S&P eyes commodity indices trade in India

With trading volumes more than doubling through the past three years, the market has attracted global commodity majors

With India’s commodity trading volumes more than doubling through the past three years, many global commodity indices majors are now considering India one of the most promising markets for commodity indices trading.

S&P Dow Jones Indices (S&P DJI) feels the potential for commodities indices trading in the Indian market is immense. “India’s commodity market is growing big. More and more investors are now getting into commodities trading. We are looking at India and the entire Asia as a potential market for S&P indices,” said Daniel Ung, associate director (index research & design group), S&P DJI.

Currently, commodity index trading is not allowed in India. In equities, three quarters of the volumes are accounted for by index derivatives, including futures and options (F&O). Globally, commodity index trading is gaining momentum and its share in the overall financial derivatives markets has been on the rise.

Parliament is likely to pass an amendment to enable index derivatives on commodity exchanges. However, this may take a few quarters or a year. After the law is amended, the Forward Markets Commission (FMC) would have to finalise the regulations. Though major exchanges have developed indices and these are displayed on exchange websites, these are hardly followed, as these indices aren’t available for trading.

Data compiled by the Futures Industry Association (FIA) show in January-June 2012, global F&O volumes stood at 11,127 million contracts (traded at 84 exchanges worldwide). Of these F&O contracts, about 86 per cent were equity indices, individual equities, interest rate and currency F&O; the number of contracts traded in these segments dropped 14 per cent, three per cent, 14 per cent and 24 per cent, respectively, against the corresponding period of the previous year.

FIA data also showed in the same period, global contracts in precious metals, non-precious metals and energy increased 33 per cent, 20 per cent and one per cent, respectively. These segments have a share of about 12 per cent in F&O contracts traded globally.

In India, commodity trading rose from Rs 77,64,754 crore in 2009-10 to Rs 1,44,17,579 crore in the April-January period of this financial year, FMC data showed.

Ung said increased awareness and attractive returns in commodities trading had caught the fancy of investors globally. As of December 31 2011, S&P GSCI had assets under management (AUMs) of about $80 billion (about Rs 4,32,000 crore), while Dow Jones-UBS Commodity Index had AUMs of about $74.2 billion (about Rs 4,00,680 crore). “The two indices are the most widely used and recognised commodity indices in the world and take the lion share of the AUMs in the indexing space,” said Ung.

Through the past three years, the S&P GSCI Precious Metals index yielded 54.18 per cent returns while S&P GSCI Energy gave returns of about 21 per cent. In the same period, India’s benchmark index, the Sensex, gave compounded returns of about 11 per cent.

“As far as commodity indices trading is concerned, our markets still need to match global standards. For India, we believe F&O in equities is still a better bet over commodities,” said Kishore Ostwal, chairman and managing director, CNI Research.

Ung, however, believes diversification would make investments safer and high-yielding. “In India, investors are quite heavy on equities. But diversification is necessary to make it safe and yield more returns. Across Asia, commodity indices are picking up well,” he said, adding, “Currently, no issuer in India has been licensed to issue products on our commodity indices.”