‘Gaps in commodity portfolio offer potential’

Broking entities are consolidating the equity and commodity arms

The commodity derivative segment is likely to witness some heated action once the NSE and the BSE launch commodity contracts from October 1 this year. BusinessLine spoke to Ravi Varanasi, Group Head, Equity Markets, NSE, to find out how the largest equity exchange in India is prepping for a foray into this segment.

How are traders likely to benefit from one more exchange entering the fray? What difference will it make to them?

There will be operational ease for investors and brokers, with all the products available under one roof. This will lead to significant capital efficiencies. Right now, the traders are able to use their capital to trade in only equity, equity derivative, currency and fixed income. Now, commodities will also be available, which will help them manage capital more efficiently and provide operational efficiencies.

But brokers were already enabling clients to trade across platforms, providing margin fungibility, following SEBI’s directive in September 2017, isn’t it?

At the front-end, at the trader-broker interface, integration had already happened. There is one level of consolidation at the broker level due to efficiencies in managing margins. Another level of consolidation takes place at the clearing corporation level. That will happen once exchanges like NSE begin to trade in commodities along with other assets. Say, you have given collaterals to an exchange trading in equity; it can now be used for trading commodities too.

Many broking entities have already or are in the process of consolidating their equity and commodity arms. Their physical and legal infrastructure, that was separated all along, is now being consolidated. They are working bringing together their security and commodity clientele.

As soon as we start our derivative products from October 1, the client can choose to trade in any asset class using the same exchange.

What are the additions you need to make to exchange infrastructure to begin commodity trading? Have you begun promotions, reaching out to potential traders etc across the country?

We have developed our front-end software and the back-end systems. As we are going to launch gold contracts, the infrastructure for delivering gold is also being set up.

The front-end is being tested by brokerages. We have also released the API so that brokerages who build their own front-end can add NSE commodity as one of the asset classes. We are also reaching out to broking community, explaining our plans.

On the agri side, we are speaking to specific constituencies where we think there is potential for launching a product. Our brokers know that we are in business from October 1.

What are the contracts that are likely to be allowed to be traded on the NSE first?

Initially, we will be looking at non-agri products. But we have started working on agri commodities too, engaging with the eco-system, trying to identify gaps in the current product offerings where we can build a large market. But phase I will be non-agri only.

NSE already has a stake in NCDEX, isn’t it? Doesn’t that stop you from launching agri commodity contracts?

No it doesn’t. There is no issue in holding a stake in NCDEX and launching agri-commodity contracts.

What will drive the success of your commodity segment? Will it be volume or pricing or something else?

One, we will see if any product differentiation is possible. Two, we will try to expand the market. Volumes have been stagnant in this market over the last few years. We will try to grow this market, bring in more trades; reaching out in a big way to a larger section of traders is going to be our focus.

Liquidity is a problem with agri-exchanges in India, with institutions not allowed to trade here. How are you going to address this issue?

Existing commodity exchanges are already engaging with the regulator to allow institutions to participate in commodity exchanges, and I am sure we will also be joining them. More importantly, there are a large number of SMEs that are probably not reaching commodity derivatives for various reasons. It could be due to lack of awareness or not knowing the part derivatives play in managing risk.

When we launched equity derivatives in 2000, we went around the country and did a huge awareness exercise. But we saw traction only in 2004-05. It took people that long to understand and start using these products.

Initially, won’t this reduce liquidity further as volumes are split between more exchanges?

Additional players always lead to fragmentation of liquidity, but if each exchange concentrates on different segments, it can work out over the long term. We think there is untapped potential and gaps in product portfolio that can be tapped.

Don’t you think CTT on metal contracts used for hedging purposes needs to be reviewed?

We believe there is a task-force that is looking at tax reforms, including financial market taxes. Obviously, representations will go there from the industry. Let’s see how it goes. The key is that the cost of trading in India needs to be comparable to international exchanges.

Unless that happens, some of the hedgers will go overseas. I’m sure a lot of attention will be paid in this direction in future.

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