With more competition lined up, comexes are focusing on delivery-based contracts.
The buzz on innovation has got louder in commodity exchanges. Reason: the country now has four national exchanges after the Indian Commodity Exchange (ICEX), promoted by India Bulls Financial Services, started operations last week. And the list is expected to grow longer.
While the Kotak group’s national exchange, formed with the Ahmedabad Commodity Exchange, will start next year, one more applicant, Ketan Sheth, has filed an application with the commodity futures regulator, the Forward Market Commission (FMC), to set up a national exchange, to be called the United Commodity Exchange. This is apart from smaller exchanges like the Soya Exchange in Madhya Pradesh.
To begin with, these exchanges are focusing on aligning the futures market with the physical market. For example, ICEX plans to introduce delivery option in copper contracts and has already launched gold futures with five delivery centers against the older exchanges’ one or two such centres. The latest entrant in the exchange space is also using its equity partner MMTC’s delivery centers as designated centres for gold futures.
ICEX is also using the strength of its partner Krishak Bharti, the largest farmers’ cooperative in Asia. Krishak Bharati will encourage member cooperatives to act as aggregators for farmers for hedging their risks on the exchange. Ajit Mittal, CEO, ICEX said, “We aim to provide a strong connection between the physical and the futures market.”
The existing players have been quick to join the game. The Multi-Commodity Exchange of India has launched the Exchange of Futures for Physicals transaction facility, which is essentially exchange of futures contracts for physical commodity between two market participants.
More From This Section
The National Commodity and Derivatives Exchange (NCDEX) is also planning to offer the facility, which allows hedgers in certain farm and non-farm commodities to transfer their physical market positions to the futures exchange and vice versa.
Some others have already done spectacular things. For example, the rubber futures volumes on the National Multi-Commodity Exchange (NMCE) on a few days in a week cross even that of the Tokyo Commodity Exchange, which is the reference point for rubber futures.
Anil Mishra, CEO, says MCX may be the king in gold futures, but the recently-launched gold guinea contracts on NMCE have been very successful with volumes higher than even MCX as the exchange has provided 22 delivery centers to begin with. NMCE has partnered with Muthut Finance, whose branches act as delivery centers.
Some others are waiting before taking the plunge. The Reliance ADAG group-promoted Reliance Exchange Next, which has set up a spot exchange for commodities, says it wants to set up a commodity futures exchange two years down the line.
FMC Chairman B C Khatua welcomes the emerging competition in the exchange space. In the last five years, the turnover in the commodity futures market has risen four times. But the growth rate seems to have slowed of late, he says.
Khatua lists several reasons for allowing more competition. Many commodities, which account for a larger share in agriculture like rice, cotton and tea, are either not traded in the futures market or are not generating volumes and liquidity despite potential. Wheat is traded but volumes are low. The futures market has grown despite the absence of banks and institutional players. Once they are allowed, the market will see a huge push.
Existing players are also all for more competition. Parveen Singhal, deputy managing director, MCX, says healthy competition is good for the growth of the industry and there is enough space for vertical specialists.
Vijay Kumar, chief business officer of NCDEX, says the entry of new competitors could help build awareness and drive innovation in products and technology. Future changes in regulations could see trading of options as well as participation from large banks, mutual funds and other large financial institutions as well as international traders.
However, it will not be easy for the new players as existing exchanges have the power of scale up with them. MCX’s Singhal says, “Our strategy of focusing on energy, bullion and base metals has paid off as these commodities have globally-linked prices, making us the largest mercantile exchange in India. Our 2,000-plus members present across over 1,000 towns and cities in India will continue to use our robust and user-friendly trading platform as we offer high liquidity and the largest guarantee fund of over Rs. 2000 crore to secure every trade on the exchange.”
Vijay Kumar of NCDEX says the exchange has a strong physical delivery platform and has participation from most value chain participants. “We will continue to strengthen our operations and introduce new products on a regular basis to sustain growth,” he said.
Kumar has a word of caution for the new players: “Until the new exchanges reach a critical volume, the high cost of operations could result in lack of profitability, which in turn could see some of them having to exit or consolidate.”
Rajnikant Patel, president & CEO, Reliance Exchange Next, agrees. “While there is certainly scope for more exchanges, I believe over a period of time some consolidation might take place in the industry.”