Financial Daily from THE HINDU group of publications
Sunday, Feb 27, 2005
Markets - Derivatives Markets
Electronic Settlement for commodities futures
THE National Securiteis Depository Ltd (NSDL), the first depository in the country was established in the year 1996 to remove the difficulties arising out of use of physical (paper) certificates for settlement of trades on stock exchanges and improving settlement efficiency.
The depository system has successfully met its objectives. On the basis of the success of demat, rolling settlements were introduced, and today, India is one among the few countries that have T + 2 rolling settlement system.
With the increase in activity in the commodities futures market and establishment of national level screen-based multi-commodities exchanges, need for an efficient settlement system in that market is felt. Broadly, a commodity futures contract may be settled either by cash or by delivery of commodity depending upon the terms of the trade, demand of the buyer and rules of the exchange.
If the trade is expected to be settled by way of delivery of commodity, the clearing house of the commodity exchange will receive warehouse receipts from the seller instead of actual commodities and pass such warehouse receipts over to the buyer. In the case of national commodity exchanges, buyers and sellers operate from different parts of the country and if warehouse receipts are in physical form, the warehouse receipts have to be delivered across the country from the seller to the buyer which could lead to systemic inefficiencies.
Warehouse receipts are title documents issued by warehouses to depositors against the commodities deposited in the warehouses. These documents are transferred by endorsement and delivery. Either the original depositor or the holder in due course (transferee) can claim the commodities from the warehouse. Warehouse receipts in physical form suffer all the disadvantages of the paper form of title documents.
A few of these limitations are as follows:
* Need for splitting the warehouse receipt in case the depositor has an obligation to transfer only a part of the commodities;
*Need to move the warehouse receipt from one place to another with risk of theft/mutilation, etc. if the transferor and transferee are at two different locations;
*Risk of forgery.
Drawing lessons from the depository system for securities, NSDL and national level multi-commodity exchanges have worked out a scheme to extend depository services for settling trades in commodity futures. Investors trading in commodity futures may follow the steps enumerated below to avail of depository services for receiving and delivering warehouse receipts.
How to open a demat account for warehouse receipts?
The securities demat account cannot be used for warehouse receipts. A separate account exclusively for warehouse receipts has to be opened. The agreement to open such account is different from the agreement used for securities account.
Can demat account be opened with any Depository Participant (DP)?
NSDL has enabled all its DPs to extend these services. But, national multi-commodity exchanges have empanelled some DPs for this purpose. A demat account can be opened only with such empanelled DPs.
Who will issue warehouse receipts that can be dealt in NSDL depository system?
Warehouses, that have entered into an agreement with NSDL and multi-commodity exchange, will issue depository eligible warehouse receipts. At present, NSDL has agreements with two multi-commodity exchanges viz., National Commodity & Derivatives Exchange Ltd (NCDEX) and Multi Commodity Exchange of India Ltd (MCX) and about 13 warehouses that hold seven commodities in their custody. An accountholder who wants warehouse receipt balances in its demat account, will have to quote the demat account number specifically opened for this purpose. Warehouse will credit warehouse receipts in the demat account using "corporate action" facility offered by NSDL. The balances so created can be used for transfer or settlement of commodity futures trade.
What are the commodities for which warehouse receipts can be credited in demat accounts?
At present, warehouse receipts for seven commodities deposited with the 13 warehouses can be credited to demat accounts. These commodities are gold, silver, guar seed, guar gum, castor seed, pepper and urad.
How to give delivery of warehouse receipts in the depository system?
Procedure for giving delivery of warehouse receipts is similar to giving delivery in securities market. Warehouse receipts may be transferred to the Clearing Member's account using Delivery Instruction Slip (DIS). However, in place of ISIN, Commodity Identifier (C-Id) will have to be quoted.
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