MCX sees bank guarantee withdrawal by brokers

Bank guarantees given by brokers to exchange to trade on platform

The Multi-Commodity Exchange (MCX) has started bearing the brunt of the commodity transaction tax (CTT) and the recent payment crisis at the National Spot Exchange (NSEL). Both MCX and NSEL belong to the Financial Technologies group.

According to sources in the broking industry, some brokers have withdrawn or reduced their bank guarantees to the exchange. Bank guarantees are given by brokers to the exchange to trade on the platform.

Typically, a broker pays a guarantee of Rs 100 crore for a trading position of Rs 1,000 crore or more. Brokers have only kept guarantees for which they have open positions. According to broking sources, a number of brokers, including some leading ones, have taken this decision.

The managing director of one of top broking houses admitted withdrawing bank guarantee early this week. “The imposition of CTT has led to a sharp drop in our commodity volumes. So, it does not make sense to lock-up bank guarantees. But we continue to do some business at the exchange with lower margin money,” he said.

In another broking house, an internal flash was sent to the traders’ terminals saying that due to internal risk-management systems, it is limiting its clients positions on the MCX.

Said Ajay Kedia, director, Kedia Commodities: “Our trading volumes on MCX have been adversely impacted in the past few days as our retail clients were worried about the payment crisis on the NSEL.”

MCX, in response to a mail from Business Standard, did not comment on the number of brokers that had decided to withdraw their bank guarantee.

“We have already clarified to the Bombay Stock Exchange that MCX and NSEL are totally different entities with no financial commitments or exposure to each other whatsoever. MCX is an extremely sound corporate entity, regulated by the FMC. It has a strong debt-free balance sheet with a net worth in excess of Rs 1,200 crore as on June 30,” said the emailed response.

However, industry players said á brokers and clients had outstanding positions with the NSEL. Clients of a number of brokerages including India Infoline, Motilal Oswal Financial Services, Anand Rathi and Geojit Comtrade have exposure of over Rs 1000 crore to N,SEL .

On Monday evening, the Forwards Market Commission (FMC) ring fenced MCX and its finances by saying that the commodity exchange will not do any financial transaction without its permission.

It’s not MCX alone. All players have suffered after the imposition of CTT. For instance, the daily volumes of CTT-levied commodities have fallen by 42% on the MCX in between July and August 6 (in comparison with June).

For others like NCDEX, NMCE and ICEX, the fall in the volumes have been 19%, 81% and 90% respectively. But all these three players accounted for less than Rs 2,000 crore of daily volumes. MCX, on the other hand, had volumes of Rs 48,000 crore from the CTT-levied commodities.

In case of non-CTT-levied commodities, where MCX is a marginal player (Rs 260 crore of volumes in June), there has been a fall of 7%. In comparison, all the other players have seen a sharp spike. That is, NCDEX, which is a bigger player (Rs 2,200 crore in daily volumes in June) has seen a 9% rise, NMCE and ICEX’s volumes have risen 69% and 473% respectively.     

For the year-ended March 2013, MCX reported a net profit of Rs 298.64 crore and for the quarter ended June 2013, the company has reported a net profit of Rs. 60.12 crore.