Commexes developing tradeable indices

MCX has a presence in agri segment but the larger part of its volumes come from elsewhere

The Multi Commodity Exchange (MCX) and National Commodity and Derivatives Exchange (NCDEX) have started developing indices for trading in derivatives.

This comes after the Securities and Exchange Board of India's decision to allow options trades in commodity derivatives. The exchanges hope Sebi will, in time, permit derivatives based on commodity indices and index-based products, like exchange traded funds.

Samir Shah, managing director of NCDEX, said: "We are building our own suite of indices. We recently developed a FARM index and are working on some more." NCDEX's market share is largely in agricultural commodities.

A spokesperson of MCX said: "We have entered into an agreement with Thompson Reuters for working on index products. After options, that is something we all expect to come in."

MCX also has a presence in the agri segment but the larger part of its volumes come from elsewhere. Prices of most such products — metals, crude oil, gas — are settled by using international prices. So, tradable indices have to be in sync with settlements in the futures market.

The FARM index developed in-house by NCDEX represents major commodities, irrespective of whether they are traded in the futures market or not. The idea is to have an index product to hedge food price risk, based on crop size and price.

NCDEX already has a Dhanya index, largely covering listed and traded commodities on its platform but not representative enough of the country's agri basket. "We will retain that, as it serves a purpose for those investors who want to invest in a basket of futures contracts," said the spokesperson.

Globally, index derivatives in commodities is not a big volume generator. However, financial investors track commodities indices for the weights of various component commodities. Products based on such indices are also traded, rather than futures and options in these.

Jodie Gunzberg, managing director for product management at S&P Dow Jones Indices, says: "There are no commodity indices in India. The futures market needs to be available for inclusion."

On the performance of commodities in the international market, based on movements in indices which are their properties, she said: "Half the 24 in the S&P GSCI and Dow Jones Commodity Index are in positive territory in 2017."

An expert in commodity risk management said: "Like Nifty indices trading, it will not be a surprise if trading based on commodity indices do well in India, contrary to the global trend." He said several Indian metal and oil refineries hedge their commodity price risk, based on their exposure in the international market. A large chunk of this is in over-the-counter (OTC) derivatives, contracts that are traded and privately negotiated directly between two parties, without going through an exchange or other intermediary. OTC derivatives are much bigger than exchange-traded commodity derivatives globally.

An MCX spokesperson said, "Launching of an index product will depend on the regulator. We believe it will be next in line after options."