Commodities

Soon, an index futures in base metals from MCX

Umang Papneja | Updated on October 13, 2020 Published on October 13, 2020

The commodity derivatives market in India is entering a new phase of growth with the launch of futures contracts on commodity indices. These new products have the ability to transform commodities trading for retail as well as institutional participants.

METLDEX futures — a futures contract based on METLDEX — an index on the five base metals traded on MCX platform, viz copper, zinc, aluminium, lead and nickel will provide investors and traders an opportunity to participate in the sectoral index of metals – a barometer of the economic activity in the global markets.

The futures contract is set to be launched next week (October 19). The allocations of 33 per cent for zinc, 30 per cent for copper, 14 per cent for nickel, 13 per cent for lead and 10 per cent for aluminium aptly reflect the volumes of the underlying base metals trading in India.

Participants, delivery

Retail investors and traders can now participate more efficiently using lesser margins than the underlying commodities. Moreover, they can avoid the worry regarding compulsory delivery process of five days for every contract month.

Institutional participants can now allocate funds under PMS, MF route to the METLDEX as a tactical allocation, long / short participation as well as create products like ETFs for their investors. As the depth and liquidity increases, far dated contracts as well as OPTIONS on these contracts will enable further offerings of sophisticated products.

One of the most interesting functions of the base metals contracts is the ability to move into a Contango/Backwardation market to reflect the demand-supply situation.

‘Ideal mechanism’

An EXCESS Return Index (which includes the profits/losses) on the roll cost apart from the delta is also an ideal mechanism to benefit from commodities, which have a periodic backwardation. With more than 60 per cent weightage to copper and zinc, the index should be able to capture this for the ‘long only’ participants efficiently. It is an interesting time for the investment management industry. Commodity-linked products, which assist in portfolio diversification, are inflation-linked and is non-deliverable can now be introduced across client portfolios. The METLDEX is the right product at the right time. We appreciate the efforts put in by the regulators and the exchanges to introduce such innovative products to the market.

The writer is Senior Managing Partner – IIFL Wealth

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Published on October 13, 2020
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  1. Comments will be moderated by The Hindu Business Line editorial team.
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