After a lull, there has been a major disruption in the commodity market space with market regulator SEBI making all metal contracts compulsorily deliverable. Though it is expected to impact volumes initially, it will align base metal prices more to domestic trends. Mrugank Paranjape, Managing Director&CEO, MCX, spoke to BusinessLine on the future trends. Excerpt:

Do you think compulsory delivery contracts will impact liquidity?

We are educating the market on the changes being implemented. Obviously, the market dynamics are not going to change just because the contracts have become deliverable. Today, the spot market is pricing base metals looking at the LME (London Metal Exchange) and rupee-dollar value. By making it deliverable on the exchange we are adding some additional cost such as customs duty, GST, warehouse charges and freight forwarding. It is still benchmarked to international prices. Gold and silver contracts have had compulsory delivery ever since launch and they still reflect international prices. We are still far away in creating an India price for these metals. I do not see much pressure on the market in adjusting to compulsory delivery.

Does the exchange have the infrastructure to handle delivery?

We have enough warehouse capacity to handle volumes. The metals market does not work on the assaying principle. They work on a pre-approved manufacture list. Just because we are saying LME-approved stock is deliverable it does not mean that it excludes Indian manufacturers. Though it will have a limited applicability we will develop an MCX-approved list for delivery.

What is the impact of the BSE and NSE entering the commodity space?

We have not seen any impact whatsoever. To be honest, I was bit worried with two established exchanges entering the space. Given the response they have received, I am relieved. The product they have launched is absolutely like ours. Why should somebody look at other exchanges for the same product, particularly when there is no liquidity there?

Is there a risk in one vaulting company providing service to all the three exchanges?

We are working with three vaulting companies in gold, but among them one is common with other exchanges. It is not a concern to trigger a concentration risk for us. If the other exchanges are having only one vaulting service common, you should ask them about the concentration risk.

Has bank broking subsidiaries taking your membership helped?

We do not give an individual broker’s volume numbers, but I can assure that volumes from Axis Securities, which has been with us for four months, have been very good. The impact of Kotak Securities and HDFC Securities joining us will start showing up as they are new. Some of the initial numbers show that 50 per cent incremental client base for us was through Axis Securities. We expect SBICap Securities to go live anytime now. Except for ICICI Sec everybody will be there. For the last full financial year, we had 2.71 lakh unique traded codes at the PAN number level. We have already achieved this in the first nine months of this fiscal with 25 per cent increase in retail participation.

Any traction from Alternative Investment Funds?

They were allowed to invest by SEBI long back but there was an issue of custodial service. SEBI has already amended the Custodian Regulation Act. It will take couple of months for custodians to be up and running. This will not only bring in AIF but also mutual funds.

Did IL&FS impact your treasury income?

No. We are already de-risking our treasury portfolio with a focus on shorter debt. The move had a positive impact on our treasury income last quarter. We are almost done with rejigging our portfolio except for some tax-free bonds. These bonds have a long tenure and have a mark-to-market impact on our financials. We are focusing on liquid and ultra-short mutual fund schemes for investment.

What are the new products looking at?

We are keen to expand our energy basket. We are looking to do something in our ferrous family. Two of our products — nickel and lead — qualify for options trading and we have already applied with SEBI. We expect SEBI to allow index trading by the first quarter of next financial year.

Has options trading slowed down after market making has been pulled out?

Early this month, on one particular day, we saw a turnover of ₹600 crore in crude options. On days of volatility, the options volume goes up suddenly. It is a good sign that people understand the product and take a call. Of course, market making had its impact in generating volumes, but the number of clients trading in gold options has not fallen after removal of market making. While the participation remains intact, the volume has come down since the removal of market making.

What are your expectations of the Budget?

We believe that Section 88E should be restored. It allows traders to set off transaction tax paid on their futures market trade against tax liability. It was available to the market till 2005. We are also expecting some direction on launch of an online spot market.

Related Topics
comment COMMENT NOW