Agri commodity derivatives space set to hot up as NSE forays, BSE expands

Stock exchanges BSE and NSE entered the commodity derivatives space last October and the initial expectation was that NSE would look at agri space after non-agri business stabilised

The agri commodity derivatives space is set to see intense competition, with two large stock exchanges planning to either expand their portfolio or enter the segment with contracts, which are currently not traded in the futures market. The BSE has sought the regulator's approval for trading in turmeric and castor seeds.

Stock exchanges like BSE and the National Stock Exchange (NSE) entered the commodity derivatives space last October and the initial expectation was that the bourse would look at agri space after its non-agri business stabilises. However, in just six months’ time NSE is now prepared to launch a few agri contracts and that too “in commodities not currently traded on any of the futures exchanges in India”, said a spokesperson for the exchange.

The NSE spokesperson declined to name these commodities, but sources said these might include those earlier trading in derivatives but delisted later and not introduced afterwards. Such commodities (traded earlier but delisted by the regulator later on) include tur, urad and potato. NSE is yet to approach the regulator with specific details.

As of now gold, silver and crude oil are traded on NSE's commodity derivatives platform.

So far, National Commodities and Derivatives Exchange has been a leader in agriculture commodity derivatives trading. Other exchanges like Multi Commodity Exchange and ICEX (Indian Commodity Exchange) have a presence in some commodities in which they could create a niche.  

BSE has already launched futures in cotton and guar seeds and gum. With a good response in these contracts, BSE is planning to launch futures trading in turmeric and castor seeds. Castor contracts currently form 15-20 per cent of the NCDEX volumes. Turmeric derivatives don’t have significant volumes. In the past two months, BSE volumes in agri commodities have been higher than that of its non- agri segment, posing a challenge to the existing exchange NCDEX. However, the former has to work on building more liquidity with increasing open interest.

The NSE's entry in agri commodities is significant from the point of view of its investment in agri-centric derivatives exchange NCDEX, in which it holds a 15 per cent stake since inception.

However, to begin with, NSE is planning to launch contracts that are not traded on NCDEX at present. As a leading agri exchange, the NCDEX has a good mechanism for delivery and a repository. For deliverable commodities trading contracts, an exchange has to have a repository tie-up as warehouse receipts can be issued as delivery and repository keeps a record of every such issue and subsequent transfers.

NSE doesn’t have the repository. NCDEX has one, while BSE’s subsidiary is a repository where MCX also has a stake. NSE, according to sources, is planning a tie-up with the NCDEX repository, the National E-Repository Limited (NERL).

The Securities and Exchange Board of India (Sebi) has allowed exchanges to offer financial incentives for commodity derivatives but that should be for commodities not traded on other exchanges, and NSE’s plan to introduce such commodities is expected to get Sebi's approval for providing incentives for market making in such contracts under the Liquidity Enhancement schemes.