MCX partners with Thomson Reuters to launch co-branded commodity indices

As Sebi gradually opening up mkt, next could be PMS in commodities that are useful for benchmarking

Multi Commodity Exchange of India (MCX) on Tuesday announced that it has joined hands with Thomson Reuters to launch co-branded commodity indices in India. The move follows signals from the Securities and Exchange Board of India (Sebi) to open up commodity markets.

While Sebi has already allowed trading in commodity option, it had long been deliberating allowing allowing trading in indices. This is because unlike equity indices, commodity indices are not directly useful for hedging in general but are used more for assets allocation.

According to sources, once MCX is ready with the first set of new indices, prepared using more scientific methods, existing indices for metals, agri-products and other commodities are likely to be phased out.

Sources close to the development said, "In the first phase, MCX proposes to have around 5-6 Indices -- a few product-based Indices, a few single-commodity ones and a composite index. The exchange is trying to be ready for dissemination by September 2017."

Once index trading is permitted, Sebi is expected to look at allowing commodity-specific exchange traded funds (ETFs) similar to gold ETFs and portfolio management services (PMS). These were banned a few years ago when the Forward Markets Commission (FMC) was regulating commodity derivatives.

A commodity broking industry veteran said that they had recently met Sebi officials and proposed to allow PMS in commodities, as now the market is under a strong and powerful regulator.

Sebi has also allowed category-3 alternative investment funds or hedge funds in commodity derivatives, and has moved to integrate businesses of commodity broking and share broking, which means that all businesses can be transacted under single entity, allowing fungibility of capital and clients' margins.

While MCX has tied up with Thomson Reuters for indices development, another exchange National Commodity and Derivatives Exchange (NCDEX) is using its in-house expertise to prepare indices, confirmed highly placed sources.

Speaking on a tie-up with Thomson Reuters, MCX said, "As a part of the agreement, MCX and Thomson Reuters will work together to create, govern, maintain and market a series of new commodity indices by tracking the performance of commodity derivatives listed on MCX. The indices will be created and maintained by Thomson Reuters and follow the International Organisation of Securities Commissions (IOSCO) benchmarks."

According to the agreement, MCX will have exclusive rights to list the co-branded indices on its own platform for trading. And, Thomson Reuters will sub-license the indices to institutions such as mutual funds, Alternative Investment Funds, among others, for benchmarking, portfolio construction and other associated products, as and when permitted by Sebi.

Globally, commodity indices are used by investors to benchmark their commodity portfolio for asset allocations within commodities and also to take positions. Direct trading in commodity indices is lower than equities but commodity futures and options are widely used for hedging.

Subject to approval by Sebi, "MCX would subsequently launch derivative contracts on the MCX-Thomson Reuters commodity indices," said the announcement.

Mrugank Paranjape, managing director (MD) and chief executive officer (CEO), MCX said, "new opportunities are opening up in the commodity derivatives market. Towards this end, we believe in lining up a very strong product pipeline to meet the aspirations of a burgeoning investor class in a rapidly expanding economy like India's. The partnership with Thomson Reuters will go a long way in building such a product pipeline given their expertise."

Pradeep Lankapalli, managing director-South Asia, Thomson Reuters. said, "We are excited about launching co-branded commodity indices in collaboration with them. This reaffirms our open platform strategy and will go a long way in helping us capture new opportunities that the financial industry presents."