Composite index
Also written Composite commodity index · Composite indices
A commodity index spanning several segments — energy, metals, bullion — whose constituents must each weigh 1 to 30 per cent, with at least 80 per cent of the weight in sufficiently liquid futures.
In plain language
A composite index gives the broad view. It is a basket of commodity futures from several segments. The basket is weighted into one number that stands for the whole commodity market.
In India the live example is MCX iCOMDEX Composite. It tracks non-farm commodities across energy, industrial metals and precious metals. The workbook also shows NCDEX's AGRIDEX, an index of 10 farm commodities. AGRIDEX was stopped from 1 February 2022.
Derivatives trade on these indices. So SEBI sets rules to stop any one commodity from ruling the index. The rules also keep the basket tied to contracts that really trade.
How it works
The SEBI rules (circular dated 18 June 2019, Chapter 2, section 2.3):
| Rule | Requirement |
|---|---|
| Constituent weight | Minimum 1%, maximum 30% (composite only) |
| Liquidity | At least 80% of index weight in futures with average daily trading volume of at least Rs 75 crore (agri) or Rs 500 crore (non-agri) |
| Illiquid constituents | Individual weight not above 15% |
| Track record | Futures in existence for the last 12 months, traded on 90% of trading days |
| Weighting basis | Production value score and liquidity value score, neither below 25% |
| Rebalancing | At least once a year; proposed new weights disclosed at least 3 months ahead |
Exchanges can be stricter within the band: MCX iCOMDEX has constituent weights of 2 to 30 per cent, with a sectoral-level cap of 40 per cent.
Production and liquidity values. Production value is the average value of deliverable supply (production plus imports) over the past 5 financial years; liquidity value is the average trading volume of the futures over the last 12 months.
Current shape. iCOMDEX Composite has 8 commodities (down from 11 in 2022), mainly crude oil (about 24%), natural gas (16%), gold (22%) and silver (around 18%).
Roll-over. Constituents move to the next contract gradually — NCDEX over 3 days (2/3 and 1/3 weights on day one), MCX over 2 days — avoiding special days such as Muhurat trading. Spread trades are ignored in index computation.
A worked example
An exchange proposes a new composite index. Test the draft weights against the SEBI rules (weights and liquidity figures illustrative):
| Commodity | Proposed weight | ADTV | Liquid? |
|---|---|---|---|
| Crude oil | 34% | Rs 4,000 crore | Yes |
| Gold | 25% | Rs 2,500 crore | Yes |
| Natural gas | 15% | Rs 900 crore | Yes |
| Copper | 10% | Rs 650 crore | Yes |
| Silver | 9% | Rs 800 crore | Yes |
| Nickel | 7% | Rs 300 crore | No (non-agri threshold Rs 500 crore) |
Check 1 — the 30 per cent cap. Crude oil at 34 per cent fails. It must come down to 30 per cent or less, and the 4 points redistributed.
Check 2 — the 80 per cent liquidity rule.
Liquid weight = 34 + 25 + 15 + 10 + 9 = 93% (≥ 80%: passes)
Check 3 — illiquid constituents. Nickel at 7 per cent is under the 15 per cent ceiling: passes.
Check 4 — MCX's own sectoral cap. Gold 25 + silver 9 = 34 per cent in bullion, within 40 per cent. After crude is cut to 30 per cent, energy is 30 + 15 = 45 per cent — above the 40 per cent sectoral cap MCX applies to iCOMDEX. Within SEBI's rules, but not within MCX's.
Why NISM asks about it
Chapter 2 (Commodity Indices): section 2.2 introduces MCX iCOMDEX as the composite index; section 2.3 (Index Construction and its Constituents) sets out the SEBI rules, the production and liquidity scores, roll-over and the AGRIDEX and iCOMDEX constituents; section 2.4 covers index futures contract design. Expect questions on the 1-30 per cent band, the 80 per cent / Rs 75 crore / Rs 500 crore liquidity rule, the 15 per cent cap on illiquid constituents, and the 25:75 weighting ratio.
Common exam traps
- 1 to 30 per cent is SEBI's band for composite indices; MCX iCOMDEX uses 2 to 30 per cent with a 40 per cent sectoral cap. Sectoral indices have no 30 per cent cap.
- Rs 75 crore for agri, Rs 500 crore for non-agri — the ADTV thresholds for the 80 per cent liquidity test.
- Illiquid constituents: at most 15 per cent each.
- Neither the production nor the liquidity score may be below 25 per cent of the weighting; MCX uses 25:75.
- AGRIDEX is discontinued from 1 February 2022, after trading in many constituents was stopped.
- The workbook mixes comparison years for iCOMDEX weights — crude, natural gas and gold are compared with 2021, silver with 2022. Quote the current figures, not the comparisons.
- Spread trades are excluded from index values, because one leg depends on the other.
Check yourself
1.For a composite index on which derivatives are to be traded, the minimum 80% of index weight must comprise commodity futures whose average daily trading volume is at least:
- a)Rs 75 crore for all commodities
- b)Rs 500 crore for all commodities
- c)Rs 75 crore for agri commodities and Rs 500 crore for non-agri commodities
- d)Rs 500 crore for agri commodities and Rs 75 crore for non-agri commodities
Show the answer
Answer: (c) Rs 75 crore for agri commodities and Rs 500 crore for non-agri commodities
The thresholds are Rs 75 crores for agri commodities and Rs 500 crores in the case of non-agri commodities.
