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

You reminded me of an opportunity a few weeks ago.

Of course.

I also have my colleague who covers MCX along with me. A native -- I mean he already has taken his [web studies ]. He recently joined us. And Mr. Reddy, would love to -- he's going to be also be covering the business alongside me.

Welcome, Mr. [ Nicolas ]. We may not have met you, but you must be watching us for a long time maybe, wherever you are, no?

He watches you every day. So yes, thanks a lot for making time. I didn't congratulate you for a great quarter that went by. I just discussed it slightly more in detail to the extent you guys can discuss them. And that said, it is a call. It's a short call.

Yes, please go ahead. Go ahead in 5 questions, whatever you have.

Sure. So I think I just heard you may have had some announcement. I also saw a new Chairman appointed on the...

Just today it came. Yes, just today it came. Mr. Bhanwala has been appointed. Dr. Bhanwala -- He was a former Chairman of the Board and he was also Chairman of the Committee of Social Stock Exchange Subsidy. And he has been our member for a little over 1 year, okay, on our Board, he has been.

On the Board. Okay.

He's already there.

And in terms of one thing, the Chairman earlier also, were you handling the responsibility, sir?

No, no. You see Mr. [ Satyananda ] retired on 2nd July. And so thereafter, there is a gap. But -- and then -- but the Board meeting, whenever it is held and one of the members is elected as a Board Chairman and the meeting is done. That's the way it is.

Got it. Got it, sir. I suppose -- I just thought I'd check. Is there any announcement about to happen apart from this announcement?

Yes. No, we are going to issue a press release, but nothing beyond. I mean, anyway, we have already informed the exchange.

Yes. Exchange is already informed. I saw that. Right. So sir, I think the first question...

And we have also issued a circular to the market. We also issued a circular to the market participant that the mock is starting from today. And in the morning, that circular has been issued with regard to our technology platform. And first, we are asking them the past 2 days to log in and then see their log-ins are happening or not because that will be a major pressure on us if somebody is not happening and they call us and all that kind of thing and then reset the passwords and all that stuff. Then next 2 days, they will do that. And then thereafter, from Wednesday onwards, I think they can do the full testing mostly.

Should there still be a testing phase, right?

Not testing. This is a part of mock. It's a mock.

Mock testing. But we notify the market participants?

Yes, the mock is by market participants. We have already done UAT. The system is still continue to be under UAT anyway. Because whatever the mock, some observations are there. They will be fixed and then released in UAT, then it will be migrated to Indian mock and then see whether participants are facing any problems somewhat.

And sir, from a grade perspective, you had mentioned that -- What do you have towards that?

We would like to go before the end of December, we would like to launch. When exactly -- and we'll be able to figure out 1 or 2 holidays or something around that, we would like to launch it so that we will have enough buffer in that sense.

Sir, maybe -- is it supposed to be locked stock balance IndAS financial? Or are features lock stock balance?

Lock stock, that's it. That's the idea. We have already notified to the market participant the APIs. We are not changing substantially the API. So there are back offices and others who will not be changing substantially in that sense. So some of the members will be testing that whether the reports they're getting it like correctly or not or whether there's something strange or some kind of columns are in order, not in order, all that kind of thing.

Okay. Sir, on the [ UAT ] options, I think this question has been asked a few times in the conference call as well, future -- you have options continue to do very well, and futures actually in line have stabilized now from a turnover perspective, that 82x, kind of more less stabilized in the last 2 months. It is not coming down. Is there something to be read from this trend? Or does that pocket bank on whether it can change tomorrow onwards, in your view?

My view is that it can change it for the, what we call, the interest -- not interest, what you call -- the margins are brought down, okay? If margins are brought down, then they will find that more attractive as well. That is the way I look at it. Quite opposite with...

Ease of us.

Yes, yes. Because we have a 2% extra margin in gold, about almost all 15% in crude. And once that is GF -- it's all linked with today, that GF -- as I told you, if the GFO dispensation comes through, probably we will be able to contribute more capital out there and then the margins can be reduced. Then again, the volumes will go up.

Sir, do you mind, I think, given we both started covering MCX for the last only a few quarters, can you help us understand how this margin -- when does the margin increase in gold and crude? And what is the pace that you think is the right number or the number before this?

