Commodity Bourses Fear Onslaught By Cash-Rich Equity Platforms
Commodity exchanges said they will require time to build infrastructure to compete with cash-rich equity platforms.
Commodity exchanges lobbied with the market regulator to delay unified bourses arguing that they will require time to build infrastructure to compete with cash-rich equity platforms. That didn’t work.
Representatives of commodity derivative exchanges were of the opinion that there is a lack of level-playing field when compared with stock exchanges, according to agenda notes of the Securities and Exchange Board of India’s Dec. 28 board meeting. “Hence, [they suggested that] all products under single-exchange entity may be allowed after another two to three years.”
Leading the charge was the Multi Commodity Exchange Ltd., the largest in India, along with its smaller peer National Commodity and Derivatives Exchange. Their key concern was that participation of foreign portfolio investors and intermediaries like depositories put stock exchanges at an advantage, Sanjit Prasad, managing director and chief executive officer of Indian Commodity Exchange Ltd., present at the meeting, told BloombergQuint over the phone.
Yet, SEBI decided to do away with the distinction. Starting Oct. 1, all bourses will be called stock exchanges. That comes three years after the Forwards Market Commission, the erstwhile regulator of commodity platforms, merged with SEBI—a fallout of the Rs 5,600-crore payments crisis at National Spot Exchange Ltd. that allowed contracts without any stocks in warehouses. The convergence ties in with the government’s plan for a common infrastructure and regulations for all exchanges in the country.
SEBI has given the Oct. 1 deadline and “we don’t believe that it should get debated any further”, MCX said in an emailed response to BloombergQuint. “It’s incumbent that we all work together to get new products (options in more commodities and index derivatives) and new participants on-boarded at the earliest.”
NCDEX, which has a new managing director and chief executive officer, declined to comment.
Liquidity Concerns And Revenue Risk
Institutional investors like mutual funds, insurance companies and foreign portfolio investors can trade in stocks, not commodities. That provides equity platforms higher liquidity in terms of exchange turnover.
Moreover, competition between BSE Ltd. and the National Stock Exchange Ltd. has brought down transaction charges. The average transaction fee on the MCX is Rs 230 a crore of turnover. That compares with Rs 100-150 for stock exchanges, said a former commodity exchange executive requesting anonymity.
The regulator has not provided a moratorium on charges when cash-rich stock exchanges enter the commodity segment, said a commodity exchange official who did not want to be identified.
Stock exchanges also earn revenue from listing fees. Commodity exchanges are unlikely to start offering listing services from Day 1 as they will take time to build that market.
Instead, they could consider debt market and currency derivatives, primarily driven by institutional investors, to begin with. “That’s one segment outside commodities that’s open,” said NCDEX’s MD and CEO Vijay Kumar Venkataraman—not willing to discuss the bourse’s plan as he took over just 10 days ago.
For stock exchanges, things are relatively easier, according to the second official quoted above. Earlier, commodity exchanges could launch new products without any approval. Starting Oct. 1, they will need SEBI’s go-ahead. And the regulator doesn’t allow individual products but gives nod for a standardised contract. The stock platforms can replicate commodity products that may have taken up to 18 months to develop, he said.
MCX’s Exclusive Rights
Yet, equity exchanges that batted for unified bourses will not find offering commodity derivatives that easy. They are unlikely to start any agri products given the complexity involving physical delivery of products. Moreover, barring gold and silver, all other non-agri securities are settled in cash. That’s where equity platforms will run into a bump as SEBI rules require cash settlement based on underlying securities.
For a non-agri contract, they would require the licence to use settlement prices from international exchanges. MCX, which gets nearly two-thirds of its turnover from base metals and energy, has exclusive licensing pacts with the CME Group for copper, crude and natural gas, and with the London Metal Exchange for the rest.
It would be difficult for stock exchanges to enter this segment unless they have similar licensing arrangements, the second person quoted above said.
Separate Custodian Services
SEBI rules mandate separate clearing corporations and custodians for stock exchanges. By Oct. 1, commodity bourses will have to spin off their clearing arms.
Though alternative investment funds and bank subsidiaries have been allowed to enter commodity markets to offer depository and custodian services, they wouldn’t start operating for another year, the second person said.
Exchanges will have to set up clearing corporations with a minimum net worth of Rs 100 crore, which must increase to Rs 300 crore in three years. MCX already has SEBI’s nod for its wholly owned clearing corporation. The exchange infused Rs 106 crore capital and expects it to be operational by April-May. NCDEX also established a wholly owned subsidiary but is yet to infuse capital.
Regulations and approvals are also pending for co-location services—that allow brokers and trading houses to place servers in the same building housing exchange’s servers.