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

[indiscernible] Yes. No problem. I'm glad you could [indiscernible] before that.

No worry then.

Yes, it looks good. Structurally, I know we're still very early on the whole modification exchange growth front. I guess, the last couple of years, you did have some, I guess, regulatory headwinds in a sense.

Margin.

Yes.

In margin and also in metals, we have converted the contract into compulsory delivery contracts.

Compulsory delivery. That's the one. Yes, okay. So that's sort of -- not killed off but stabilized the futures volume. Is there any hope that this will -- because it's still kind of like trickling down. Is there any hope that this will start rising again do you think?

See the current rate is towards options, okay? But if margins comes down even today, in crude oil, the margins are about [indiscernible] okay? And when you go near to the starting because of the introduction of the 3-year starting market, it can grow to even 55% in total, okay, even in energy other, energy contract natural, there also the margins are very significant. It is around more than 35% or so. So that kind of margin comes down. That is one. Second, in gold also, there is a certain amount of margin is being [indiscernible]. Just to take ourselves to bring down the SGF level. SGF is like a Settlement Guarantee Fund because if you are not in increasing the margin, then it is like the trust numbers can give a higher number, and you are supposed to include the capital in the [indiscernible]. And you cannot take it back, okay? So whatever is being introduced to them, you cannot take it. So while we have made the representation to the SEBI to reconsider it, and not only we, it is a group of all the exchanges and [indiscernible] corporations. They made the representation to the SEBI. SEBI would be taking it up to mismanagement committee, and the matter will be [indiscernible]. If that kind of some dispensation is given by the regulator and that's the way it has to be, like as and when it is needed, we are ready to infuse it, provided it allows us to take it [indiscernible] and take it out of...

So what's been discussed at SEBI is this SGPs -- SGFs.

SGFs, Settlement Guarantee Funds.

So that is in discussion, not the fact that the margins itself can be adjusted.

So if I'm not increasing the margin, what happens means the stress number can show higher, and so I need to bring it to...

Okay. Okay. So I understand. So what do you -- I mean, who knows what SEBI will say, but I guess you seem serious about MCX or commodity exchanges, surely they should consider it, right?

Yes. Their [indiscernible] still that way it is like, I think somehow almost a decision already happened. But we have to see that because till the final thing comes out, you don't know how the things will pan out to be. But the margins happen to be quite significant compared to the global market. If you take CME or you take any other market, we have the same product. Crude oil or natural gas won't attract this kind of high incidence of margins. So when this comes down, we feel that there could be, again, some people can start again looking at the futures contract.

Why is it that India has such high margins?

It's because of -- see, in India, especially the regulatory structure is designed as that. For Settlement Guarantee Funds, you have to look back for a period of 15 years history. Okay? So any unprecedented event can continue to be a -- it won't be behind you. It will continue to be following you because, guess what... Negative. And that's because of the like the crude oil [indiscernible] is negative.

[indiscernible] for [ 2 ] Years.

That's what I can say. So there in the global markets, they were all back to normal. But here, it is like because you must trust us. See, you have to anyway have to look back for a period of 15 years, and that will become a part of it.

Is there any chance that, that 15 years can be shortened to global like I don't know what the CME looks at, history-wise?

They have CME or meeting over this particular incident considering that the pay platform even [indiscernible] and they're completely taken out. But SEBI, they are not concerned [indiscernible]. So they made some aspects like they said that at least some technically is the head that the [ jet score ] should be to some extent. So that gives some leeway, but it is not totally giving us a complete freedom to yielding that kind of events which are linked up to the -- are associated to the black swan event.

So I guess futures, do you think that in this -- from the future side, we reached the bottom or not?

So currently, the way because we currently don't foresee any major regulatory thing coming up. But even the peak margin reporting is -- came as a surprise to all of us. Okay, in fact, it impacted the entire market first. So it's very difficult to confidently say that. But yes, given the current scenario, another thing, whatever it is, at least in the discussion which we have too with that kind of very [indiscernible], but we are more focusing on options now because that is where we are seeing that there is immense growth opportunities are there.

