While the MCX has been seeing its turnover grow this year backed by new participants and increased momentum in the price of gold and oil, the two equity exchanges — BSE and NSE — that stepped into the commodity derivatives space in October last year, are yet to leave a mark.

Observers initially feared that with the entry of NSE and BSE in the commodity space, MCX and NCDEX will lose their market share. But 10 months in, not much has changed. Between January and July, 2019, the total recorded turnover of the commodity derivatives market across all exchanges was ₹46.26 lakh-crore. Of this, ₹42.75 lakh-crore — over 92 per cent — was transacted at MCX. NCDEX was a distant second with a turnover of ₹2.83 lakh-crore, a 6 per cent market share. BSE, ICEX and NSE together held 1.5 per cent of the market.

In September 2018, before BSE and NSE came into the picture, the commodity derivatives space was divided among three players — MCX, NCDEX and ICEX — with MCX holding about 91 per cent of the market.

BSE and NSE waived off transaction charges on their commodity derivative trades when they entered the market, and still continue to do so, but have not been able to churn much volumes.

At BSE, while there is some momentum in cotton and guar seed futures, much of it appears to be day-trading.

Open interest in both these contracts at BSE is far lower than that in MCX cotton futures and NCDEX guar seed futures.

Commodity play

NSE, with its deep pockets, was expected to sweep the commodity derivatives market as it did in equities, but reality turned out differently. Despite the exchange keeping the transaction charges at zero, it was not able to pull volumes from MCX. The average daily turnover (ADT) at NSE even today is only ₹60-70 crore; while in MCX, in gold futures alone, the ADT is ₹6,000 crore. NSE, in the past 10 months, has launched only three contracts — gold, silver and Brent crude futures.

BSE has been doing better than its rival NSE in commodity derivatives. The exchange has so far launched 11 contracts (of eight different commodities). Besides gold and silver, the contracts are in Oman crude oil, copper, guar gum, guar seed, turmeric and cotton. While the Oman crude oil contract sees no trading at present, and in copper and bullion there is very little action, in the agri contracts (cotton and guar seed futures), volumes have not been bad.

In cotton futures, BSE recorded a turnover of ₹867 crore in July, close to 30 per cent of the traded value in cotton futures contract in MCX (₹3,087 crore in July). In guar seed, BSE recorded a turnover of ₹2,681 crore in July, again, a third of what was recorded in guar seed futures in NCDEX (₹8,837 crore). Now, the question that may arise here is — has BSE taken the market share from NCDEX and MCX in guar seed and cotton, respectively?

While it does look like the exchange has been successful in pulling some of the traders in agri-contracts to its side, the weak OI (open-interest) positions in the contracts show absence of physical market participants.

In MCX, in August so far, the average daily OI in cotton futures contract has been about 2 lakh bales. In BSE, however, it is way too lower at 350 bales. In guar seed, while at NCDEX, the average daily OI in the contract in August has been 1.26 lakh tonne, in BSE’s contract, it has been quite low.

Also, if we look at the percentage of OI held by the largest participants in BSE, in most contracts, 100 per cent OI is with the top 3-5 participants, showing high concentration among a few traders.

What’s helping MCX

MCX has been reaping the advantage of being the first mover in the metals and energy space in the commodity derivatives market. The wild price swings in oil and the sharp upward movement in gold prices have been benefiting the exchange this year.

With the exception of base metals, most other products have seen traded volumes go up at MCX.

In base metals, lower trading volumes can be attributed to SEBI’s move to switch all base metal futures to compulsorily deliverable contracts, which has irked some players, say market observers. Further, given the regulator’s instruction to have only one contract under each base metal, the exchange had to do away with variation of ‘mini’ contracts in nickel and copper, further impacting volumes.

The next few years look promising for MCX as well as the entire commodities market in the country as the pie itself can expand with institutions coming in. While there is not much action from institutional players — except for a few AIFs (alternative investment funds) that are investing the money of HNI (high net worth) clients in commodities — over the next one-two years, PMS (portfolio management service) players and MFs may also join the fray and kick up the volumes.