Gold futures on BSE: Cross-delivery centres may be a challenge, say brokers

The issue facing BSE is not unique to it and applies to all exchanges, but since BSE is launching commodity business with precious metals futures, there is a scope to look at the issue afresh

Even as the BSE has announced its preparedness for the commodity futures play, its brokers have some concerns, especially around delivery of bullion at the centre of choice.

This means, the exchange might offer delivery of the commodity at a centre different from the one chosen by a trader in case the underlying is not available at the centre of choice. Transportation, premiums, discount, value at risk and other costs involved in the changed delivery centre are factored in the actual price payable for sellers. But BSE traders want the exchange to offer delivery of bullion at the centre of their choice.

Existing commodity exchanges take a leeway in the delivery of commodities after the expiry of a running contract. They have a number of identified delivery centres across all deliverable commodities.

The issue facing the BSE is not gold-specific; it applies to all commodities across exchanges, according to brokers. Since BSE is launching commodity business with precious metals futures, there is a scope to look at the issue afresh.

“We used to trade in bullion on commodity exchanges earlier. The exchange offered the delivery of gold to us from a remote centre. Since the transportation of gold from that centre was difficult, we accepted the delivery, assuming this would not be repeated. But, gold delivery was again offered from the same centre. After that, we stopped trading on that commodity exchange. Now, BSE needs to address the delivery problems that traders have faced on commodity exchanges,” says A P Shukla, president, Joindre Capital Services Ltd, a member of all recognised equity and commodity exchanges in India.

Many brokers who attended BSE’s seminar last Thursday expressed their apprehensions over trading in deliverable commodities, including gold.

Following the Securities and Exchange Board of India’s (Sebi’s) go-ahead to universal exchanges – meaning equity exchanges could offer commodity futures, and vice versa – BSE last week showed its interest in launching a commodity derivatives contract effective October 1, 2018.

BSE Managing Director Ashishkumar Chauhan had on January 4 said, “Our 35 million trading clients can trade in commodities on a single screen with no membership fee. We will also offer lower transaction charges to our members for commodity futures as our margin cost stands near zero. Out technology is world-class and ready to accept large orders, and we have proved that in equity and currency futures & options.”

BSE, however, is planning to launch futures trading in bullion (gold and silver), energy (crude oil and natural gas) and base metals (copper, aluminium, lead and zinc) without any fresh investment in technology upgrade.

“BSE needs to address all technical issues that brokers face. But we are enthusiastic about BSE’s entry into commodity futures. With lower transaction charges and, most importantly, no membership fee, we would be trading in commodities on the BSE,” said Alok Churiwala, former vice-chairman of BSE Brokers’ Forum and director of Churiwala Securities Pvt Ltd.

To integrate equity and commodity futures markets, Sebi had earlier integrated brokerages to merge their separate companies in both segments into one. And later, it allowed equity exchanges to offer commodity futures and vice versa from October 1, 2018.