Type Minimum ADTV Agri Rs 75 crore Non-agri Rs 500 crore Option (d) reverses them, which is the standard trap. The agri threshold is the lower one, because agricultural contracts are smaller markets — a Rs 500 crore test would exclude virtually every one of them.
And note what happens to a commodity that fails: it is not excluded. Its individual weight simply must not exceed 15% in the index, so that illiquid names together cannot exceed 20 percent — leaving at least 80 percent of the index formed by liquid commodities.
2.In a composite commodity index, the weight of each constituent must lie between:
- a)A minimum of 1% and a maximum of 30%
- b)A minimum of 2% and a maximum of 40%
- c)A minimum of 5% and a maximum of 25%
- d)A minimum of 1% and a maximum of 15%
Show the answer
Answer: (a) A minimum of 1% and a maximum of 30%
In a composite index, each constituent has a minimum weight of 1% and maximum weight of 30% — and crucially, there is no such cap in the case of a sectoral index.
That exemption is what allows gold to hold 60.119248 percent of MCX BULLDEX, a bullion sectoral index, in 2025. Reading the 30 percent cap as universal is the commonest error in this chapter.
Option (b) describes what MCX has chosen for iCOMDEX — weights of 2% to 30% with a sectoral level cap of 40%. Exchanges may fix their own limits within the SEBI band, so MCX's narrower floor is an exchange choice, not the regulatory requirement the question asks about.
Option (d)'s 15% is the separate liquidity cap applied to a commodity that fails the ADTV test.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Cost of carryThe cost of holding an asset until a future date — financing interest plus storage, less any income it pays. It links spot to futures: fair futures price = spot + cost of carry − inflows.
- Average Daily Trading VolumeThe liquidity test a commodity future must pass before its price may carry weight in a tradeable commodity index — Rs 75 crore a day for agri, Rs 500 crore for non-agri.
- Price-based indexAn index whose constituent weights stay fixed for the year, so the level moves only when prices move — how every Indian commodity index works, as against volume-based equity indices.
- Sectoral indexA commodity index built from the futures of a single segment — bullion, base metals, energy or the guar family — with fixed annual weights and no 30 per cent cap per constituent.
- Broad based indexA stock index representing an entire market segment and a significant share of that market — e.g. NIFTY 500 — used as the practical proxy for the market portfolio and as a benchmark for equity funds.
- AGRIDEXNCDEX's agricultural commodity index, weighted across ten crops by production and liquidity — discontinued from 1 February 2022 after several of its constituent commodities stopped trading.
- BULLDEXMCX's sectoral index tracking sentiment in the precious metals segment, currently weighted roughly 60% gold and 40% silver, based on futures prices rather than spot.
- CPMI-IOSCOThe joint global standard, from two international regulator bodies, that Indian commodity index futures and options risk management frameworks must conform to — behind the 99% VaR and 2-day margin period rules.
- Excess return indexAn index measuring an investment's performance purely against a benchmark or risk-free rate, without counting any income the underlying generates — the flip side of a total return index, which counts both.
- Cross margin benefitA margin offset of up to 75% for a client holding opposite positions in index futures and futures on that index's own constituents, similar to the crush margin benefit, allowed by SEBI's circular of 29 June 2021.
- Spread tradeA paired buy-and-sell trade across two related futures contracts, such as a calendar spread, which exchanges exclude from index price computation as it is not a bonafide single-side trade.
- Three-month disclosure ruleThe requirement that a proposed rebalanced commodity index — its new weights and constituents — be publicly disclosed at least three months before the exchange starts publishing the index on those new weights.
- Volume-based indexAn index whose weights shift daily with market value, the way equity indices work — unlike commodity indices, which fix weights for a year at a time.
- GUAREXNCDEX's sectoral commodity index on the guar family, with only two constituents — guar seed at 59.35% and guar gum at 40.65% for the year 2022-23.
- Law of averagesThe averaging effect that makes a commodity index less volatile than its constituents — useful diversification for a hedger, and the workbook's main explanation for why index derivatives stay illiquid in India.
- Liquidity valueOne of the two scores that fix a commodity's weight in an Indian commodity index — the average trading volume of its futures over the last 12 months.
- Maximum tenorThe 12-month ceiling on a commodity index derivative — an index futures contract may not run longer than 12 months, and index options are permitted up to 12 months of expiry.
- METALDEXMCX's base metal sectoral index — for 2025, copper 40%, aluminium 30%, zinc 26% and lead 4% — which the workbook also reads as a rough inflation gauge for the metals family.
- Monsoon proxyUsing an agricultural commodity index future as a stand-in for a bet on the monsoon — buy it for a deficit monsoon, short it for a good one — which the workbook offers as an approximation only.
- Production valueOne of the two scores that fix a commodity's index weight — the average value of deliverable supply over the past five financial years, where deliverable supply is production plus import.