Multi Commodity Exchange of India Limited (MCX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Multi Commodity Exchange of India Limited, MCX, Q3 FY 2022 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. On the call we have with us Mr. P.S. Reddy, Managing Director and Chief Executive Officer; Mr. Manoj Jain, Chief Operating Officer; Mr. Satyajeet Bolar, Chief Financial Officer; Mr. Praveen D.J., Head, Investor Relations. I would now like to hand the conference over to Mr. P.S. Reddy. Thank you, and over to you, sir.

Thank you so much. Good evening, everybody. Welcome to this investor call for Q3. And as you have noticed it, based on our ADT, even this quarter is not as much as we thought we should be able to do that. The only silver lining is that options contracts are doing well. And we also started charging on options contracts. As a result, we made about INR 10 crores in this quarter. And probably, the trend will continue and the new contracts are being introduced. Very recently, we introduced in this month, what we call, new natural gas options contract. That started doing well. And in the initial 1 week itself, the volume clocked almost INR 230 crores. And I think going forward, that is another product that we can look forward to. And during this quarter, maybe 1 or 2 or 3 regulatory important changes have taken place. One important thing is our crude palm oil contract has been suspended along with other contracts on MCDX. And actually, we are almost getting about INR 350 crores of average daily turnover and it's doing well. And SEBI also approved an options contract, which we were to launch in the month of January. And we were expecting good rise there because of volatility in the underlying contract or underlying commodities. Unfortunately, as you are aware, the price determination is not taking place on MCX. It is in Bursa Malaysia. Almost 98% of the product is imported, and we have no control on it, okay. Yet, there was a clamor for it. So that led to suspension of the contract, along with other products, especially the edible oil contracts, without much application of mind, I would say this. Unfortunately, it takes time for us to get it restored. It's easy to suspend, but it takes hell lot of time to bring in liquidity, restore confidence of the investors in these contracts. That is a big challenge for us, even if it is restored. That's one important thing that has taken place. Other thing, of course, it was implemented from 14th or 15th of January, but the peak margin of the circular, which was applicable till 5:00 in the evening, has been made applicable till 11:30 or 12:00 midnight, till our markets work. As a result, in addition to the, up to 5:00 whatever peak margin calculations that we are doing and submitting to the member brokers for collection, we need to do it beyond 5:00 also. So that has also removed some operational leeway that some brokers were enjoying maybe after 5:00. But that is the important development that has taken place. The third important one is segregation of collateral among various segments of the Exchange. So we need to segregate it with respect to NSE, BSE, MCX. How much collateral a client has given, that has to be uploaded on the Exchange platform. It adds to a lot of compliance, but otherwise, it doesn't, in my view, achieve much of any transparency. Yes, as long as you know how much total money has been given by the client, that's good enough. Don't need to earmark which explain what, et cetera. And that takes away some operational leeway or adds some work burden whenever that collateral is shifted from one exchange to another exchange or one segment to another segment. These are the 3 important things that have taken place. Apart from it, of course, SEBI has come out with the spot bullion exchange, domestic exchange guidelines. And since we do not have a trading platform immediately, the Board has decided that we will have it developed. Maybe TCS will only develop using the existing platform, which they are developing for the CDP, that is commodity derivatives platform, once the build is given for us testing. Of course, up to draft 2, they have delivered and the testing is going on, and maybe that stabilization will take some more time. Only post that, they will take up that very platform and develop it as a spot platform. Having said this, on the International Bullion Exchange, the developments are very good, and the government has issued a notification, probably you're all aware, that any jewelry company or who is in the business of jewelry making or jewelry industry, if they have a net worth of INR 25 crores and 90% of the business is in then bullion, they are directly allowed to import via International Bullion Exchange. So many have shown interest and many applications we're receiving and that is, in a sense, disintermediation. Currently, there are 20, 25 canalizing agencies. So now people don't have to import via those canalizing agencies. They can directly import from this International Bullion Exchange. You are all aware that we have about 20% stake there on all exchanges and MIAs have put up this, BSE, NSE, CDSL, NSDL and MCX. So this is another development that I must share with you. Then in terms of client participation, et cetera, yes, we are more or less keeping that client participation as last year because many are moving towards, what should I say, towards options contract. And there, the number is increasing. And we are hopeful that we will be able to shift the focus from futures to options. That doesn't mean that futures is not something that's not worth pursuing it. But considering some of the margins that are there, clients are choosing between the two. And wherever there high margins are there, maybe options are better for the investors to pursue and that's how it is happening at this point in time. Mr. Bolar would like to update you on financials, and thereafter we'll keep it open for question and answers.

Okay, sir. Thank you, sir. Dear everyone. I mean, this December quarter as compared to September has been better. As MD said, we have started charging on options. The top line has increased by 5%. And we have been able to keep our costs under control, which we have been able to see from quarter-to-quarter. And thanks to that, we have a profit of around 6%. So when we compare to September '21, we are marginally better, which has good signs for us. And more importantly, we've kept our costs under control and we have started charging in options. So going forward, that's a positive trend that we see. Yes. I'll now leave it open to question and answers. Thank you.

[Operator Instructions] The first question is from the line of Mohit Kumar from DAM Capital.

Three questions. Sir, firstly, sir, what is the status of elasticity derivative contract? We've heard that there's a committee which has been set up by SEBI. Is it right? What is the kind of time line we're looking at for launching this contract?

