SEBI has permitted the BSE and the NSE to also launch commodity derivatives on their existing platforms. Currently, MCX and the NCDEX dominate the commodity derivatives trading in India. While NCDEX has leadership in the agricultural commodity segments, it is MCX which is the larger exchange by volumes as it has leadership in the more popular non-agri commodities like gold, silver, industrial metals and oil. What could be the implications of the launch of commodity derivatives on the BSE and the NSE?
Benefits of permitting commodity derivatives on NSE and BSE
- While some benefits are specific to exchanges, there could be some benefits to the commodity trading segment as a whole. Let us look at the overall impact of permitting commodity derivatives on the NSE and the BSE.
- For the BSE and the NSE, it will give them one more product offering to their clients and that will be an advantage since now all the key financial products like equities, equity futures, equity options, currency derivative, ETFs and now commodity futures can be traded on the principal exchanges itself.
- Both the BSE and the NSE bring with them a long standing reputation of investor education, investor awareness programs, risk management and supervision which will now be extended to the commodity segment also. That will make the commodity trading a lot more safe and secure.
- It will now be possible for traders to actually do causality trading between equities and commodity. For example, companies which are into commodity businesses normally see their stock price trending with the price of the commodity.
- Both the exchanges will be starting off with non-agri commodities and then extending to agri commodities at a later date. Normally, non-agri commodities are less vulnerable to regulatory shocks. That will make their business less volatile.
- The advent of NSE and the BSE into commodity will enable the gradual institutionalization of the commodity markets. Currently, while global investors are permitted to hedge their risk through commodity derivatives, there has not been much enthusiasm shown by these institutional investors. With their long standing relationships with the NSE and the BSE, foreign institutional investors should be more comfortable dealing in commodities since they are familiar and also comfortable with the risk management systems at the two exchanges.
- It is still not clear if the two exchanges would create additional liquidity or result in more volume in the commodity markets. However, that would largely depend on how the two exchanges roll out the products and implement them over the next few months.
- From the markets point of view, there will be more competition among the exchanges and that will ensure better products and also better pricing for the traders. For too long MCX has dominated the non-agri futures space while NCDEX has dominated the agri space. That is likely to change with competition. We have seen in the past how the NSE changed the contours of competition in the industry.
These may still be early days to gauge the impact of the launch of commodity derivatives but it is definitely likely to improve the extent of institutional participation and make the market broader and deeper. Currently, commodity markets have a large element of speculation and that can be curbed with the participation of institutional players in the market. Also it is expected that costs will come down gradually as competition and better technology comes into play. But above all, customers are going to benefit from a more integrated approach to trading. Traders will now be able to look at commodity as one more asset class to be traded in sync with equities and F&O. Whether eventually, the KYC and the margining system also get integrated remains to be seen. If that is done it could be a big push for the commodity market volumes.