Commodity Analysis

The CME Group of exchanges

Bavadharini KS | Updated on September 16, 2018 Published on September 16, 2018

The world’s leading diverse derivatives marketplace handles 3 billion contracts a year

There are many commodity exchanges worldwide, and each of them specialises in certain commodities. In this classroom, we take a look at the CME Group and its four exchanges.

About the group

CME Group is the world’s leading diverse derivatives marketplace handling 3 billion contracts worth approximately $1 quadrillion ($1015) on an average annually. CME Group has four exchanges — CME (Chicago Mercantile Exchange), CBOT (Chicago Board of Trade), NYMEX (New York Mercantile Exchange) and COMEX (Commodity Exchange). These exchanges offer the widest range of global products across all major asset classes, futures and options based on interest rates, equities, forex, agriculture, weather and real estate.

Nearly 80 per cent of the trade at CME Group happens electronically.

CME Group brings buyers and sellers — companies, individuals and institutions — together on its electronic trading platform Globex. Customers from over 150 countries virtually access the CME Globex trading platform almost 24 hours.

However, the trading hours vary with each product. For instance, crude palm oil (in CME) trades between 5 pm and 4 pm (next day) through the week. Copper Future (in COMEX) trades between 6 pm and 5 pm (next day) ET (Eastern Time).

US Commodity Futures Trading Commission (CFTC), an independent federal regulator (that regulates futures trading) oversees CME Group.

CME Group has strategic alliances with 12 other exchanges, and many of its largest contracts serve as benchmarks for investors globally. For instance, India’s Multi Commodity Exchange (MCX) has signed an agreement with NYMEX to link the latter’s benchmark price as a reference for settling crude oil and natural gas contracts traded on MCX.

How to hedge on CME

In India, the RBI has issued guidelines for companies to hedge price risks in overseas markets. Companies should open an account with one of the AD (authorised dealer) category-I banks before they begin their hedging activities on CME Group exchanges.

Only companies that have exposure to commodity price risks can hedge in overseas commodities exchanges such as CME Group.

Companies can hedge any commodity (except gold, gems and precious stones) in international exchanges, if they have direct exposure to price risk. A company is said to have direct exposure when it purchases/sells a commodity (India or abroad), the price of which is fixed by reference to an international benchmark; or it purchases/sells a product (in India or abroad) which contains a commodity, and the price of the product is linked to an international benchmark of the commodity.

Companies with indirect exposure can also hedge in international exchanges. However, hedging is permitted only for aluminium, copper, lead, zinc, nickel and tin. Indirect exposure to price risk means: when companies purchase/sell products (in India or abroad) which contains a commodity, and the price of the product is not linked to an international benchmark of the commodity.

One of the significant benefits for companies hedging in international commodities exchanges is the liquidity of the contracts.

Similar contracts on Indian commodities exchanges such as MCX lack volume, and hence are less liquid.

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