I guess, globally as well, options are much bigger market than futures.

Actually, it is. If you see the global market, even commodity options contribute only 20% of the futures.

Really?

Yes.

I thought it was larger.

But in India, even in equity, the biggest product happened to be the index options. Okay? 75% to 80% is contributed by the index options. But the rule why the kind of anomaly between the international markets and Indian market, this could be because of the transaction tax that is there in Indian market, where it is very significantly high in futures compared to the options because, in options, it is based on the premium, not based on the turnover.

So CTT is based on...

Based on premium. It is the same across -- you call it commodity transaction tax in commodity derivatives market. In futures market, it is called a securities [indiscernible] but the rates are same. Okay, so no difference between the two. It is like INR 10 per lakh on sell side is the transaction tax.

So that actually is okay. I didn't note it, so I thought that CTT was much higher than equity. So there was [indiscernible].

No. No. It is same. In fact, they're the same.

Same. Okay.

Same. But the commodity globally, CTT has not been levied anywhere, except I think in Taiwan or something. But even the percentage happen to be very miniscule. It is not significantly higher because commodity derivatives are considered to be meant for hedges unlike in the equity market. So the quantum of the tax, even it may be same, but it could be at a very huge difference in terms of commodity derivatives market compared to equity market because then it can be one-size store. It can keep going up and that kind of -- But these commodities are cyclical in nature. Sometimes you won't find that kind of volatility in the commodity cost.

So I guess to be globally competitive exchange in the commodity space, this will be difficult. This will be a bit of a deterrent for you.

Yes, definitely, this will not only the transaction tax, we also have stamp duty, which is again a significant amount. Besides the stamp duty, we also have DSP, okay? So trading cost is quite high compared to the parental numbers.

Okay. From an Indian standpoint, I guess, your option has done phenomenally well the last few -- 1.5 years at least. You started charging for it in October.

Yes. October '21.

October '21. Also we're going to -- and I guess, okay. So it's looking great. So where do we go from here on the option side?

So options. So our objective is that today most of the volumes are coming from energy products. Earlier, it was only the crude oil, but now even the options are doing pretty well in case of the natural gas also. Both happened to be -- the underlying product happened to be a gasoline product [indiscernible]. But besides these two, we wanted to increase the trading interest in other bullion options. Maybe later, we wanted to fish for even the metal options and other things. So [indiscernible], the challenge happened to be that they're all bimonthly options like especially the gold kg happened to be a bimonthly contract, and the options are bimonthly renewed. So because of that one, the premiums are higher because the options, the value of options depends on the [indiscernible] so that is one actually. So we thought that if we can be able to bring down that kind of premium amount, definitely, it can attract more market parties. So now they are doing well, and gold is doing well. Silver also is doing well. But we wanted to come out with the monthly options in both gold and silver. So underlying will be the same bimonthly futures, but you'll have 2 contracts evolving into the same underlying contract.

Is bimonthly 2 months or...

Bimonthly in the sense it is we have a February contract, then we have in April come due. [indiscernible]

Oh, every 2 months.

Every 2 months, we have a contract.

You said bimonthly.

So we plan to launch a January contract, February, March, everything that means we want through the gaps with the options because, in the future, we don't want to make any change, but an option, we wanted to bring in that new series, monthly series, where we can fill the gaps and which we're able to bring all the premiums down. And that can attract more market participants.

More market participants means bigger volume.

Bigger volumes.

So when do you plan to do this, if I might ask?

So we actually got approval for our gold monthly options. But since our transition technology and transition is ongoing, we wanted to all take it up all these things post our system technology migration.

Okay. So before -- I guess, okay. So tech migration. So 63 Moons has extended the period until when?

Till December.

Okay. And then hopefully -- is it TCS then?

