This step is to address falling volumes in its metals segment, down 30 per cent this financial year. The fall was a sequel to the Securities and Exchange Board of India mandating delivery-based settlement.
Currently, these large companies (such as Hindalco) hedge all their risks in metal prices on bourses abroad, such as on the London Metal Exchange. MCX, in an interaction with regulators, had proposed that major mining and smelter companies hedge at least a tenth of their requirement on Indian exchanges.
Last year, the Reserve Bank of India made gold hedging mandatory on local exchanges only. Companies in the segment sell future production in derivatives, enabling more liquidity and investment in commodities by institutional investors like fund houses. Some big jewellery companies have started doing this in recent months, which has increased volumes and open interest in gold contracts.
Other proposals include increase in delivery centres. At present, there are only one per metal and mostly in Mumbai (Bhiwandi). All metals — copper, zinc, lead, nickel, tin, aluminium — are now settled in delivery. The process began from April. The MCX management told analysts last week that they will be increasing the number of delivery centres.
The mandatory delivery rule had also impacted market participation. From April onward, when the settlement period was approaching, speculators with had huge 'buy' positions had to exit or roll over their positions. They had been used to cash settlement on the difference or rollover. Mandatory delivery resulted in lower participation and volumes, leading to broker complaints.