Commodities

Why commexes should offer incentives to encourage growth

Shyamal Gupta | Updated on March 12, 2014

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Sops can be given in an innovative way to expand the footprint of the futures market



Commodity exchanges collect transaction charges from its members according to the average daily turnover in a slab-based system.

The recent decision of the Forward Markets Commission to give freedom to commodity exchanges to fix different transaction charges is a landmark one.

Transaction charges

The flexibility to fix the transaction charges is leading to a situation where it has sparked competition among the exchanges to grab market share in the already shrinking futures pie. Instead of using the freedom to attract more participants in their fold from different parts of the country, exchanges are looking to grab each other’s shares.

The non-agri-exchange is vying for the share in the agri space and vice-versa. This freedom to set transaction fee could be used more innovatively used to give a fillip to better geographic participation which is now concentrated mainly in the western parts of the country. If the exchanges try to do the same thing, they may not succeed.

However, if exchanges expand the network by broad basing participation that go beyond the cities and bring more and more players, there will be space for more growth.

Incentive programmes

The incentive programmes of the exchanges can enable non-penetrated geographies where knowledge and usage of the futures market is low.

Participants from these geographies can be charged a discounted fee for qualified products. Under such schemes, existing market participants are not included unless they specifically inform the exchanges about the efforts made under the programme. This will prevent misuse of incentives by the members.

The incentives apply only to electronic trades that are done by qualified registered traders in accordance with exchange policies. The participants will be eligible for discounted fees during the announced period provided they satisfy the minimum quarterly volume requirements.

CME, which is the world’s largest exchange, offers a number of such incentive programmes directed at different parts of the world.

The incentive programmes offer fee waivers or reductions to new traders from locations where the exchange has yet to make inroads. There is also an Emerging Market Programme that covers the world outside the 20-most developed economies.

The New Trader Incentive Program (NTIP) provides fee waivers for new traders associated with proprietary trading firms and trading arcades located in approved countries. Qualified registered traders can obtain fee waivers for trades of qualified products in accordance with the announced policies.

The NTIP is designed to encourage the development of new traders with no experience.

The mobile phone industry underwent a metamorphosis when it changed from call-based tariff to usage-based tariff.

The commodity futures market is yet to see a change from a value-based fee structure to a transaction-based fee structure …which may prove to be a game changer.



( Shyamal Gupta is the Chief Business Officer of NCML The views are personal)

Published on March 12, 2014

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