TCS.

That will be ready...

So our plan is to go live by end of December. We already started more. Soon, we would be starting the panel rentals.

Okay. So I'll assume -- okay. And then fingers crossed everything goes well. We'll see volumes at 63 Moons. And I keep forgetting. So what's the differential in cost that you [indiscernible].

It's more -- it's variable versus fixed run variable. Here, 63 Moons is actually a cyclical component as well as a variable component. But when it comes to the TCS, you have only the fixed component, fixed the AMC.

[indiscernible].

Yes. Annual maintenance.

Right, okay, which is quite low. Is the second component lower than the fixed component you said at 63 Moons, or not really?

[indiscernible].

So overall...

The AMC would be split. I think we should also keep in mind along with the previous back on the ecosystem will also be built up. And so the network which is vacation [indiscernible]. So they only accrue costs like the [indiscernible] the AMC on the ecosystem also not only the TCS platform, but the AMC. The AMC for the ecosystem also will come.

Will come down.

No, will come in.

Oh, come in. Okay.

We are not seeing any major difference if volumes happen to be at the same level, and we also have to do the depreciation and amortization. Given all those things, unless your volumes grow significantly another thing, there will not be any significant difference that it can be able to bring in. But other elements also, we have to look at. But in long run, yes, in the long run.

The more products that we launch, the more volumes in futures and options. Definitely, it could be beneficial for us.

Yes. Because you are [indiscernible]. That makes sense. I think we touched a little bit about regulation as well. So on the options front, is there anything that could happen like what happened in futures? Can somebody come in an say, hang on, this is too risky. I don't want any of it.

Our volumes are quite miniscule compared to the futures market.

Yes, but...

It's a small fraction.

[indiscernible].

Yes, I don't see that kind of measure because, overall, our market itself is very significant. Structure-wise, it is more or less the same products. The only difference happens to be like if it's an option on futures compared to option directly and maybe the quarter the groups in equity and currently both [indiscernible].

Okay. Any other favorable regulatory changes apart from what you told me about the [indiscernible]?

GST is one thing that really we are looking at. Besides that, if anything comes for GST related, we have multiple delivery centers, which we have been doing, but things have not come because, it's not only the central government. There is a state government that also [indiscernible] same as the entire [indiscernible]. But if anything comes out in that nature, I think that there will be a big boon for the commodity market.

Yes. So since you have multiple delivery centers -- yes.

The players require registration in all the centers. So that's the...

Compliance issue.

Compliance [indiscernible] full thing.

[indiscernible] everywhere. Okay. So you're hoping for a kind of...

If we can be, or with lack of time...

[indiscernible] IDFC, yes. So that is a companion. There's only one. We don't have to then get registered at these states or provinces.

And is something in the works, or is it...

Yes, we connected it to the central government Ministry of Finance. But I mean, [indiscernible].

We have been following.

But when did you actually suggest this?

More than a year. But these are politically sensitive because...

Okay. Okay. So on the new product, I mean, you mentioned that monthly...

Monthly looking for even index options, we are looking for [indiscernible] options.

And mostly gold will probably come -- after next calendar year, after you implement TCS, then you're going to launch the monthly gold index option? Or is this all -- index options, do you have approval for that? Or do you...

No. But the regulator has come out with a [indiscernible] list. So the regulator has come out with a credit [indiscernible]. We have proper and we have to get approval.

Okay. So how long normally would you expect for approval process.

It depends on case-to-case analysis. If they have any particular concern of anything, they may take time, otherwise maybe things that you can get the approval in [indiscernible].

About 6 months?

Like I said, it's very difficult to say, but [indiscernible] some products we have been [indiscernible] and all that we were after, but because of some other reasons, we could not able to get the approval when we have applied. But in some cases, you can get the approvals very quickly. If there are no issues, concerns related to that one, immediately you can get it. But what we are doing, I don't think that our -- what we are applying is of something different. So we are hopeful that we can be able to get it approved also.