See, the crude oil margin, it went up as high as 80% post what we call the -- negative pricing hit the market, okay, in March 2020. Thereafter, for almost a year or so, there was no trading in that quarter -- I mean, hardly any trading, obviously, okay? Then gradually, this peak March -- we have reduced this as the time passes by. The -- for the margin calculations, the past period to get less weighted. And then the current period, it gets more weighted kind of things, okay? So as we went by, then the margins started reducing it. So it got reduced to about 20% up, so if I'm not mistaken. Then it started picking up volumes. But then from the calculation of GF, we have to take the worst-case scenario as well. So the worst-case scenario happened to be a negative 2 pricing. So that's how we went to SEBI and then requested them for a different dispensation as GF contribution. Now while SEBI is looking at it, they did not allow us to remove this negative 2 pricing as a one-off kind of thing. We have informed SEBI -- see, we have got a mail from CME. They are also not taking into consideration this negative 2 pricing. But it's a one-off kind of thing, okay? And whereas they introduced what is called a pre-expiry margin, sir. Now, which SEBI said, you also introduced pre-expiry margins. We were not giving the dispensation. They said you introduced pre-expiry margins. So last 5 days, 3 days.

It is last 5 days. Last 5 weeks kind of period margin.

We keep adding 5-5-5 percent kind of thing. And it goes up to 25% in addition to what we have currently. So that's how...

20% plus 25%?

That's right. Yes. But not less than 30%, no?

It is currently 30% -- around 30%.

Currently, it is 30% plus 25%, 55% becomes on the lost today. So the last 5 days becomes unviable in terms of trading, okay? So obviously, that's why the market participants are having reservations on this participation. And especially when the SEBI introduced the peak margin circular, then obviously, the clients have to necessarily put in upfront margin when they want to trade it. In trade, what we call that leverage is gone. So all the more reason why they are hesitant. And in the case of crude oil, in the case cotton, in the case of gold, we had to introduce it deliberately. Because if we don't intro -- the NGF calculation substantially depends on open interest, okay? Open interest is needed for more volume to be traded. No open interest essentially mean there are no -- what we call a fly-by-night kind of operators. There are people who have interest in the stock, and they want to take a position in it, viewing this. Okay. So the open interest increases, then the SGF cover is required. SGF is required, obviously, the whole native scheme is something which we are looking forward to, okay? Now this is -- so in fact, we have also sought another dispensation. Can we have during the daytime one type of margin and then the -- only on the open interest, we will have a higher margin kind of thing? No, nothing doing. That was the answer we got. So coming back to this open interest thing, it's not only in open interest in crude, but in the gold and silver also, it is increasing, okay? So whenever there is an open interest, obviously, it's good for us. No doubt about it. It's good for the market, good for the market participants, and they will be able to -- that increases the debt in the market. And -- but then we need to contribute more to SGF. And we -- once we contribute, we can't take it out, that is the problem at this point in time. That's why we...

Settlement let's say. So can you achieve if there's no settlement, if let's say, open just goes down?

Then the requirement comes down. But whatever we -- how loss contributed, it's remained there only. You can take it out.

You can take it out, okay.

Now for example, our SGF cover has gone up to INR 430 crores or something like that, okay? Although our SGF cover is INR 100 -- INR 530-plus crores, INR 35 crores or 60 -- INR 40 crores, the rest contributed beyond INR 430 crores is contributed by penalties and other interest -- penalties, not interest income, penalties. And it should be said that penalties should not be used also for this calculation. So our contribution as it stands today, we're about INR 430 crores, 45 -- 30 crores. How much INR 400 crores?

Total is INR 565 crores and MRC, INR 400 crores.

MRC, I'm not asking for MRC.

INR 180 crores.

[Foreign Language] CCL and crude. Again, CCL and crude -- in crude and CCL, INR 420 crores, it is coming to NR 425 crores. And the MCX contributes 25%. And then MCCL contributes 75%. This is the rule, okay? Obviously, CCL is the 100% -- wholly owned subsidiary, which is as good as our own contribution going there. Now whenever this, what we call, minimum purpose requirement, if it goes up, then 25% we have to contribute, 75% CCLS to contribute. So that is why -- and we can't with a drop. Once you contribute, let it remain there only. That's the rule.

Okay. So it's basically one-way cash.

Yes.

Kind of, if I may call it sync, it goes and doesn't come back.

Yes, it doesn't come back.

And that margin extra applied to the trading members finally?

If in the event of a default and in the event of margins are not available, in the event some of this collateral which we have collected clients, everything is not available, then this is going to be used.

Yes. So in a sense, the gold and silver, you have mentioned, there's 2% extra margin discount...

Only in gold. We have put it only in gold.

In gold, okay. And what is the margin before this in gold?

I think, if I'm not mistaken, the initial margin is supposed to be 61% -- 6% as to me, and 1.25% is the ELM. That is extreme loss margin, it's called. So 7.25% is the margin. Now we put 2 more percent, so 9.25% is the margin.

