MCX: New products to drive future growth; are you taking note?
Bear attacks and market corrections aren’t bad always.
In fact, corrective phases can always let you run a stress test on companies you might want to track.
Take an example of Multi-Commodity Exchange (MCX).
MCX has a 92.6% share in India’s commodities futures market with 74.8 lakh unique client registrations. Despite having such a dominant market share, the stock of MCX is down 8% on a Year-To-Date (YTD) basis.
In the on-going market correction, the stock drifted 23% lower from its October highs but has found some stability over the last two-three days.
So has it cleared the stress test? Well, it looks like the market has at least well-understood and absorbed the negative impact of peak margin requirements on the traded contract volumes on MCX.
MCX’s Average Daily Turnover (ADT) in futures dropped from Rs 28,031 in Q1FY22 to Rs 25,797 crore in Q2FY22. Nonetheless, ADT in options jumped 3 times on a Quarter-on-Quarter (Q-o-Q)—from Rs 1,900 crore in Q1FY22 to Rs 6,023 crore in Q2FY22. ADT in options saw a 5-fold increase on a Y-o-Y basis.
For those who came in late, the exchange had come under tremendous pressure after SEBI’s 100% peak margin requirements kicked in on September 01, 2021. They seem to have affected futures trade volumes the most.
Can options compensate for the loss of revenue in futures?
Now that the options volumes are peaking, the exchange has finally decided to charge a transaction fee on the options premium and has indicated a rate of Rs 4,500 for the premium of every Rs 1 crore.
This looks like an interesting development, considering that MCX was reluctant to charge any fee for the past 3-4 years on its options contracts citing the reason of low volumes.
MCX is working on a strong product pipeline
Going by the commentary of the exchange and the on-ground developments, it seems that we are at a crucial juncture. MCX isn’t only expanding its options portfolio but talking about some exciting new product launches as well.
It has already launched nickel options contracts on December 13, 2021 and has lined up natural gas options contracts, which will be launched on January 17, 2022.
Moreover, electricity futures, steel TMT contracts and aluminium alloy contracts are also in the pipeline for this financial year, subject to regulatory approvals.
And here’s an anecdote
If you ever wondered who doesn’t like stability, the answer is commodity traders.
And this is not what we believe; it’s a key takeout from the management commentary of Multi Commodity Exchange (MCX), post Q2FY22 results.
On this backdrop, the response to natural gas options will be worth monitoring given the highly volatile nature of natural gas prices.
With such a strong product pipeline, MCX will try to address the hedging needs of big companies engaged in the business of infrastructure, housing, construction and those using energy as an important input.
Can this place MCX truly in a league of its global peers which are not retail-driven but B2B dominant?
Time holds the answer.
You see, India’s electricity spot market is yet to mature but as and when it does, exchanges such as MCX are likely to gain.
According to the management of MCX, the turnover in the electricity derivatives contracts can be as much as 7 times that of the spot market turnover, purely going by the examples of some mature markets.
In future, MCX will use India Energy Exchange (IEX) prices for the trade settlement of energy derivatives. In return, MCX will share 10% of its revenue on energy futures with IEX.
Index F&O is a way to go
MCX is hopeful of getting huge traction in the index F&O segment as well. A combination of economic significance of the underlying commodities and liquidity in the futures markets decide the weightages of index constituents.
Hence, they not only offer a diverse choice to traders but they can also prove beneficial to hedgers who want to hedge their exposure to a basket of commodities.
For instance, the energy index is comprised of 75% crude oil and 25% natural gas. Now anybody who wants to hedge positions against the volatility in the energy basket may take advantage of the energy index, rather than taking exposures to all underlying commodities.
The product portfolio expansion appears to be well thought through, you see.
Moreover, MCX is implementing a big overhaul of technology for which it has partnered with TCS.
Developing spot market for gold and coal
Along with BSE and NSE, MCX is going to be a part of the International Bullion Exchange. It is said to be the gateway for India’s gold imports.
MCX has been evaluating various options to cater to the domestic spot gold market. In September 2021, SEBI gave a green signal to developing a gold trading ecosystem to facilitate trading in Electronic Gold Receipts (EGRs).
Similarly, developing a platform for spot trading in coal is also work in progress for MCX.
In a nutshell…
The fear of peak margin impact on MCX’s volumes might have been factored into the stock prices already. While each new segment of the commodities F&O market will have its own gestation period, the performance of new products will set the tone for MCX.
As they say, the stock markets are always forward looking hence going forward, tracking the progress of new initiatives, not the past volumes, will be crucial.
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