How long did it take the monthly approved?

I don't know the start date, but roughly, maybe 6 months' time or something [indiscernible].

Less than a year?

Less than a year.

Okay. So I'm just trying to -- for my own model, it could be wrong...

See, once you get monthly contract, now getting another monthly contract, I don't think, if you already appreciate have been said, so it won't take much time.

So this index option you'll see a monthly as well?

This is we are looking for weekly and monthly. We are holding on looking for that.

Okay, weekly or monthly.

But since it is new, maybe they may only examine it before giving any approvals.

Okay. And then when you apply for this, do you apply for both weekly and monthly at the same time for index options, or do you apply for monthly first, and then when you get that, you apply for weekly?

So we -- when we apply, we apply for both because we already have monthly futures, okay? It's all about like how to bring that synchronization between the futures and options. Both should have a weekly and monthly kind of thing.

I'm sorry, stupid questions I know, but I'm not -- I'm only equity versed.

[indiscernible] very much similar.

Yes. I mean, because you mentioned before you have been applied weekly, and then you had to apply for the monthly and bimonthly [indiscernible] this monthly, so I was thinking maybe it was something different. Okay. I understand. Okay. So you can't gauge the future, obviously. But judging from the growth that you've seen in over the last 6 months to a year, do you think that kind of level of growth in options, is that sustainable for in the short term?

I think you started with a low basis in a -- now -- so I mean, it will be interesting to see how it does tails even when we closed September at a premium of around INR 800 crores.

The potential is good, no doubt about it. We have good potential because given the equity market and other things. And even we could see that participation adding -- it's not only the volume. We are also seeing the participants getting added into the futures options [indiscernible]. So given that one, there is definitely a great potential, only we have look for enhancing the [ FIR ] and other things so that more people can start looking at it. And the options by a product, the exchanges are pretty familiar with that product because the equity is also is very popular. So it's not something, a strange animal coming in India. It's a well-known product.

Okay. So you've mentioned new participants. Who are the new participants now?

New participants. One interesting development that happened is now foreign portfolio investors are allowed. They had to make an entry, but it is a new development, and we are expecting that maybe once we also come out with necessary circulars, I think we can see their participation in the next year. The current participation is we see very good diversification between then our [ co-players ] and then we have the retail clients. So different category of participants are trading in the option. And especially the options first multiple strategies for any [indiscernible]. So it should definitely -- you require some people who continue to write. But on the other side, given kind of [ rupees ] margin reporting and all those things, some setup market participants may only prefer to buy the options. Some may prefer to only -- some can -- not really can be happy to write the option because you require to maintain that kind of margins to write the options unlike in [indiscernible] you will only pay one set of premium, and then you have [indiscernible] You do not have to be active on that one. So the rates are falling. The margins will not impact it. But for right there, it is -- for right there, it is that. That is why we see that when the options grow, being our products being option on this, both should complement each other.

Yes. Should be. Right?

That is what we look at.

What about [ some of the ] mutual funds?

They are already there, but the participation is still not so high. It is very maybe does that should be around 2% to 3% of maybe [indiscernible].

Why do you think that is?

See, currently, it is like the regulations are still not given a complete -- rolled out completely, or it is like they want to do in a phased manner. So even recently, the silver tier for the -- come there also certain conditions that the underlying should be exactly [indiscernible]. And certain, one more institution, [indiscernible] institutions cannot hold the metal for more than 30 days compared to the gold where it can be hold for even wholly for period up to 180 days. So these are certain things which really may not be encouraging for those people to come in fully fledged and do it. So we are seeing some 3, 4 participants active in this commodity side.

And then on the -- will these regulations, will they be with you?

The [indiscernible] you can see and even we are constantly engaging in [indiscernible], and they are also planning to come out with a separate committee for commodities, which can collate our -- which can deliberate on various issues related to the commodity, and then they can take it up to the regulator.