It's actually a lot, if you compare the base, 2% over 9%. It's -- sorry, 7.25%. It's a lot of extra.

Yes. Yes, that is what the members are complaining about. And you won't see gold so much volatility.

Yes. So what's happening now in terms of reduction of these margins? Do you think there is any indication of the regulation on these margins to be reduced over time?

As I say, these are not imposed by the regulator. We have imposed it because our SGF cover we have, on gold. And as well as on crude, okay? Crude oil, the base 30% initial margin is 30%. Actually, if you leave it to the calculations to initial margin, it will come to 12% or 15%, something around that, okay? So that additional margin, we have imposed it because so much margin is counted for the SGF cover. SGF cover is beyond what is not available in the margin.

Got it. Got it, sir. This is very helpful. So in terms of new products, how do you implement new products? I think last time we discussed -- things were in the pipeline, but at different points and the regulators discussed different commodities. So anything that you have looked at that you may point out?

We were to launch the gold monthly futures contract. But we held back because the system development is on. And once the migration is over, whatever is pending in the pipeline, we will be launching them. Of course, 2 more contracts are to be licenses to -- permission of subsidies actively obtained. But pending whatever licenses that we have or approvals we have, that we will launch post go-live. That's the way it goes.

I guess money -- gold monthly futures. What else can we anticipate?

In fact, we are taking very strong demand for even for other monthly contracts like silver. Silver, again, we have only bimonthly contracts, whether it is micro or mini both are bimonthly. So there are also the recent demand. And besides that, even for index products, we are looking for some shorter-duration contract.

Is index meaningful part of the business right now?

Not yet, not yet, sir. Not yet, sir. Not yet sir. We ought to make it.

And who buys index future typically? Is it in local Indian brokerages, initial quant investor? Or is it global investors?

See, the difference between the index products versus the underlying products is underlying products are all, other than the energy products, they are all delivery contracts, okay? People who want to wire delivery, but then cash settle is what this is. Otherwise, the different -- there is no other difference. And it truly reflects only the same return. That's the way it is.

There is special demand from those people who wanted to spread their portfolio and wanted to trade. You start putting all the money in one commodity like institution, some of the institutions. We now -- we feel confident about a sector moving in one directional movement. Then they are preferring the indexes, and that being -- also being cash-settled product. That is one advantage.

Index?

Index.

When you say cash preferred, how is that an advantage?

It is because of all like -- just like MD said, it is like underlying commodities, are all delivery base of contracts.

Okay. And this Is just the cash...

Right. It's a pure cash, it is.

They can play to the loss today. But in the case of other products, they have to get out of it. They take -- I mean they can remain to the loss today. That's all it is. It's a cash-settled contract.

And sir, have we seen growth in the same time that the base is small? Is it growing? Or is it more flattish right now?

Come again, please?

Growth.

This segment of index products, is it more flattish? Or is it growing fast?

I will tell you, the energy index did pick up at one time, but then subsequently, it went down -- that has been fitted out this one. Whereas the metals, they are doing well, very well, I would say. All of a sudden, nickel development took place and nickel rate was about 25% in the total indices, metal indices. So nickel stopped trading on the exchange. So the underlying is not there, obviously. There is no price available. So obviously, the participants have deserted that also. So we are reconstituting that indices. I think come January -- we have already done, issued a notice. And I think, come January 16, if I'm not mistaken, as the SEBI, what we call program for index revisions and rebalance this quarter.

Rebalancing yearly basis, all our indexes, the rebalance on an annual basis. And that annual rebalancing happens in the month of January. While we announced the tweaks and everything in the month of October, but actual rebalancing happens in the month of January. So already the new rates have been announced to the market. Variance in the metal index, the nickel is not having any place in that one right now, in the new weight, as per the new constitution. So post that one, again, we, in fact, going for certain changes in terms of the tenure -- and also parallelly, we are looking at options as well as futures. So all those things we are planning to correct.

So when you look at these gold monthly future contracts, several multi-feature contracts and -- I mean these 2 primary products, so they haven't yet launched. Of course, they will probably have some annualization of the existing financing contracts that we have. But do you think, in your estimate today, is this a large market for these 2 contracts that we are going to reduce? Or how do you get the potential of these 2 specific contracts?

