Multi Commodity Exchange (MCX) is taking measures to address falling volumes in the metal segment, which has plunged 30 per cent in the current financial year (FY20) so far after Sebi made delivery-based settlement mandatory. MCX has proposed that the capital markets regulator promote ‘trade in India’. It has asked all major metal and mining companies to hedge a small part of their total bet on Indian exchanges.
Currently, large companies are hedging all their risks in metals prices on overseas exchanges like the London Metal Exchange. An MCX official in an interaction with regulators had proposed to mandate major mining and smelter companies to hedge at least 10 per cent of their requirements on Indian exchanges. The MCX proposal follows the Reserve Bank of India’s notification last year making gold hedging mandatory on local exchanges only.
These companies sell their future production in derivatives which help increase liquidity and also help institutional investors like fund houses to invest in commodities.
Some big jewellery companies have started doing this in last few months which has increased volumes and open interest in gold contracts in the recent past. Industry sources also said that some of these big companies are taking MCX membership to do all their hedging in their own arm rather than doing through other brokers. These companies will run their proprietary book for this.
More delivery centers for metals
Other proposals include increasing delivery centers which is only one per metal and mostly in Mumbai (Bhiwandi). All metals like copper, zinc, lead, nickel, tin, aluminium are now settled in delivery. The process begin from April. All metals have delivery center outside Mumbai. Lead had Chennai and Mumbai has been added now.
MCX management told analyst last week in a call that they will be increasing number of delivery centers to make delivery process smooth. Management’s response was in view of falling volumes in metals. Volumes are down 30 per cent. (see chart).
Mandatory deliveries had also impacted market participation.
From April onwards, when settlement period was approaching, speculators who had huge buy positions had to exit or roll over positions else they may have to take deliveries which they hardly intend. They were used to cash settle with the difference or roll over. Hanging sward of deliveries resulted in lower participation and volumes and even speculation which provides liquidity has come down.
Brokers have been complaining about this. One large broker said on the condition of anonymity that, “once an exchange loses liquidity in metals, it will be difficult to get that back. In past few months spreads in two contracts of same metals have widened making trading difficult.”
During months April-June spreads were quite high when the contracts were entering delivery period for the first time. Now the spreads are high still but moderated from what was a few months ago.
Ajay Kedia, Director, Kedia Commodities said that, "Spreads on MCX base metals have calm down and came in line after recent spike due to transmuting in non-delivery based contracts to delivery-based. This step of delivery based settlement is in the direction of integrating spot and derivatives market. This will avail the SME's with the platform for hedging and to give or take deliveries."
Only one size contract for one commodity
MCX is also opting for one contract for each metal to ensure that liquidity is concentrated in one contract only. MCX has, apart from main contract, even mini contracts of these metals which are aimed at retail participation. It plans to have only one contract going forward, either main or mini, and preference towards mini is higher as the number of clients in the smaller one are higher and they can attract retail participation, said the source in the know.