But we have around 4 mutual funds which are started.

But they [indiscernible] or...

We have 2 like Tata, Axis [indiscernible].

So I guess that will slowly roll out. Supporters will slowly turn to you next year. And your tech will be resolved. So I guess very short term for this particular quarter, you'll see double [indiscernible]?

Yes, do you mean for the quarter ended in December?

Yes.

Yes, it could be high.

Okay. But I think everyone knows that already. So they [indiscernible].

[indiscernible]

Okay. So what are you most worried about right now?

Our focus is primarily on tech migration right now.

Okay. So what's your execution on that?

Yes, that's a key for us.

All right. I guess, if you're changing vendors on everything, your core [indiscernible] first time ever, I guess for you guys. Are there any sort of contingency plans if something doesn't go right by end of December. Any way you can mitigate this risk?

[indiscernible] to really look at this over right now [indiscernible]. We are [indiscernible].

Yes, we have then, but at [indiscernible].

I'm sure your risk management committee is looking at it right now? Okay. What else?

I think broadly you have covered it mostly. The issues have been covered.

And dividend policy is the same, is it?

Yes [indiscernible].

Yes [ 75% ].

Out of [indiscernible] for the year.

Which is one of the highest in India, [indiscernible] worrying. Is it 75% of [ stock ] value?

No. 75% of what you earn.

Payout, right. The net profit. Okay, yes. And you still have cash. [indiscernible] net cash after this testing? And then what would you do?

I mean we run a few plans. One is the colocation that SEBI allows us to come in colocation while we're not sure of the amount that we need, that is one. In India, to set up other exchanges, so we've named an exchange to capitalize those entities with network requirement. For me, cash [indiscernible] the Board will take a cost at an appropriate time not to do with any.

Colocation is allowed for...

Equity.

Equity.

Commodity is [ not at all ].

Okay. So I guess if they do allow it, where is the next -- is it GIFT City?

We have space in GIFT City.

[Technical Difficulty]

Okay, I couldn't hear that.

Just in the -- okay. How long have they been deliberating over the colocation this year?

I mean [indiscernible]?

Yes.

Wasn't it a decade? I [ can't remember ]. A long time.

A very long time.

And then the...

When we were under the forward market commission, that time only was total colocation. So that has been continued, and we also not [indiscernible]. And I think given some issues, all those issues, equity markets, still there not that immediately would be looking for any colocation. But you have, apart from colocation, like you said. We also look for some [indiscernible] industries like coal, and coal is that. Coal...

Coal. Coal.

Yes, coal, C-O-A-L.

And EGR is another thing which the regulator has allowed recently, gold spot exchange. [indiscernible]. So that is kind of a thing. And also, like you also would be knowing that, that it give CT international bullion exchanges come into operation. We are also all [indiscernible].

You can [indiscernible] minority stakes.

Well, I think equal stake across filing [indiscernible] have come.

All the [indiscernible].

That's right. Okay. So these are -- apart from its colocation -- okay. That could be cash. Do you think it's in cash?

And even if you have to [indiscernible] even for HTS, if you are to transfer money and after transaction, so you need some liquidity.

Okay. Okay. And on the -- I guess, no one talks about it anymore. For a while, we were talking about [indiscernible] eating your cake.

No that's the...

Nothing.

That is [indiscernible].

Not even worth considering that option?

Liquidity drives liquidity.

Yes, an you're obviously -- okay. And with the IPO, that's completely make it [indiscernible].

We no idea. [indiscernible] This is...

[indiscernible] public domain.

Okay. Anything else that I should know?

Because you're following asking not only [indiscernible].

But sometimes, the shareholders [indiscernible].

That's what I'm saying.

[indiscernible] shareholders.

I mean before also. I think so. I'm not able to reconnect.

And [indiscernible] I mean, it's not a move to [indiscernible] machine. We got labor, inflation [indiscernible] right? [indiscernible] [Audio Gap]