Yes. Go ahead. All 3 you can ask me. I'll note them down and then will answer.

Sir, can you please explain once again, the peak circular, which you said that it has to work beyond market hours? How does it impact the margins? And is there an adverse impact of this on this current quarter? And when was it applicable, for which date? And third is on the spot bullion exchange. Pardon my ignorance, but can you launch this in the current form? Or do you need to set a separate bullion exchange? And what is the criteria for setting up this bullion exchange? What is the kind of time line we are looking at for launching this? These are three questions.

See, all the electricity derivatives, there is a joint committee or a working group of CERC and SEBI has been set up under the agreement signed with -- consent filed with the Supreme Court. So they have set up a joint committee. And they are the ones who have to evaluate the contract specifications and accordingly, they have to take a decision. Funding that, we are organizing a lot of awareness programs, both from European, what you call, participants, some of them who are in the industry. And European Exchange also, we have already done that. And we have also done with the -- just a week before, U.S. Energy Department has conducted a program, where we also participated, to CV, CERC, and the state regulators are also there -- electricity regulators, to all of them. And IEX has also participated. So the code system development is going on. But parallelly, our application is still with SEBI. And I can't put any time line, but we have been changing them constantly to give approval for electricity derivatives. This is one part of it. The peak margin of the application. Okay. Now the peak margin, what it does is, daily we'll take 5x snapshot. And at that time what is the open interest of the client? And what is the margin collected by the broker from the client? And is there any shortfall? Obviously, penalty will be levied. If the margin is option, no problem. Now instead of giving five snapshots, we will be giving eight snapshots. Probably you are aware that some of our contracts are international prices they track, like your bullion as well as the energy contracts. So they mostly have to post 5:00, 6:00 updates. And so even if I have the -- so one is that we'll be giving the snapshots for those clients -- not for those clients, for everybody, at that point in time, that is at 7:00, maybe 9:00, and 11:00, or something like that, some timings are there. And accordingly, the margins have to be collected by the brokers. Earlier, this was not the case. If they have complied by 5:00, that is done, point number one. Second, the argument that we have also advanced is, if I've entered into a contract at 5:00, I hedged my position and I'm done. I paid fully the margin. I go back. But then, if the prices move up maybe at 8:00, 9:00, then the brokers will call me and then ask me to give additional margin because the valuation has gone up -- open interest valuation has gone up, and I need to bring in additional margin, although the position may be in profit by the way, okay? Still, I have to pay margin because 10% of the open interest value is what is counted, and accordingly, one has to bring in the 10% or whatever is the margin that is applicable for that commodity. So that is applicable from 14th or 15th of January. Mr. Praveen, you can correct me, of this month. As of now, we are not seeing so much of impact, but I'm not too sure about it at this point in time how much it will impact. But definitely, it is a negative, what you call, characteristic for trading in the exchange. And mind you, we are the most active exchange in the post 5:00, because other exchanges almost all nil trading they have. And this is one part of it. Coming back to the bullion spot exchange, that is domestic exchange I'm talking about. SEBI has come out with an option for anyone to go for a separate exchange. If you've to go for a separate exchange, separate exchange will have the same conditionalities like no single entity can take more than 15%. And only certain entities are allowed to take 15%, rest are all up to 5%, et cetera, et cetera. Okay? Now if it is within the exchange's segment, like you have a currency segment in NSE, BSE, or like that if you want to start as a separate segment, probably you need to have a separate bylaw or separate membership. But you don't need to have a separate net worth requirement and separate, what should I say, the Boards and all attending costs associated with it. So we are planning to have only a separate spot, what you call, segment. Now what is the time line? We're looking around September, is the framework that we are looking at, but it's only tentative. We've not as yet formed it up because the work has just started and SEBI has come out with its regulations just about 10, 15 days ago. Having said this, I must also say that it will be traded in EDRs, electronic gold deposit receipts. Now there is a, what we call -- that is treated as a security, but once you start typical delivery, then GST is applicable. So there are certain GST challenges that needs to be addressed, and government is not able to address as yet. SEBI is pursuing with the GST council, et cetera. And that is something which would take time. So that is why we are hopeful it may not immediately pick up even if there is some head start delay. That's what we are looking at.

[Operator Instructions] The next question is from the line of Devesh Agarwal from IIFL Securities.

Sir, just wanted to understand that there were some talks of -- within the margin requirement also, the different components that are there in terms of BG, cash, and others, there may be certain limit. And the cash component can go up significantly from a Feb onwards. Is that correct? And if that happens, would that further impact the volume? What is your assessment on the same, sir?

There is already, limit is there. I think the other cash and cash equivalent cannot be less than of certain percentage. The securities components, it cannot be 100%. Securities can be, with haircut, can be only 50% of the total margin given, et cetera? I think that system is being put in place. That is also there, to some extent, already in place, but the bifurcation for exchange wise, segment wise is not there. So what the issue will be, if one client has given more cash and some other client has given more security, although we consider whatever the broker gives me as the collateral for me, because that is not transferred to me, the client's money, except securities which are pledged, I have to apportion -- brokers have to apportion how much margin limit has to be given subject to those ratios, that is cash versus noncash ratio. So that is adding complexity to the entire operations. I think that is implementable from 28th February. That is something which is work in progress. And we have also discussed with SEBI, I think it's only complicating the issue. So let us see what will happen. I am sure broking industry also has represented collectively on this.

Okay. Just to understand it better, sir, currently, the cash component will be under 10% of the total margin requirement and that can increase to, say, 40%, 50%, if the regulations were to go through as it is?

See, that is what I'm saying it. Currently, we are taking only from the member brokers, okay? We don't take directly. So we don't manage client collaterals at our end. So it is the broker who has to collect the margins. So those ratios will alter. So we don't directly from the clients.

Right, sir. And in terms of, sir, the operating expenses during the quarter, is there certain element of expense towards TCS in the software charges because the number looks slightly higher than what the formula would have given out to be. Are there expense for TCS?

No. There are some expenses, okay? No doubt about it. But some of the expenses are, what should I say, one-off expenses in the month of December, November, we have incurred. Mr. Bolar, you can explain whether...

I'll explain, sir. We had certain building repairs in the premises. So we had one-off expenses. Also, there were some marketing expenses that we incurred. That's why there's a slight blip in our expenses. There's nothing extra that we've paid to anyone in connection to software or anything like that.

Understood. And sir, can you quantify this onetime expenses on overall basis?

Around less than INR 1 crore.

Less than INR 1 crore, okay. And this migration that we are looking for is from September onwards. So you did say that the testings are in progress. So are we on track to migrate to the TCS platform from September onwards?

As of now yes. That's what the confidence TCS gives to us.

Okay. And sir, how much have we spent on this contract so far?

I don't think we are giving out those numbers as of now. That's the way. Because it's hardware cum software. We have already acquired the hardware and some software has got some phases. Accordingly, we will be paying them. And yes, that's the way it is at this point in time. Go ahead.

Yes. And last one, sir, the other income looks slightly lower. Are there any M2M losses or anything in the quarter in treasury incomes?

Not really. I mean, I'll take this Mr. Reddy. As we discussed in the last meeting, we said that we had some tax-free bonds. So we have exited fully from tax-free bonds and we have parked it temporarily in short-term and ultra short-term mutual fund scheme. And as you know, in December, the 10-year yields had gone up. But there's no loss that we have booked.

Okay. And I think the tax adjustments are likely to be done only in 4Q. So for the first 9 months, we have not done any tax adjustment towards MAT.

No. So I mean, as we mentioned earlier, whatever adjustments we had to do, we will do it in March. But since we're...

Ladies and gentlemen, I would request you to please stay connected. We are just trying to reconnect the management back to the conference. Requesting you all to please stay online.

Yes. I'm there on the line.

Yes, sir.

Mr. Bolar, are you there?

Sir, we should close the line for the Board room. I'm just reconnecting them. Allow me a minute please.

Okay.

In the meanwhile, would you like to take the question now, sir? I'll just connect the Board room?

Yes. On the MAT credit and the long-term losses, I think we have almost all exhausted all that. Maybe we will be moving into a different tax rate now.

For FY '22, the effective tax rate will be -- our earlier guidance was around 18%. Do we hold with that guidance? Or there will be change in the guidance for effective tax rate for FY '22?

I think in the last quarter, there could be some change, that's what I construe.

Hello, am I audible now?

Yes. Yes. Mr. Bolar, he's asking what will be the effective tax rate? Will it change in the fourth quarter? Or last time you've given a guidance about 18% is the effective tax rate, whether that holds good? That's what he's asking.

It will be a bit more than 18% because we have exited from tax-free bonds.

The next question is from the line of Sanketh Godha from Spark Capital.

Sir, just wanted to understand, out of the total volumes what happen at the Exchange, what percentage of the volumes happen on an average during evening 5:00 to 11:30, where now the new peak margin rules are getting implemented. So where probably it was no impact in the past. So can we see some volume downwards? Or if you can quantify what percentage of on an average volumes happen during those hours compared to the entire day?

See, earlier we used to have about 50-50 to begin with, okay? Your first session is 50%. Your second session is 51%, something like that, 49%, 51%, like that. And subsequently, it moved to almost all 55%, 45% kind of thing, 45% in the morning and 55%. And now again, coming back to maybe 50-50.

Okay. Okay. Got it, sir. And sir, what will be our average realizations in the options contract? I mean, in futures it is INR 2.07 per lakh. Then in options, will it be closer to INR 4.50 as per the premium turnover?

As for the premium turnover, ours would be INR 45 or INR 50. INR 45 is average you can take, INR 45 per 1 lakh of premium. Praveen, you can correct me?

Yes, sir, that's right. It is between INR 40 to INR 50. At an average, you can take it as INR 45.

Okay. Sir, just asking a very fundamental question. See, whatever growth we are seeing in the options is probably at the expense of futures. And in futures, the realization for the same ADTO is far superior compared to the options, because they charge on premium turnover instead of total turnover. So honestly, if that is the trend or that is the new reality, then the options volume ideally should be growing at multi-x levels compared to what we are seeing now, so that it becomes revenue neutral. So sir, just wanted to understand your view of this basically given in options we charge premium, not on the ADTO investments?

You're absolutely right. In the previous meeting also I said, 1:3 ratio, this follows. Now 3x of turnover in options will be equivalent to 1x of futures turnover. That's the way it in. So currently, we have INR 10,000 crores ADT in options turnover, okay? That is equivalent to INR 3,300 crores of futures turnover. I mean, whatever the future turnover of INR 3,300 crores revenue comes out of that is equivalent to over INR 10,000 crores of options turnover. You're right, we need to ramp up the options volumes. So if it is INR 30,000 crores options volume, then we will get as good as we are getting INR 10,000 crores. And my view is options are going to pick up. It is happening and we have seen more and more participants, brokers, and all those are coming into this.

So currently, sir, the mix is 80:20; 80 is futures and 20 is options in ADTO terms. So we can assume that in a year or 2-year period it will be more like 50-50, so that it becomes revenue neutral? Or you're very confident that 3x growth in the options is going to sustain going ahead also...

That's the way I look at it. That's what our efforts are all aimed at.

Okay. Okay, sir. And finally, on the spot bullion exchange. So basically, we need not apply for a separate thing with SEBI. Whenever the spot bullion exchange starts, we will start it as a separate segment. So only product approval is needed from SEBI, nothing more than that. And it is true for every exchange. Maybe like NSE, BSE, if they want to follow the same approach the way you are trying to say, sir right?

They too have to apply for a segment approval, not just product approval, segment approval also. Because segment will have its own bylaws. Segment will have its own, what we call, membership.

Okay. But sir, does it mean that there will be more than one exchange operating in the spot bullion exchange, too?

Could be. Could be. Could be.

The next question is from the line of Sameer Dalal from Natverlal & Sons.

So my question is regarding this change in software that's happening to the new TCS software from September. I wanted to understand, I mean, we've discussed this in the past, of course, but what kind of savings per quarter can we expect once we do this, once the shift happens?

See, currently, there is a, what we call, transaction-linked revenue sharing that is taking place. Okay? So that is done away with, point number one. Structurally speaking, in terms of contracts, okay? The second one is, it is fixed for a period of 6 years. So whatever we have entered into agreement that is for a period of 6 years. One year is warranty and the rest of the 5 years is the contract. And thereafter, we have to pay an AMC, which is less than -- I mean, it's a single-digit figure. That's what I've been saying here.

No, this single-digit figure is per quarter, you're saying?

No, no, no. Single digit is for the entire year, per annum.

Per year. And that will be after the 6th year?

After the first year.

After the first year. So what is the total investment that will be going into this entire hardware plus software which you mentioned? Of course, that will be depreciated. But if you can just give us some thought process on, like I said, it will be single digit, it could be 6, 7, 8, 9. I mean, I don't have a number. So if you could just give us some particular guide, so we can try to decipher what kind of...

The contractual obligations do not allow us to reveal the numbers, honestly, okay? Probably, as we go along, when we start depreciating, you will see the numbers coming in. That's the way it is.

Okay. Now the other point you were discussing about the turnover criteria, that 3x the turnover of the options is equal to onetime that of futures, correct, on the revenue front. This is on the daily notional turnover, not on the premium turnover, if I'm correct.

No, no. Yes. Yes.

Okay. So at the moment, if we are doing about INR 8,600 crores of turnover, which you did in Q3 on an average basis on the options side, that you're saying is roughly equal to about, say, INR 2,700 crores or INR 2,800 crores worth of futures contract, correct? That's a fair assessment?

Yes. Yes.

Okay. That's one clarity. And you said that you are of the view that options contract is expected to grow. But if that grows, do you think that could hamper our futures contract also on the negative side because, like we discussed, that it is cannibalizing to a certain extent the futures contract as well, right?

No. See, there are one set of players who write options. There is another set of players who are buyers, okay? Now the retailers mostly are on the other side. The writers need hedging also instrument. For the writers, the hedging instrument is futures, okay? Have I made myself clear? For writers, option writers also need to hedge themselves. And for them, the hedging instrument is the futures contract.

So you are saying, overall, you are expecting a growth in both sides, if the options contracts grow.

Yes, that's right.

The next question is from the line of Aman Shah from Jeetay Investments.

Sir, my question is, we earlier were actually talking of settlement guarantee fund, where I think to and fro of funds is not yet allowed. So we had to, at least in times of high volatility there, we had to increase margins, because withdrawal of funds from SGF was not in a way allowed. What's the situation there, sir?

Okay. Very good question. I really appreciate this focused subject. You're absolutely right, SGF has become a constraint for us. And we are willing to contribute as long as we are allowed to push in and push out the funds as in pump in, pump out the funds as needed. Now just on 27th December, we had a risk management committee meeting in SEBI, where the working group of exchanges has made a presentation under its report. So with that report, SEBI is considering it. The risk management wanted SEBI to give its views in the next meeting. And thereafter, the final decision on that will be taken. But otherwise, currently, we have INR 510 crores of SGF and our contribution is almost all INR 400-odd crores and INR 400 crores, both MCX and CCL contribution. And the rest is all penalties, which have been accruing over the several years.

Okay. And post that effect actually leads to a favorable thing for us, which would positively affect our volumes, because we can then change...

Yes. We can reduce the margin in crude oil contract. Currently, it's about 24%. We can bring it down to 10%, whatever is the minimum initial margin required. And so is on gold, we have additional 2% margin extra. Now the natural gas options are increasing. And even the options positions also require more SGF cover as well.

Okay. And secondly, sir, on this domestic spot bullion exchange. Basically, just want to understand how does it like, the disintermediation that we will be doing here, which participants we will be serving? First thing. Secondly, what will be our advantage compared to the physical spot bullion market right now, mainly the disintermediation benefit that will be there, which will be passed on to participants? And like just how big the potential is and how much can be actually captured?

On the domestic spot exchange, our view is there's a lot of nontransparent transactions that are taking place in domestic fiscal market, okay? Now that all gets eliminated. There are many people who prefer transparency. There are many people who want accounting to be done properly. And there are many investors who want quality stock to be received by them, et cetera, et cetera. For example, a lot of investors want to take the gold in small denominations and then save. And at the end of maybe accumulation of 500 grams or a kilo, probably they want to take delivery of, what you call, the jewelry post making. So they can transfer it seamlessly, those EDRs, and make the payment of GST as well as the making charges. So today, whosoever is going around in the Zaveri Bazaars of the country, they all will be flocking to this exchange platform. Number two, even in many small towns, they go to jewelry shops and they don't have any guarantee of the metal that they are getting. They are not sure of the quality, whether it's 24-carat or it is still lesser, et cetera. So this will really help in bringing or integrating this non-transparent market into a transparent market. This is a major development. The third, which is equally important is, might is right is the kind of thing is also there in this market, okay? And big fish eat small fish kind of thing. But when they come out to the exchange platform, all are equal, transparent pricing, and small jewelers and small bullion people also can buy it on the exchange, take delivery and be happy about it. But having said this, there are also arbitrage opportunities that will emerge. Currently, that arbitrage opportunities are not facilitated through an institutional mechanism. The spot exchange versus the futures section that we have will have a lot of synergy between the two platforms.

So basically, what we are saying is like apart from all the qualitative part where the quality is there, transparency is there, and arbitration benefit will be there, which is your main quantitative benefit of this intermediation. Would that be a right assessment?

Yes.

Okay. And what are the regulatory road blocks in this? One is you said of the EDR, when delivery is taken, the GST is an issue.

What I was saying is, if I am the one who imports gold and I convert into EDR and then I sell it in the market. Now this EDR being a security, the other party, which is buying it, doesn't pay any GST, and right up to the chain. But the guy who first time demat'ed, he needs to get his GST credit, isn't it, because he paid GST and then bought it. Now if the end party takes delivery or takes out of the vault after 1 year, then the payment of GST will happen only after 1 year. Will that first party wait until then? My answer is no. So there must be some solution for the first party, which is depositing the gold initially, to get the benefit of GST the moment they sell it the first time on the exchange.

Okay. Sure, sir.

Reddy sir, I'll add one more point for Aman. Aman, to query on spot exchange and its future potential, this is Manoj Jain this side. So yes, you are right. See, in India it is getting launched first time. So naturally, you would want to understand that what are the nuances, what parameters, how it will pan out. So to give you a very easy and a readily available information, you can look at China. China has a very well-thriving spot and futures market on gold. And as you know, I mean, we are so demographically related amongst the largest consumers, importers of gold. And obviously, in India also, government is very keen to grow this market, which is, again, a similar thing which happened in China. You can look at their past history, they're amongst one of the largest exchanges involved on spot trading in gold. And we expect that you'll see a lot of similarities in our growth cycles also in India. And it is available on web, huge data, trends over the last few years. You'll get wealth of information there.

The next question is from the line of Sri Karthik from Investec Capital.

Sir, if you could speak a bit about the operational issues that you have to go through for making the technology transition? And what would happen in the event of any delays with respect to time lines involved here?

See at this point in time, we're not initiating any delays at this point in time. And we are confident, the TCS is confident, and they are assuring that they will deliver it. So we've not debated that hyperscale per se. And yes, MCX has right to use the current software, perpetual license that we have. We'll not be getting the support. That's one way of looking at things. But yes, that is the way it is at this point in time. We don't expect to outshoot the time lines.

And is the mock testing already taking place?

As I said, the draft 2 has been delivered and the testing is going on. And we are engaging with all the vendors, the back office vendors who provide solutions to the member brokers. They are actively involved, file formats have been released, and API based, obviously, all of them have been released.

The next question is from the line of Mohit Kumar from DAM Capital.

Sir, one question, sir, on the options trading. How is option trading for the other international commodities in this? And second question was that [indiscernible] is primarily happening on the energy side, right? Do you think bullion will pick up in the near future for the options?

Could you please repeat. I couldn't hear your...

Sorry, am I audible now?

No, you're audible. There's no problem. I had a cough, bad cough, bad throat.

I repeat, sir. So how is the option trading compared to futures trading for other international commodity exchanges, if you can comment on that. Secondly is that we see the options volume is picking up only for energy, right? Do you think option volume for bullions or other materials will pick up in the near future?

Yes. See, on the options, internationally, you're absolutely right, they are not great, okay? And peculiar to India, even in equities, you're seeing how the options contracts have been doing, maybe several times with the multiplier they're trading. So the same trend is being witnessed in India also. So that is the reason why we are more in line with what's happening in equity markets. Now coming back to the gold and silver, why they're not doing it. I think we are amending the contract specifications. Currently, the gold contract, 1 kilo, tenure is bimonthly, and it's long. So as a result, the premium is also very large. Now because these are options and futures. They devolve into futures contract before the underlying is expiring. So we have just had a product advisory company meeting where we are breaking it into two contracts of monthly option contracts, which will devolve into the underlying futures contract, okay? So it's a March, April contract. So futures contract is bimonthly, but one options contract will expire in the end of March, another options contract will expire at the end of April. As a result, the premium may become half than what it is currently. So that I think we are making an application to SEBI after getting the necessary regulatory approvals within the sales. We just had last week the product advisory committee, which has approved this change. So similarly, we have also got an approval for introduction of 100 gram gold bar -- I mean, option on gold mini. So earlier, we had introduced option on goods on the under 100 gram gold, but that didn't take off. Now we are making it optional futures rather than on goods. So these two, we expect to do well, and that will pick up the other contracts.

The next question is from the line of Amit Chandra from HDFC Securities.

So my question is on the institutional participation. So we have not seen that actually going up and also on the index volumes. So I think the institution and the index volumes are somehow linked because the index is actually cash settled. So what factors you think that it will actually boost the institutional participation and also the index options and the index futures contract, because if I see, index options is a product which is very popular in India.

Yes. The institutional participation, yes, it is coming in bits and pieces. That is something which has been on the top of our mind and we have been working with most of the mutual fund businesses. One is that not every fund is taking delivery of -- participating on the exchange by taking exposure for a part of the gold or gold ETFs that they have. The reason being, there are 2, 3 reasons, which we have already addressed through SEBI, asking them to understand this. Under the extent whatever regulations or something, whatever they have, they're supposed to have LBMA approved gold only. Now we have introduced the India Good Delivery Gold also, that's what the government wants us to do it. We have done it. So the custodians are having reservation of taking delivery on the exchange platform. The reason being that they may end up India Good Delivery standard, but not LBMA. So that requires a change, which we have addressed to SEBI. Similarly, recently, after a lot of effort, even from our side also, silver ETFs were permitted. A lot of mutual funds have already opened NFOs. Some are yet to close. So these funds are looking at -- at this point in time, what SEBI's circular says, it must be a 30 kg bar. Now in the case of silver, it may vary about 2.5% plus or minus. There's a tolerance limit. It will not come in 30 kg exactly. The weight keeps varying it. So we have represented to SEBI, please amend this regulation. Don't say that they should get it only in 30 kg bars. It could be plus or minus whatever the tolerance as per our contract specifications are there. And one more thing is that some of them, as I explained, don't have even set up a desk for commodities, which they consider it as an expensive thing at this point in time, because they are not into commodities. And I think that goading is happening gradually, probably in the next maybe 6 months' time, we should be able to see greater degree of participation. And probably, if the FIS and others join, as SEBI has decided to permit, probably the institutional participation also will pick up is our view.

And sir, on the index side, what factors you see will, both the index volumes, especially on the index options side?

Yes. One is that on the index volumes, the open interest limits are just 1,000 lots. Now 1,000 lots versus the underlying contract 17x, I repeat 17x. For example, gold, underlying, you can have 17x more than what you can take in index contract. So we have represented to SEBI, there are times where the people have already exhausted the 1,000-lot limit. So please expand this, because they need a minimum, what we call, volume size. And unless the volume increases, unless these limits are relaxed, we will not be able to grow. So that is where our representation is and SEBI said they will consider and come back on that. Second, in some of these contracts, especially the energy contracts or cash settled contracts, SEBI has also introduced, what we call, pre-expiry margins. Okay. Now pre-expiry margins, in addition to higher margins that they are doing it, 5 days before, the pre-expiry margin starts, so that people are moved away from the contract to the next contract, okay? Now as a result, the number of trading days are coming down. Although assets, they are monthly contracts. In a month, you have 22 trading days. Over and above, you have 5 days killed by way of this kind of rule, pre-expiry margins. Okay. So the liquidity is impacted because of these regulatory hurdles.

Okay. And sir, on the crude margins. So we were expecting that to come down, but it has actually gone up. So what are the factors which are actually deciding to increase the crude margins? And also on the top 10 concentration of our members. So is it coming down Y-o-Y? Or is it going up?

See, top 10 numbers by and large remain the same, around almost 55% to 60%. Mr. Praveen, you can comment on that. You have it, concentration of members, top 10?

Yes. It's about 60%, top 10.

Top 10 accounts for 60%. It has been there earlier also. So that is one part of it. Second thing is the crude oil margin. Primarily, it depends on the open interest, how much it will bring in, how much it will make our SGF requirement increases. So if it increases our SGF requirement, MCX and then CCL have to contribute in the ratio of 25:75. And this is where I pointed out; one gentleman asked 1 question, whether SGF, you can contribute, pump in, pump out the money, which we have been looking for SEBI's help in that. If that happens, we would like to lower the margins, pump in more funds, allow the liquidity to build and that's the way it is. And we don't need to show that as a permanent loss to SGF. That fund can be taken back once the OI comes down or concentration comes down.

The next question is from the line of Rikin Shah from Omkara Capital.

So the way I see it, domestic exchanges have never been a competition for MCX. And volumes are very sticky in a business like this. However, global exchanges, where most of the copters are hedging themselves is the customer segment for MCX. So how does MCX plan to grow the market share overall?

I'm sorry, I couldn't get the question clearly.

So I'm trying to say that domestic competition has never been a competition for MCX. However global exchanges would be the real competition in a business like this. So how does the management plan to grow the market share going forward?

Okay, okay. How do we increase our market share globally? Okay. Now you see, honestly, we don't have an ambition to compete with international exchanges. Let's be very clear, okay? And we need to first grow in the domestic market. There are so many restrictions, so many restrictions within the country which we face, but they don't face it. Be as it may be. Now if you see, who are we catering to? No international player is coming in and hedging on Indian exchanges. It is just the domestic SMEs and domestic players who cannot go abroad and then hedge their positions are hedging on domestic exchanges. So our contract size is small. For example, in London Metal Exchange, ours is tonnes, theirs is 25 tonnes. Obviously, 25 tonnes is not required for many of the domestic players. So that serves our contract or our market's house that smaller segment. Now once we are able to effectively cater, as of now we are not able to cater to all of them because of the message change in which we have been hedging is taking place, and many do not fully understand what hedging is, whether it means loss of money or whether it means no loss, no gain, or it means gain. So people are not able to fully assess its impact. So at this point in time, our interest is to increase the domestic participation in these contracts and make it for the purpose for which these hedging products are devised. Once the domestic capability builds and more and more open interest increases, then we can look at others coming in. Now that is where I'm looking for greater participation of institutional investors as well as, what we call, the FIS who may bring in more liquidity to these counters and open interest. Then even some of the big players in the domestic market, you can take a look at the contract for Hindalco, and BALCO or Vedanta, they're hedging in international market, be that in ICE or in CME or LME. And they say, your contract is not liquid. Formal contracts are not liquid. Obviously, I can't provide liquidity. I can only provide platform for them to trade. So that is something which we are struggling with. And it's an egg-chicken situation for us. And hopefully, we'll be able to address with greater participation coming through some of these institutions and FIS and other players. Let's see.

The next question is from the line of Akshay Vora from Praj Financial.

Yes, I wanted to understand the client concentration that we have in our derivatives volumes. And like the top 10 or top 20 clients, how much of volume would they be giving us?

Yes, 1 minute. I'm seeing that. I just...

Client level, I don't think we have readily available. In fact, we publish it on a daily basis like whatever is OI position across the top 10 clients. Across the commodity wise, we give it. And we don't have at the exchange level, and it varies depending upon contract to contract.

Okay. But like an overall idea?

At least, I don't have the numbers right now, those numbers.

But we have this algo versus clients. You have the also versus client, use it.

Yes, algo is about -- if we want to give that rate, it's roughly 48% for the 9 months and 52% is the nominal growth, that is the assumption.

The next question is from the line of Prayesh Jain from Motilal Oswal.

I have just this one basic question with regards to your existing payment to One97. Till what date we have to pay them in terms of the software charges that is currently based on the formula?

I'm sorry, whom do we pay?

Sir, the software charges that we are paying right now, which is going to be transitioned to TCS, that payment. Currently that is being paid to the entity. That entity, till which date do we have to pay them?

That is the current software vendor, that is 63 Moons, is providing the software. How long do we need to pay?

Yes.

We need to pay till September of '22.

September of '22. Okay. And immediately afterwards, it goes to TCS?

That's right. We want to migrate it much before that.

Okay. Okay. And just one very basic question again. What would be the average premium on the options for the quarter?

Yes, that number is already given in the presentation. Roughly, I'll give you the numbers. It is about INR 11 crores for the quarter Q3 -- sorry, the premium turnover is INR 184 crores versus the notional turnover is INR 8,610 crores.

The next question is from the line of Nilesh Jethani from BOI AXA.

So just wanted to understand. In case of driving the volumes for the options, you are planning or on the position to divide the 1 Kg contract into 100 grams as far as the bullion is concerned.

No, no, no. That is not correct. We are not changing the contract, please. Futures contract remains as a 1 kilo and bimonthly contract. The options on futures, that is the option on future contract will be a monthly contract. So before the expiry of the futures contract at the end of 2 months, there will be two contracts, one will expire in 1 month and next one will explain in the next month.

Got it. So this will help to reduce the premium number also?

Absolutely. Then the participation will increase.

So this is already done? Or it could be implemented going forward?

No, we've not done. Just we had a product advisory committee meeting. It requires a lot of approvals. Then we'll take it to our regulatory oversight company, then we have to take it to SEBI. It's like that. It may take about 2 months' time.

Okay. And are we planning to do this for other commodities also, say, for example crude, we have 100 barrels. So are we planning to reduce that as well, sir?

Yes. Just to add to that, it is only in case of bullion because we have bimonthly contracts. For example, if we take gold and silver, they're all bimonthly contracts. But in case of crude oil, already monthly contracts are available. Whether we wanted to go for a weekly or other thing, that is presently whatever monthly contracts, they are already doing extremely good, okay? And bullion are the ones where the participants have been asking for monthly contracts because of the duration is higher, the premium is getting higher.

And apart from it, the value of bullion has also gone up. Now it is almost INR 50 lakhs. So INR 50 lakhs of contract, the premium of 2 months, will you buy?

So one advantage, like just to add to that one, like gold mini, which happened to be earlier when it was launched that time, it was launched as an option on goods contract. And what we plan to do is we wanted to come out with a gold mini option on futures contract, because on our platform, gold option and futures have been doing extremely good. All our contracts happen to be options on futures.

Got it. So when is this time duration where we're taking it down from 2 to 1 month? My question was on the crude side, there is an opportunity where we can reduce this number of barrels for the options contract and again, increase the volumes over there?

No when after regulation, what they say is, there are two challenges to that one. One is the regulator says that we cannot have multiple variants. We need to have only one variant. Apart from bullion contract, if you look for any other contracts, we need to have only one variant. We cannot have multiple variants. So the current one...

That is why we have done away with mini contracts. Otherwise, mini contracts were getting us about 30%, 35% revenue on the ADT in addition to this. So we had aluminum, copper, zinc, lead, all of them had mini contracts. We have done away with it. We had a crude mini also. That is done away with. And apart from it, the options have to result into underlying contracts -- underlying futures contract. So we can't bifurcate into a smaller one because the underlying is 100 barrels.

Got it. Got it. So what kind of volumes are you guys sensing, which would be picking up because of this bimonthly...

No, I don't think we will give out any numbers on that.

The next question is from the line of Aditya Yadav from Transient Capital.

Sir, firstly, I wanted to ask regarding the gold mini option you were talking about, that you had certain disadvantages with the option on goods and you plan to reintroduce it as an option on the future. So if you could elaborate a bit on that, what kind of disadvantages we had with option on goods?

See, we had introduced option on goods along with the, what we call, LES, liquidity enhancement scheme, okay? Notwithstanding the quotes being given two way, the people are not coming forward because the option writers have to deliver necessarily the option -- they don't know exit for them, except for delivery of the goods, okay? And the buyer also has no option but to take delivery, whereas people got used to the futures contract and there... I'm sorry?

As a cash settlement.

As a cash settlement and/or even if -- they will get the extra days because the liquidity will be more here in the futures. So they get more time to liquidate. Before the option expiry -- I mean, option expires into futures contract 3 days or 5 days before the future expires. So they have an option to exit. That's why the goods contract did not succeed.

Okay. Okay. And sir, good discussion we had on the bullion and the energy part. And if you could talk a bit about the base metals part also that what are the challenges there? And what are the efforts we're taking to grow this market? And any kind of qualitative assessment for near term, let's say, 12, 15 months?

Yes. See, in the case of bullion contracts, one is that we are -- I'm sorry, in the case of base metals, we are taking some of the domestic refiners bringing in, so that their participation also enhances liquidity into these products. So that is one quick decision that we have taken. And it will happen maybe next week or so, some domestic refiners in lead will be admitted. Now the second thing is we have introduced the multiple delivery centers in these contracts. If you look at it, some of these metals are imports. So we need to be in proximity, our delivery centers should be close to the port. So we have opened additional delivery centers in Kolkata and in Chennai. And we have expanded them for other products also. And right up north, in the Noida area, where a lot of consumption of this metal takes place, we have also introduced a regional delivery center. Now the third dimension is that we are also looking at -- we have filed for a steel TMT bars approval and also for aluminum alloy. These are the two contracts that we are looking forward to...

Exactly, and this you discussed in the last call as well that you want to introduce these soon. So any kind of...

We've not received as yet the approval. It looks as if so near, but then we missed the bus. That's the way it is. We are not getting them as yet. A lot of questions back and forth are raised.

So let's say, in the coming quarter or so, should we expect these to come on board, these contracts?

Yes. At least one contract, steel TMT, we expect to come in. Aluminum alloy, they are expecting the BAS to notify those certifications. Now BAS takes its own sweet time. And CDAC has already approved it. But if the BAS has a standard, it's fine. If it doesn't have a standard, then whatever MCX or any exchange suggests, we should go forward and approve it. That's the way decision was taken. But steel TMT, if it comes, I'm sure there we will be able to do good business. That's what my answer is.

Okay. Okay. So probably soon. And sir, 1 last question I had. So with spot exchange, the domestic one, you have discussed that the expected time line is September?

Yes, that's right.

So you plan to launch it by then?

That's what our guesstimate is rather.

Okay. Okay. And with the international exchange, what are the time lines?

That is already placed and mock runs are taking place. I think the government has to inaugurate it. They have to put a date and inaugurate it. That's the way it is.

Okay. The mock runs are taking place.

The next question is from the line of Siddharth Shah, an individual investor.

Sir, my question is on the broader path for the company going forward. If I see the company's profit, it was at peak level around 2012, '13, around INR 300 crores. And we have come back with a slightly higher profit in March 2021, with INR 225 crore. And with current run rate, during current financial year, we will do INR 150 crores. So sir, despite all the initiatives taken by the management, the financials have not really improved. In fact, they are showing a declining trajectory. So sir, do you see in the next 2, 3 years, you will be able to achieve the peak profit of INR 300 crores in the next 2, 3 years?

See, I'm not giving any number to it, but this happened to be a very bad year, okay? It's a very bad year. In terms of other income, that is also hammering us. In terms of regulatory tightening, that is also hammering our growth. So from all sides, we are cornered, in that sense. So we are hopeful, maybe the new year holds a promise the way that we are moving forward, and hopefully, we'll be able to achieve something in that.

Okay. Sir, and my second question, sir, any clarity on the INR 20 crore that we have spent on this gold bullion exchange? Are we going to amortize it or write it off any amount in next 6 to 12 months?

We are yet to take a call on it, but in this quarter we'll be able to take that call.

That is you are saying by March '22 quarter, we'll be able to take the call?

That's right. That's right.

Thank you very much. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Thanks to all of you and being patient with us. And yes, we are making every effort to make best out of the worst situation that we are currently in, in terms of regulatory framework as well as the interest rate sector that is currently or the yields that are currently giving us. Hopefully, maybe next year we will be able to do better. And thank you. Thanks to all of you for your interest in the company. Grateful.

Thank you very much. On behalf of Multi Commodity Exchange of India Limited, that concludes this conference. Thank you all for joining. You may now disconnect your lines.