Okay. See, I'll tell you here, they are not ultimately too [ certain ]. The way that cannibalization takes place is that is something -- it does happen. It all depends on the suitability of the product. Today, there are a variety of interest of the trading numbers, some wants monthly, some wants bimonthly. Though some want monthly, they're not available. They are trading in bimonthly. But there are some who wants monthly, they have chosen to stay away from participating, okay? So whereas those who have chosen to trade in bimonthly, just because it's not available, probably move to the monthly. So cannibalization is in that sense, yes, but there will be overall basket of these products, gold or overall basket of products of silver should increase the volume on the exchange. That's the way I look at it, okay?

See, generally, the greater the duration, the premium automatically will be higher for option. So generally, they prefer, even if you look at general trend, keeping all other factors constant, whenever the expiry is further, maybe the 2 months prior to the expiry, then volumes are going to be lesser. And in the month of expiry, you see greater traction in options. So when you come out with the monthly options, so then you can see that a lot of demand can -- because the premium automatically, the time value of the option automatically will come down, that will reduce the premium amounts and that we make the products more attractive. And you having 2 contracts, it also uses opportunities for kind of arbitrage opportunity between different calendar months.

Got it. So this is helpful to understand. So when you look back to the futures versus options, some of revenue on a kind of per-lakh perspective, do you think futures pending the lakh, the commission that we charge will come down over time? Or do you think it remain stable? To the extent you guys can talk about it both on future and option side will be helpful to know. I know option work more complicated, but whatever you can help will be very helpful.

See, I mean how does the value of premium get decided? Obviously, the premium get decided depends on the strike price whether it is at the money, in the money or near to the money or close to the near or something like that, okay? Now if it is far away contract, the premium will be very little, okay? Now it all depends on the view of the market participants, whether there's going to be a volatility in the coming days, and then they will enter into such what we call faraway options contract. I mean, strike price Yes. Now as the volumes increase, for us -- at this point in time, volumes are increasing, at this point in time, we are finding more people trading maybe closer to the money, near money or at the money or maybe a few maybe in the money, but it is helping us at this point in time in getting the same revenue. But today, you have a volume of, say, INR 35,000 crores, okay, in options. Now the next batch of INR 35,000 crores, will it be near the money or far away from the money? If you average it out, it may be lower for all you know, okay? So we cannot call it that it has been -- the return is lower because you are expecting volumes also to grow, but we will think about it at the money. That's the way I would like to address this. So we should access some kind of a lower realization. If volumes increase to us, how does it matter?

No, of course, in any way the fixed cost structure, it needs higher volumes will actually help us in operation size. Sir, when you look at the future side, is that we maybe still on the future pricing.

Interest pricing is more or less stable. I would not like to disturb that at this stage. When you are introducing new products, no, we do not want to attract the members get into...

Realization rate to remain more or less the same.

Yes, that's what I said. It is realization, this 2.07 or 2.06. It keeps varying it. So it remains the same. So we are not planning to change any tariffs or anything like that. Somebody will be impacted, Somebody will be benefited, and we can't go on answering that.

Yes. No, no, of course. And I think last time you had mentioned on the conference call that in the 66%, I think, the concentration of, I think, top 10 members from [ IDBI ] perspective. We are also not planning to change the pricing structure for a volume discount that we offer to them? Or is it going to be at least -- if this conversation changes, do you think that our average price will come down over time?

No. I see, already, it is there at one -- see if you are on a higher slab, you will pay about INR 175 per lakh, if I'm not mistaken, okay? So most of them may be already paying INR 175. Now if it is INR 174 per lakh, then this is what the rate is currently, INR 2.07, whatever we are getting it.

This is the highest? They are already highest lakh?

They are on the highest lakh. It's like income tax lakh, up to INR 300 crores INR 350 crores, they pay a lower rate and then over and above that.

Got it. Lastly, on the energy derivatives. Any update on that, sir?

Energy deliver to -- I think, still to get the regulator's approval. And we are only at this point in time appealing to their intellect to clear it fast. And with whomever we can engage with, we have been engaging the purpose of it, how does volatility will be reduced, contracts up there. There are so many research articles. We have fund issued to them okay? So they're worried about volatility being increased, it's either volatility will be reduced. That is what we are saying here. And we have -- probably we may not be required to protect cap, what they did of INR 12 per kilowatt hour. So that's what we are telling them. Let us see.

Okay. No specific major time lines at least on the energy side?

No, no. See, what is in our hand, we will control, but what is not in our hand, what it will do.

Yes. Got you. One, you have mentioned on the conference call about FII participation in foreign exchange investors. Can you explain where people can participate in FII? And like why would they participate, let's say, in MCX versus, let's say, going to LME when these guys are not planning to take delivery of contracts? Just wondering how does this work.

