MCX prepares Rs 10-bn war chest ahead of universal exchange implementation

Cash reserves will help it meet competition; exchange eyes currencies in phase-1, plans more options, index derivatives

MCX preparing war chest to face competition

Rajesh Bhayani

Mumbai, 18 January

The Multi Commodities Exchange (MCX) says it is readying a war chest of cash to compete with major stock exchanges once the universal exchange concept is implemented by the regulator.

MCX currently has a little over Rs 10 billion in free cash. The BSE has already announced a plan for commodities trade and also plans to start mock trading from January 29, even as the Securities and Exchange Board of India (Sebi) is yet to issue guidelines for a universal exchange. Once norms for the latter are issued, equity and commodities exchanges will be able to enter each other’s space.

Mrugank Paranjape, managing director at MCX, said in a conference call with analysts after their results announcement: “There are a lot of things in a Universal Licence, which might happen anytime this financial year. While fluid at this point in time, the company is keen on the currency segment.”

For commodities, currency is a natural choice for the same lot of participants to hedge in.

A company spokesperson said, “We are indeed preparing ourselves for competition and, most mportant, going to strengthen our present product portfolio and physical market connect, beside member engagement.”

MCX declared its December quarter results on Tuesday; it showed operating income down and income from investment falling sharply. As a result, its share fell on Wednesday by 5.1 per cent, to close at Rs 850.65.

MCX has already said it is approaching Sebi with four more contracts to be launched, having tied up with Thomson Reuters for creation of some sectoral indices. It is in discussion with Sebi for permission on index-based trading for commodities; it already has Sebi approval for a new product in futures, a deliverable contract in brass rubber contracts. However, it has says, market conditions are not conducive at present for a start.

When MCX launches currency derivatives, it will face competition mainly from both the BSE and the National Stock Exchange; they have long track record in this. MCX will also have to fight to preserve its own turf, which is non-agricultural commodities’ derivatives.

A report by Edelweiss on MCX quoted a conference call with the latter's management saying, “We don’t have any plans to launch anything on the international side of the business. We will (rather) conserve the cash over the next two years on account of competition and any rise in technology cost.” MCX has the technology support for commodity futures and options but when it expands in to segments like currencies, will need to spend more on this.

A sectoral official says: “The cash is not necessarily for direct use in any competitive landscape; it is more that MCX draws cushion and comfort from such reserves to bear any pressure on margins. Profit margins might be less if MCX is to respond to predatory pricing tactics from the competition. The cash on hand gives adequate scope to MCX to fight.”

MCX launched options in gold a few months earlier and has tested a few settlement cycles, including devolvement, without glitches. 

Says Paranjape, “This paves the way for us to seek regulatory approvals on more options contracts. In parallel, we continue to engage with regulators and market participants to increase the liquidity in this product.”