Mint Explainer: Why MCX is warming up to a wider pool of FPIs

MCX did this to widen the information of investors successful the commodity derivatives segment, which mostly comprises hedgers and retail traders successful bullion and basal metals derivatives. But however effectual volition this determination beryllium successful deepening the market? Mint joins the dots. 

What are commodity derivatives contracts?

Commodity derivatives contracts are those backed by underlying commodities specified arsenic gold, silver, crude, and copper. Unlike successful the equities markets, wherever securities exchanged betwixt 2 counterparties are not successful carnal form, most  commodity derivatives contracts effect successful the transportation of a carnal commodity specified arsenic golden oregon metallic bars oregon copper rods. However, vigor products specified arsenic crude lipid and earthy state are settled successful cash.

When was trading successful commodity derivatives launched?

The authorities successful 2003 re-introduced guardant trading successful commodities aft a four-decade ban, and established the National Multi-Commodity Exchange, the National Commodity and Derivatives Exchange, and the Multi Commodity Exchange of India. 

While the NMCE and the NCDEX specialised successful spice/plantation and workplace products, the MCX was conceptualised arsenic an vigor and metals bourse. These exchanges were regulated by the Forward Markets Commission, which was merged with the Securities and Exchange Board of India successful 2015.

Later, the NSE and the BSE excessively launched trading successful the commodity derivatives conception successful 2018.

The MCX is the person successful the commodity derivatives segment, accounting for 97% of the turnover successful February. The NSE has a 2.6% marketplace share, followed by NCDEX astatine 0.4% and BSE astatine 0.00006%.

What is the intent of allowing much categories of FPIs to commercialized successful the commodity derivatives segment?

Sebi wants to deepen the marketplace with broader information from retail, wholesale and organization traders. Currently, information is restricted to a fewer companies, and retail and wholesale traders.

To summation organization commercialized successful the segment, arsenic successful the equities currency markets, Sebi successful 2017 permitted Category III alternate concern funds, communal funds, and portfolio absorption services to commercialized successful commodity derivatives. 

So a communal money launching a golden exchange-traded money could hedge connected MCX golden oregon silver. Similarly, AIFs that are agelong connected metallic stocks could instrumentality other positions connected MCX metals oregon crude. However, this hasn’t played retired arsenic expected.

In overseas exchanges specified arsenic those connected the Chicago-headquartered CME Group, the world’s starring derivatives marketplace, hedge funds instrumentality contrarian bets to existent users specified arsenic lipid and metals producers.

Also read: MCX makes different stab astatine getting much FPIs connected board 

On Indian commodity exchanges, it’s a spot of a chicken-and-egg situation, accidental marketplace players. Institutions participate erstwhile determination is liquidity arsenic their positions thin to beryllium huge. But if they don’t participate past the liquidity volition not increase. 

Which is wherefore Sebi is pushing hard to widen information successful the commodity derivatives segment.

What happened with earlier attempts to widen participation?

In October 2018, Sebi allowed eligible overseas entities (EFEs) having existent vulnerability to Indian commodities to enactment successful the commodity derivatives conception for hedging, but that besides came a cropper.

In September 2022, Sebi discontinued the EFE way and overseas investors were allowed to enactment successful the conception done the FPI way prescribed by the regulator. To statesman with, Sebi restricted their trading to cash-settled commodities and indices based connected cash-settled commodities . 

It laid retired 2 categories of FPIs: Foreign portfolio investors excluding individuals, household offices and companies could commercialized successful the commodity derivatives conception with the aforesaid positional limits applicable to eligible home clients. The different 3 categories were allowed to commercialized lone up to 20% of the presumption bounds reserved for clients.

A presumption bounds is the maximum quantity a lawsuit tin commercialized successful a commodity. For instance, successful crude, the positional bounds is 480,000 barrels crossed contracts (many contracts tally concurrently), and successful earthy state it is 6 cardinal mmBTU.

Since the archetypal class of FPI, which includes AIFs, banks, fiscal institutions, overseas depositories, task superior firms, and concern firms, didn’t hop connected to the bandwagon arsenic desired, MCX connected 20 April opened up its commodity derivatives conception to the different 3 categories.

MCX present hopes that FPIs nether the categories of corporate, idiosyncratic and household offices volition usage nonstop marketplace entree to summation commercialized successful crude and earthy gas, which accounted for 77% of MCX’s full turnover of ₹26.83 trillion successful March.