Sure. See, one, bear in mind we have [ capacity ] contracts and [ non-capacity ] contracts. Now -- so coming back to the [ capacity ] contract, yes, those products are already there in CME LME. Now why do they come to you, okay? But there is always arbitrage opportunities between the markets. And today, the member brokers are some of them are having 2 books, around maybe 1 for international arbiters and others for -- maybe they may not be our numbers also. We do not know how that structure works. With the permission of FIIs being allowed legally into the country, they can have one single book and then adjust their losses and profit against whatever is happening. In both these markets have maybe several markets. Accordingly, they can trade in the country. That's number one. Number two, if the GST issues are also resolved, now they will have what you call arbitrage opportunities, which may not be available in any other market or may be available, but then to be -- it's not an alternative kind of thing. So arbitrage opportunities between near month and far month may be there, here in this country. Now many, many FIIs who are already there in equities, if they have any surplus cash on their books, they can always deploy in these arbitrage opportunities and then air some of this stuff up.

These are typically equally investors like us or these are different kinds of institutions which typically prefer to more equities and let's say commodities?

Well, there's a lot of interest is coming. That's what our member brokers are saying, and there could be equity players also. They may have set aside a profit for a portfolio of commodities. Now for all these years, that is not available. So they have not set aside anything. Now that the client says that you trade in Indian commodity markets is fine for us.

Got it. Super helpful. How is the GSE right now on this segment?

It's not a question of GSE percentage, okay? The problem is one of registration and then keep filing reports on the GSE utilization. If somebody buys and needs helped, they can even get the credit back. But then to get the credit back, you have to register there, okay? All those assets are there. Why should a financial player who does not lift the commodity, you may not see the commodity also, and he believes that is there in the warehouse, why should we take any GSE utilization? This has been now asked quite for some time.

And this is not yet resolved?

Not yet resolved, yes. In fact, even for domestic players also, it's coming in the way, even on FIIs. Even if it is resolved, even FIIs are not there, when domestic players will play a much bigger role in these products.

So I have 2 more questions. On the business side, on our historical [ GCPMOS ] contract, its book, just I want to ask was it based on percentage revenue or was it a minimum guarantee plus a percentage of revenue till the time it is actually came in or it was after it came in?

Minimum guarantee plus a fee pay based on turnover. So that contract has ended in September. So whatever the new -- for 1 quarter, we have paid the substantial sum that is only a fixed one. There's no -- nothing to do with the volumes.

Got it. Okay. And we are reasonably confident that we would not be required to use their services beyond this quarter?

No, we launched the mock. I mean, that is what we wanted. This is kind of a do-or-die kind of situation from the management. That's the game we have told all our team members also. So they are all working day in and day out to make sure that it is successful and go live.

Very helpful. And sir, last thing on treasury, both the treasury that we have our network, treasury at the margin money. And there was a number of fee, INR 1,100 crores and INR 600 crores pay of network cash and margin cash, respectively. Has that never gone down in end of this quarter?

I'll take the question. So the margin, which is with the clearing corporation, on 30th September, INR 1,000 crores -- INR 1,090 crores. And network as of date is around INR 900 crores.

So is it true? It was INR 1,100 crores earlier at this point.

Yes, it was.

Okay. And so why has this come down?

If you recollect we have paid dividend in October.

Okay. Oh I'm sorry, you did pay a dividend.

Do you think -- I think INR 89 crores?

Sorry?

17.4%, aggregating to INR 89 crores.

So that's it. Okay. And just to end out, what are we being yield on this money that we have?

More a level of -- as you know, as we mentioned in the call, a certain amount of our mutual fund investments to development roles, okay? So more importantly, we have booked it under the amortized method. So it's basically a -- we won't be booking any promotional gains or losses. And this has started from June till even our position today also, we're looking out for good deal. And the rates in India are pretty attractive at the moment. But we're still deciding. And we're looking at the state of the control.

Got it. Sir maybe from a...

So basically, it will be INR 8 crores. Yes, it would be only INR 8 crores.

How much to say, in terms of interest income, if I may just make it simply for our understanding, what's the interest income percent that we have been able to create from this money that we have across the...

I don't know whether we can really disclose that part of it upfront, okay? Because started from June onwards, please appreciate. Thank you.

Got it. Got it. And this is -- I think I don't have any other further questions. [ Nicolas ], do you have anything to ask Mr. Reddy?

Nothing. No further questions here.

Perfect. So this is super helpful. Thank you, Mr. Reddy. Thank you, Mr. Satyajeet and thank you, Mr. Praveen. We appreciate you taking our time. You guys are doing great and look forward to meeting you guys whenever we are in Bombay.