Though at a nascent stage of development, the derivative segment of cash and commodity market has a strong potential for integration. The article examines the same.

In India, unlike the security market, commodity market is highly fragmented and most of the commodity exchanges deal in single commodity. They are subject to T+11 settlement unlike T+2 settlement for security market. Cash market is controlled by few traders. Volume is low as compared to security market.

Derivatives are recent introduction in the Indian market. There are two categories of derivatives, namely, the Over-the-Counter (OTC) and exchange-traded derivatives. OTC derivatives is entered into between two persons by personal mode, like telephone, telefax, and personal contacts. These are customized derivatives. The counter party risk has to be borne by the parties, while in exchange-traded derivatives the counter party risk is borne by the clearing house of the exchange, so it is free from counter party risks. While OTC derivatives are customized, exchange-traded derivatives are standardized. OTC is highly ill liquid while exchange-traded derivatives are highly liquid instruments.

Portfolio Organizer Magazine, Commodity Market, Derivatives Market, Bombay Stock Exchange, BSE, National Stock Exchange, NSE, National Commodity Derivative Exchange, NCDEX, Multi Commodity Exchange, MCX, Foreign Portfolio Investment, Securities Contracts Regulation Act, Commodity Futures Trading Commission, CFTC.