exchange arranges for the payment of money / good) and the exchange collects various margin payments, to ensure this. The exchange also offers various other services such as quality certification, warehousing, warehouse receipt financing, etc.
Advantages of Spot Exchanges
It can lead to efficient price determination as price is determined by a wider cross-section of people from across the country, unlike the present scenario where price discovery for commodities happens only through local participation. This also ensures transparency in price discovery.
Anonymity ensures convergence of different price perceptions,as the buyer or seller merely expresses their desire to trade without even meeting directly.
If spot exchanges can ensure participation in large numbers by farmers, traders and processors across the country it can eliminate the possibility of cartelization and other such unhealthy practices prevalent in commodity markets.
Spot Exchanges can also usher in some best Practices in commodity trading like, system of grading for quality, creating network of warehouses with assaying facilities, facilitating trading in relatively smaller quantities, lower transaction cost etc.
Bank finance available against the goods in the warehouse on easier terms improves holding capacity and can actually in centivize farm production and hence reduce rural poverty.
Since the trades are guaranteed, counter party risk is avoided.
Spot Exchanges in India
As on July 2013, there are four spot exchanges currently operating in the country. These exchanges are:
- The National Spot Exchange Ltd (NSEL) is a national level commodity spot exchange promoted by Financial Technologies (India) Ltd (FTIL) and National Agricultural Cooperative Marketing Federation of India Limited (NAFED). NSEL commenced “Live” trading on October 15, 2008.
- NCDEX Spot Exchange Limited. (established in October 2006)
- Reliance Spot Exchange Limited. (Yet to be operationalized)
- Indian Bullion Spot Exchange limited (they have described themselves as online over the counter spot exchange)
For the purpose implementing trading of agricultural produce on e-platform, the state of Karnataka has established a Special Purpose Vehicle (SPV), Rashtriya e Market Services Pvt. Ltd. (ReMS) as a joint venture company between Government of Karnataka and NCDEX Spot Exchange Ltd. In the last one year 55 markets have been linked to the platform and 21 lakh lots of 343 lakh quintals of agri-commodities of a total worth of Rs. 8500 crores traded on the platform as per a press release of Ministry of Agriculture dated 9 July 2015.
Regulatory status of Spot Exchanges in india
Spot Exchange is presently recognized by Ministry of Consumer Affairs, Food & Public Distribution, Government of India. Further the spot exchanges have to obtain licenses from various state governments to facilitate online delivery based trading in various agri-commodities (spot transactions in commodities comes under the regulatory purview of provincial / state governments. In that sense the Exchange operations will be regulated in each state by the respective state governments and will be subjected to various laws of the land like the Companies Act, 1956 Stamp Act, Contracts Act, 1876, APMC Act and others which impinge on its working.).
Regulation 3(c) of the Warehousing Development and Regulatory Authority (Electronic Warehouse Receipts) Regulations, 2011 issued under Section 35 read with Section 51, of the Warehousing (Development and Regulation) Act, 2007, provide for registration of Spot Exchanges by Warehousing Development and Regulatory Authority (WDRA). As per this Regulation, no entity can organize trading in electronic warehouse receipts, unless it has obtained recognition as a Spot Exchange from the Authority under these regulations and holds a valid certificate of commencement of business issued by the WDRA.
Eventhough Spot exchanges are trading in commodities, the spot trades are not covered under the Forward Contracts (Regulation) Act 1952 (in short FCRA). This Act only covers forward contracts / commodity derivative contracts traded in a commodity derivative exchange like MCX or NCDEX.
The spot contracts of one day duration are exempted from the provisions of Forward Contract (Regulation) Act, 1952 (FCRA), by Government of India, by Gazette Notification dated June 05, 2007, subject to conditions, which includes – “complying with the regulations by authorities regulating spot trades in the areas where such trades takes place” and empowers the Government of India or its designated agency to call for information or returns related to trade and to impose additional conditions. Though the spot trades are not covered under the FCRA, the activities of the exchange are monitored by the Forward Market Commission (FMC). For this purpose, the spot exchanges submit a monthly report to FMC about the trading and, delivery and settlement data. However, there does not appear to be any legal or statutory backing for the monitoring by the FMC.
Following the settlement default issues in NSEL, the Ministry of Consumer Affairs on 6th August 2013 issued a notification stating that settlement of all outstanding one day forward contracts at National Spot Exchange Limited shall be done under the supervision of Forward Markets Commission and any order or direction issued by the Forward Markets Commission in this regard shall be binding upon the National Spot Exchange Limited and any person, intermediary or warehouse connected with the National Spot Exchange Limited, and for this purpose, the Forward Markets Commission is authorized to take such measures, as it deems fit. Later this exemption from from floating one day contracts which could be squared off for creating liquidity was withdrawn for all such exchanges in September 2014, due to the scam that unfolded in 2013 at National Spot Exchange Ltd. (NSEL). Hence, at present, their operations are limited to just delivery based trades. In 2015, following the NSEL crisis, FMC itself was decided to be merged with the securities market regulator - Securities and Exchange Board of India (SEBI).
The warehouse receipt forms the basis for the creation ofa spot, or cash, market. If transactions involve the delivery of goods on a , warehouse receipts can form the basis for the creation of a forward market and for the delivery system in a commodity futures exchange.
Some of the commodity futures exchanges also provide for spot contract trading, though the volumes are far less compared to the futures trading volumes. The popular spot contracts are available in currency, gold or electricity / power rather than in agriculture.
Globally Spot Exchanges are known to be mostly localized entities with a regional presence. Successful national level spot exchanges are being developed.
Bulgaria’s largest commodity exchange, the Sofia Commodity Exchange, is one of the few exchanges in the European and Central Asian countries offering spot and futures trading. Established in 1991, the exchange is using WHRs for its physical deliveries.
In Poland, the Warsaw Commodity Exchange(WGT)’s agricultural spot commodity market, the InternetowaGieldaTowarowa (IGT), an electronic trading platform for the cash commodity market, and is known to be the largest B2Btrading platform in Poland and one of the large stagricultural spot markets in Europe.
In December 2008, the Regional Financial Center of Almaty city together with the Russian Federation’sstock exchange, the Russian Trading System (RTS), announced the creation of a new commodity exchange, the Eurasian Trading System (ETS).ETS was initially designed for spot and derivatives trading in raw materials and commodities. It started trading spot and forward grain contracts in March 2009. However, the spot volumes are known to be far less than futures volumes.
Around 45 commodity exchanges are officially registered in Russia and almost all of them are spot markets trading a wide range of industrial goods and agricultural commodities. St Peters burg exchange is known to be the major spot exchange there.
One spot exchange similar to the ones operating in India, is Nepal Spot Exchange.
London Stock Exchange claims to have launched the world’s very first committed and distinct trading platform for commodities through Exchange Traded Commodities (ETCs) Platform. However, this is not strictly a Spot exchange. Exchange Traded Commodities (ETCs) are investment vehicles (asset backed bonds)that track the performance of an under lying commodity index including total return indices based on a single commodity.
Commodity exchanges in Europe and Central Asia: A means for management of price risk (2011)FAO Working Paper prepared under the FAO/World Bank Cooperative Programme
Emerging commodity exchanges database of UNCTAD: