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

Yes. Good morning [ Mr. Mark and Mr. Neil ] I think first time you're visiting the MCX. Is that correct? Physically, probably.

Yes.

And in fact, when I was heading the CDSL, I have visited your office in Hong Kong. And I think -- I was heading CDSL, we were doing ICO. And at that time, I think a few Indian colleagues were there. I think 1 Parsi gentleman was also there.

[ Rukhshan ].

[ Rukhshan ] that's right. In 2018?

Yes. Yes.

That's right. They were all there. And yes, it was a good experience I had. Of course, subsequently also, [ Mr Rukhshan ] came in 1 or 2 calls also. And since you are physically traveling, maybe you thought that you should meet us, but we are welcome. I'm very happy that you have come down. Now please go ahead and ask your questions and switch on the mic and...

Yes. So maybe you could start with business update [Technical Difficulty] Give me a sense of [Technical Difficulty]

Sure. See, we -- as a matter of policy, we never project any numbers and -- but what we are hopeful and which are the companies -- which are the product lines specifically we would like to focus more on is something which we will share with you. Yes. At this point in time, as we are speaking, the crude oil contract or the energy contracts are doing well, both energy and crude oil. And thanks to our Options contracts, thanks to the peak margin in crude oil Futures. I think a lot of shift has come and a lot of vibrancy have come in Options contract. And there's no peak margin in the crudes applicable, especially when somebody pays premium it is done kind of thing, there isn't thing beyond that. So that helps -- that's something which investors are looking forward to. That's why our volumes are really, really good. And in this current financial year, you've seen and we have even touched highest Options turnout of INR 62,000 crores 2 days before -- 2, 3 days before. And yes, whenever there's an expiry, the -- toward the expiry, we will go up offering expiry till little bit throw off of a particular peak. And again, it will start building the volumes. So our contract -- crude oil contract expires today, today's 20th, so it expires today -- or tomorrow it expires -- today is 19th, so tomorrow it expires. So the volumes go down. And again, when the fresh contract moves, then again the volumes start building. But on an average, currently, we're about INR 20,000 crores ADT of the Options. But these figures are all there on the website on a day-to-day basis. You can see that. Something which we would like to replicate and we wish to have a similar Options vibrancy in the metal -- in vertical bullion contracts, okay. Currently, our bullion is not showing so much of vibrancy. We have Options contract, INR 1,000 crores, INR 1,200 crores ADT is what is clocking. And so what we proposed and we have gotten approval also from SEBI for a monthly Options contract and a bimonthly and it is like, we have a Futures contract, which is a bimonthly contract. So Options contract will be monthly. It will devolve into the underlying Futures and the Futures will continue. If somebody closes, it's okay. And another contract will start and another one monthly Options contract [indiscernible]. So that the premium will be reduced. Tenure will be reduced, so premium will be reduced. Maybe you can expect more participation. And in a gold contract, if you look at gold, almost all INR 50 lakhs 1 kg, on INR 50 lakhs and 2 monthly, bimonthly contract means the premium will be very high, INR 70,000, INR 80,000. If you lock it off and make it up, then we expect a good amount of liquidity building to that. We plan to launch sometime in September. So let's see how it pans out. The third thing that we are looking at is to launch new products, especially, of course, option in bullion is also a new one. But the electricity derivatives contact is something we are looking forward to, and we are keen that SEBI gives us approval at the earliest but currently it is taking a lot of time. And pending our contract being launched, the derivatives contract the spot exchange are allowed to launch the -- what we call forward contracts, monthly, quarterly, et cetera, yearly, they have been permitted. So we don't want to lose that potential client base to the forward contracts. We would like the Futures to be ruling the roost in that space. So that is something which we have been telling SEBI and Spot is fine. We are not interested. Whatever DAM or TAM they are doing, it is fine. But don't let this go out of our hand. So there is a Supreme Court order which says that both CERC and SEBI should constitute a joint committee and then they in turn take a decision. And that decision is not forthcoming. That is the reason why we are concerned about it. And now SEBI is in the driver's seat. Hopefully, they will steer it clear. This is one contract that we are looking forward to. In terms of distribution, especially the bank bookings again continues to be our focus. But generally, the tendency is to compare the equity markets with the commodity market -- commodity market with equity markets. Now obviously, people say that you should compare with somebody who is successful not the one unsuccessful, so that you can keep the bar high, but the success of equities is too high a bar that we can't compare it. Because structurally they are different. I mean that's something they have to understand this. For me, you buy 1 share Reliance for INR 1,200 or something like that or some other share, I mean you are allowed to buy 1 share. But here, 1 lot you have to take it, 1 lot is something which is a delivery unit. If it is [ a vehicle ] contract, it is almost INR 40 lakhs, 1.5 metric tons on which the margin is about INR 7 lakhs, INR 8 lakhs. So it's not the same thing as equities. So the retail investors to that extent, I would like to see a smaller contract, denominator contracts to be permitted in this space. This is something which we are looking forward to SEBI. So please introduce first products which are smaller denominations that are affordable by the retail investors, then you can look at the distribution side in the form of bank broking equities, et cetera, bank broking companies which used to come. Currently, it's about very small percentage currently contributing. I think ICICI and Kotak are the ones major at his point in time, and I expect HDFC to start by the end of this year because they have to also build their infrastructure and there's a cost to it, okay. Now unless they see what we call some kind of potential, minimum guaranteed potential in this market, they would not like to make those investments. So that is something which is happening. And hopefully, you will be able to track them also that issue.

On the retail side, are there any countries in the world who had retail participation in [Technical Difficulty] Rationale of retail investors investing in one of these? [Technical Difficulty]

So I think Indian experience of retail investor participation is something unique. I think maybe even in equities, you have South Korea, which has maximum retail investors directly participating, not via mutual funds and other means. And this is one, so is China, retail investors directly participate in equities, okay? So that is the reason why we are replicating it because they're attuned to that kind of situation, okay? They are attuned to participate directly. So there's no risk for them, and again if they want to be a day trader, and they are welcome to do that. And I think that is where a smaller contracts help the retail investors than bigger contracts. So bigger contracts is primarily for the hedgers. Now if we compile our market only for hedgers then obviously, there won't be any liquidity. Hedgers don't do a day trading and hedgers give away their risk, and it is a speculators who pick up that risk, okay? So you need all of them in the marketplace.

During these last couple -- I know we're not comparing equity markets, but in the last couple of years, we saw volumes increasing in financial investments generally [indiscernible]. Do you see the similar trends in the commercial market as well?

No, I've not seen as much exuberance as it happened during the COVID, okay? And -- but yes, there is some -- given the size that we have, that kind of multiplicity I have seen. For example, in 2019, '20 or even '18, '19, we had about 331,000 investors alone, unique investors who have traded. And I think in the last few years, now it has gone up to 470,000 or something like that. You have the numbers. Yesterday, we had seen, something of that kind, those numbers were there. So that is something which happened in the recent past. But earlier, that was not the trend.

Can you give an idea [Technical Difficulty] hedging that position?

Of course, we do get.

The new accounts in the last two years, where we have mentioned is participants coming from [indiscernible].

Well, see, obviously, hedgers will not be lakhs, okay? I mean, especially the corporates and others. Now the open interest that is kept is maximum is by the hedgers, okay? Like, for example, just to give you an example that in cotton, one of our flagship products in agri commodities. In cotton, 60%, 70% is open interest is maintained by hedgers, but those hedgers are about 500, as against for 5,000 who are trading. Okay? So hedgers happened to be big ones, corporate, clients, very high networth individuals and others. But they are small in numbers. And they are the ones who maintain the positions. But day trading and liquidity is provided by some of the traders and the retail investors.

I think we were just trying to ask about the number of accounts increased. Is that another metric monitoring [Technical Difficulty] got all the big players that accounts for [Technical Difficulty].

Sorry I didn't get this.

I was asking about the number of accounts that signed up, whether that is on track, is something that you target?

We are targeting. We have the target, and we track that. Okay. Now I tell you the last year what happened was because of this peak margin requirements circular and also the very high margins in the crude oil, many retail investors were dejected if I give you some numbers, they have gone away from those contracts. Actually, the number has come down. In the case of crude oil, I had in the year 2021, [ 175,000 ] unique clients trading. And then in '21, '22, it has come down to 105,000. Okay. So the count has been [indiscernible] but they shifted to Options. If you see the crude oil Options, we had -- last year that 2021, we had 37,000; in '21, '22 159,000. Okay. So this is a huge shift -- because the margins are less, you just paid a premium and then started trading. I think this is a unique clients traded. Yes. Sorry, '18, '19, I had 308,000 and now we had 470,000, that's kind of growth we have.

And that is across Options and Futures?

Options and Futures. That's right.

Just to understand this, there is a lot of the participation switch due to Options.

In the case of crude oil.

Not the other?

Not other one.

That's because the peak margin was specifically for crude oil.

No. No, not specifically for crude oil. It is applicable for other contracts also. But in the crude oil, even the margin itself is very high, 35%. Internationally, it is almost 7%, 8%. Because of the negative pricing that happened in March 2020, we had what is called as stress test requirement for keeping the SGF, Settlement Guaranteed Fund. When you are doing the stress test results, it takes into account the 50-year high-low of the prices in that particular every month high-low on that thing, there were 100-odd or 200-odd scenarios with this. So because of this negative pricing, if the question comes, if top 2 brokers were to default, it is because of negative pricing, they go down, what will be the requirement of a Settlement Guarantee Fund. And if the settlement guarantee fund has to be increased, I mean, Settlement Guarantee Fund is calculated after taking into account the margins. If margins are reduced, Settlement Guarantee Fund has to be increased. Now Settlement Guarantee Fund is something where we are contributing it. We don't get it back in the Settlement Guarantee Fund. Currently, we have INR 550 crores. If I reduce margins in our crude oil Futures, then I would increase it by another INR 500 crores or something like that. So that's why we are not reducing it. We are still continuing the same margin, and we have gone to SEBI requesting them, either you consider removing this negative pricing because the CME and others are not considering it, they are one-off kind of thing, or you allow us to get the contribution from SGF as and when the requirement comes off. We will give it back whenever there is a [ requirement in ].

As people switch from Futures to Options, does that have any impact on your revenues or profits.

As I have explained, definitely it will be impact. But it is compensated by growth in the volumes, okay. Now in the case of Futures today and we are in the last year, financial year, you had about INR 26,000 crores ADT average in turnover. Now our -- that is Futures -- our fee is based on the average realization is INR 207 per INR 1 crore, that is a transaction fee, is that correct? Now we had last year clocked financial year, about INR 7,000 crores ADT of the Options, now which means it has a revenue potential of almost 1/3 of the Futures turnover. So Options turnover is equal to 1/3 of the Futures turnover in terms of revenue potential, that is what the rule of thumb kind of thing we have assessed it. Instantly, in the current quarter, current means the quarter which we closed as well as the current quarter, we are clocking almost 48%, in short 1/3. It's almost 48%. So we have -- now currently, we are having INR 20,000 crores of average daily turnover of Options, which is equivalent to INR 10,000 crores of Futures turnover.

Is there a bit of a negative impact on the revenue?

No, it's not a negative impact. Currently, my ADT is INR 25,000 crores in Futures, then additional INR 10,000 crores is added to the Futures. So if I convert into Futures equivalent turnover in terms of revenue potential, currently, my ADT is, talking in terms of Futures, INR 35,000 crores.

That is added to it. It is not cannibalized?

No, it is not. It is not cannibalizing. We are not seeing this cannibalism. Post peak margin, it has settled -- our ADT has settled out at INR 25,000 crores, INR 26,000 crores. Having settled it, other verticals are growing in the form of Options. That Options is contributing, if I convert into an equal into Futures. At this point in time, as we are speaking, it is INR 10,000 crores additional.

And what's the potential for the Options business in the other commodities apart from crude oil [Technical Difficulty]

See, in fact, our crude palm oil got contract suspended. But otherwise, we were to launch in the month of January, the crude palm oil Options also. We got the approval, but contract got suspended, so we couldn't launch it. But in cotton, there is a growth potential, but we have not gone to SEBI as yet because this is again coming under the -- I mean people are clamoring for suspension of the contract. There's a worldwide cotton shortage, but our prices is only going up kind of thing it is projected, which is not the case. On ICE also, there is a huge rise. And so we are not looking into it at this point in time, but cotton is another potential commodity. Coming back to the base metals, nickel debacle in LME has completely eroded our, what you call, our contract -- liquidity in that contract. We have asked SEBI to reduce the contract size. As I said, it's 1.5 metric tons, which is almost INR 40 lakhs. Premium is all -- I mean the margins are about 20% means it's very high but people can't afford to it. Please reduce it. So that is being looked at by SEBI. We have also asked SEBI to allow mini-contracts in other commodities. Once those minis come, I think we will be again able to do better in the commodity space.

So, do you say that the liquidity has moved to LME [Technical Difficulty] ?

LME also did not get any liquidity because of the problem in Nickel.

Something has changed as the liquidity has gone somewhere else.

No, people have deserted the contract, okay, because they are not able to take the risk because it is frozen every 15 minutes when the circuit filter is getting -- what you call is hit and more trading is taking place. And there, the MTM margins are increasing, mark-to-market margins are increasing because we reprice and margin calls are issue. Broker says, "I'm sorry, how can I get margins from the client so many times" Almost 16x in a day on that 1 day, I think, 7th of March, the prices have gone up on LME. And LME could do square, what you call tear-off those contracts, but we couldn't do that. We have settled it.

Does the LME offers smaller lot sizes? Is it what you are saying that you spoke to SEBI about a smaller lot sizes. [indiscernible] Does LME offer that?

Yes, it does. It does. But for them, smaller is our biggest contract. Their contract size is 25 metric tons and 5 metric ton is smaller. So ours is other way. People ask me, actually. I mean we can go on then hedge an LME. We can go on and then hedge an ICE wherever because bigger liquidity is there. And currently, except in gold, all Indians can go on and then hedge any of the corporates in any other market. So what is the rationale for anybody to come to you? That's fair question. So the way that we explain to them is, A, our products are rupee-denominated. So foreign exchange is -- volatility is already there in it in that sense. The second important thing is, so you don't need to hedge one for the commodity, other for the rupee-dollar for exchange. So the 2 legs you have to hedge sitting in India. The second reason, most of your exposure will be domestic exposure. We have so many -- the medium and the small industries, their exposure is within the country, not overseas, okay. For them, the international hedge doesn't make sense. Third, the contract size is smaller as against to those international ones. So they can -- I've been able to cater to these local markets, local players. That's good enough for me. I mean if all local players join, probably my liquidity will also increase, then others will start looking at our platform for trading. And at this point in time, it's an [indiscernible] situation. We don't have liquidity, so I can't trade. But unless you come and trade, I can't have liquidity. This is the situation we're facing.

Do you have any tie-ups or alliances [Technical Difficulty]

With CME, we have for this both crude oil and I mean all energy products, except electricity, of course. Electricity is going to be IEX, I mean, IEX, our domestic contract will be settled on IEX DAM prices. But otherwise, both for crude oil and natural gas, we have with CME. So we paid, what you call a minimum threshold, we have to pay but over and above it is turnover $. Then this is one. With LME, we used to have contracts -- LME settled contracts prior to 2019. And SEBI said, "No, you must make it a delivery-based contracts," so no longer use their prices. But still, we have an agreement to use their brands to be delivered on the exchange platform. So that is what we are [indiscernible] . But see, currently, what you say, all LME-approved brands, in the case of base metals are allowed to be delivered on the exchange platform. So we don't do a separate brand empanelment. So what we started is, in order to give what we call provide our platform used by our domestic players also who are not LME registered, we have also started an empanelment process but those ones who are not with LME. So we are done with the lead, there were 4 of them. We are done with gold, again, 4 of the big players, including Titan Refineries and that's an increase. So our platform is also, we wanted to bring in into our fold the domestic refineries also.

On the costs part, [Technical Difficulty]

I mean, you must have seen also over the years our costs have remained around the average CAGR of 5%, okay. And revenues are growing at 7%, but 7% because of these last 2 years have pulled down. But otherwise, we don't see costs going up and up. And I keep telling also and I am a strong believer in it, whether it's in personal life or public life, and if you can't bring -- I mean, you can't earn the rupee, but then at least you can save a rupee in terms of reducing expenses. So that is something which we strongly advocate. We don't spend unless and make sure that every rupee has some impact, which we get back in the form of revenue.

What’s your relationship with NSE and BSE Exchanges. How much do you collaborate [Technical Difficulty]

First of all, I think when unified exchanges came in 2018, sometime in the back, regulations came and then everybody can trade [ in the listing ] and there was a fear in the MCX, whether the giants like MSC and BSC takeover. But liquidity is such a sticky product, it doesn't go away, okay. So now that fear is, I would say, warded off. Okay. But they keep trying still, and they have deep pockets, so LES and all those things, liquidity enhancement schemes and other things they have given, they did it in cotton, artificially ramped up. We complained to SEBI. We have no problem about it. Then showing volume is something which is doing it between 4, 5 of them and then morning 10 o'clock to 11 o'clock trade them and no trade thereafter. That's not the way. You're falsifying the data. You're falsifying the ecosystem. So that is something which we mislead the public to believe that there is something in liquidity. So I think that's stopped. So the point I'm making is it's behind us. Coming back to the energy contract, BSE invested in Hindustan Power Trading, that's in electricity,, it's a spot exchange. And we throw their hat in everything and anything. And efficacy of it, I'm sure you must have seen over the years, what happened and what has not happened. So I mean persistency, consistency, these are all not there with them.

[Technical Difficulty]

Maybe on regulation, we collaborate because SEBI says that all of you have uniform circulars, uniform penalties, uniform vertical processes. So on the regulatory issues, yes, there is a collaboration. But otherwise, we don't interact much.

[Technical Difficulty]

Yes, that is different. I mean the international bullion exchange we have set up. So that is where we have come together because the IFSC has said that only 1 exchange will be permitted and all of you come together. So to that extent, it is good for me in that sense, it is not taking away my time also in competing. Did you have something else to eat? Please order some snacks or some biscuits and cookies and then ask for tea, also.

[Technical Difficulty]

See, there are so many matters in which they impact. one is that we have an APIs given out, okay? We have also trader workstation, which the exchange gives. The trader workstation cannot be multiplied. You want 10 trader work stations, you have to take 10 trader work station. But through API, they developed a CTCL, what is called Computer To Computer Link, something like that, they call it, CTCL. That's a front-end provided by vendors. So they integrate it and multiply to any number of places, any number of brokers, terminals [indiscernible] that is what and they all get integrated, all orders at the broker server and then they are pumped into the exchange. So we don't directly do this. And the third method is the mobile apps, the broker has developed a mobile apps. Every broker has developed a mobile app. [indiscernible] also they come. And the fourth one is the Internet. Now brokers also have been like Zerodha and other kind of things. They are discount brokers houses and somebody who wants to play algos and other things, they need to have this kind of CTCL and other things so that latency issues will not be there. But it is on Internet, you want to buy 100 shares of Reliance on my account and another 100 shares you want to sell, you sell it. So that is through internet which [indiscernible] also come.

It is quite similar to [Technical Difficulty].

Yes, Of course, of course.

What portion of people [Technical Difficulty]

I am sorry, I did not get it.

[Technical Difficulty]

Everyone has to go through the broker, be that the equity, be that the commodities. Anyway, brokerage is a must. It is a different matter if somebody may take a membership and then trade on their own. And that such people are also there. For example, Titan has become a member of [ Tata industries ], which is into jewelry and other. So they trade for themselves.

What’s the foreign participation. Are there any foreign participation?

There's no participation as yet, but SEBI has permitted. Rules are yet to be announced, notified. So SEBI -- Board has cleared that. So FPI participation will come through.

[Technical Difficulty]

In fact, whatever decision is taken is for our commodity exchanges for all these years, the FPIs were not allowed to participate in commodities, only they are permitted in equities. Now they are permitted in the commodities. So there are 2 clear advantages that we see at this point in time. There is cash-and-carry arbitrage generally exist. So they earn an extra buck of 12%, 20%, 30%, I don't know, depending on the per month and formal contract differences. So they can invest, take delivery and they can deliver back in the next 1 or 2 months settlements later. So that is something which will happen. The fund based activity [indiscernible] The second thing is the -- some of the people want to do international arbitrage, I mean nickel is nickel, lead is lead. They are not able to do unless there is 1 book. So now in the form of FII, they institute an FII, they can merge both the books, Indian book as well as the foreign book and then have consolidate it. Today, they are not able to do it from a tax law points of view.

[Technical Difficulty]

So we have only 2 slabs, especially for transaction fees and for equities up to -- it's like income tax slab. Up to INR 350 crores, it's about INR 260 per crore. And beyond that, they have to pay INR 175. So you only just 2 slabs. Now we started charging for Options from October onwards last year. And there also, we have 2 slabs. I think one is INR 40 to INR 50 depending on the premium value.

What's the talking on the first slab?

About equity -- I mean, for the Futures?

Yes.

INR 175 beyond INR 350 crores turnover.

[Technical Difficulty]

We can change them, but we have to be very transparent and charge the same thing to everybody, okay. So the principles have to be notified to everybody. No, I can't say that you are an algo player, I will discount, but he is a retail I will not give discount, that discretion will not be there.

[indiscernible] You are charging Rs.260 crores now, what will be that in five years?

It is by and large remain the same, okay. Other way, now with the increase in the business from algo players, okay. In fact, currently, Tower capital trades on Jump trades substantially and then [indiscernible] has come, and another one would be Citadel in Electricity, [indiscernible] but they have taken membership. So what I would just say is, as they are increasing, they are saying that we must reduce the fee because algo players want a lower fee so that one more tick they can go down. There's a lot of pressure. So that's why we are saying okay. And would like to have it to be a volume-based business than a tariff based.

Is Algo contribution [Technical Difficulty]

No, it is, actually it is a 65%[indiscernible].

[Technical Difficulty]

No. Equities it is even still higher.

[Technical Difficulty]

Yes. Because jump has started on last year, okay.

[Technical Difficulty]

It's not volatile. The more the liquidity, the more their participation.

Your market share number, they are basically 100%. But on agri commodities they are about [indiscernible]

Come again?

[Technical Difficulty]

Okay. Agri?

[Technical Difficulty]

NCDEX. This is about INR 2,000 crores ADT, that all nothing else. So far less as compared -- that's how the overall market share of MCX is 93%, 94%.

[Technical Difficulty]

Yes. See, the capital that we have currently is mostly kept keeping in view some of the future requirements that may come, okay. One is that the SEBI may likely to permit, we don't know when, the allocation. So you need to provide a much bigger data center space to host a lot of servers of this thing. So that will be a big expense, okay. We are also planning to get into various spot markets, spot tradings subject to SEBI's approval, of course. So that requires, again, a lot of capital, isn't it? And for a rainy day also, we need to keep something because almost -- as per our dividend distribution policy, almost 75% of earnings are distributed every year. In fact, last year and maybe for last year, almost 90% is distributed. So we are not keeping anything more. Whatever we had in the past, that is the only thing which is being accumulated in terms of return on those investments. So whatever in the recent past we have earned, almost all distributed.

[Technical Difficulty] So if you need Cash on Spot markets?

Spot market. Come again?

Will you reduce dividend?

No. Dividend we will not. We will continue to pay whatever it is. But whatever cash lying in the account, that will meet the [indiscernible]

[Technical Difficulty]

You are welcome. You are our most valued investor. Be invested, we will do our best to ensure that company is run well.