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

Gentlemen, thank you very much for taking your time. Perhaps before we ask any questions, we'd be very interested to get a very brief update from you. So any key points that you would like to make sure [indiscernible] that would be very helpful.

I'll speak about last quarter, the latest developments that happened in [indiscernible]. This year, we have seen very good performance in case of [indiscernible] option contract. compared to the futures, ever since the fixed margin reporting has been introduced within the U.S. It is a regulatory mechanism. It could be investigated by the regulator. So after the implementation of that one, we have seen good growth is being witnessed in our options. And marginally, there is a drop that you could see in our futures contract. But all our contracts today are optional futures contract. This essentially mean, at the time of [ expiral ], but all in the money contracts are going to get excercised, they devolve into the underlying futures, okay? So there won't be any [cash] agreement per se, they devolve into the underlying futures. And then depending upon the contract, whether if you say physically delivered contract or [indiscernible] futures contract then finally, it will result according to that [indiscernible] get resulted and agreement will get [indiscernible]. And that is how the contracts are [indiscernible]. Besides that, one recent development happened to be is the foreign portfolio investors have been allowed in this market. The exchange is yet to come out with regulations, I can say the guidelines of the circular in relation to that one. Otherwise, the framework has been already been set by the regulator or regulation.

Which foreign?

Foreign portfolio investors, okay? Earlier, they were allowed but they were allowed in a limited way like they are supposed to show that they were having an exposure in like gain commodities markets. Only those people who have that kind of exposure, they are allowed to trade in Indian markets. But those all -- whatever is a limitation with that, they have been removed now, its free to allow but they started with [indiscernible] contracts, okay? So today, we have two contracts out there which are contracts [indiscernible] contracts, the crude oil and the natural gas, both are the settled based on CME contracts. And we take their reference price, and that will become the basis for which we finally settled the contracts. So besides these 2 contracts, we have some indices but that fall under a different category of products. But India is [indiscernible] to pick up and recently the episode that happened at the LME debacle -- nickel debacle that impacted our metal contract because nickel happened to be one of the major components in out metal contract so that impact it. Otherwise, the other [index] contract, which is [indiscernible]. So that's the overview of the ForEx.

[indiscernible]

So regulations have to be like in our market, it is more of a progressive in nature. They don't want to happen everything in one go. Whenever they want to relax the markets, we will do it in a step by step manner. So that is what we have witnessed even in the case of mutual funds and other institutions. They have allowed in a limited [indiscernible]. We have already made some web presentations to our regulator on that particular aspect also. So those challenges if they get removed, we can see that greater participation is going to happen. So participation-wise, we see that they are allowing more and more participants that is what we have seen with the recent permission with regard to the [ foreign entity ]. Product-wise, still, I think they house certain regulations, which says that in case of metals, you cannot have multivariant contracts, new metals, like you cannot have multiple contracts, you can have only 5-metric ton contract or 1-metric contract depending upon what market needs, but you cannot have multiple variants. Before 2020, we were having both main and mini contracts, metals. So both were doing good. We were having from 5-metics ton contract, 1-metric ton contract. And also we were having something called odd lot treatment. So with that facility, we could be able to have the trading unit different from delivery units. But now regularly -- as to the current regulation, regulation says that you cannot have a different trading unit and delivery unit that will both should be seen, and we cannot have multiple variants. So we had to modify our contracts than in 2019. So these were converted into compulsory delivery contracts. And also, we had to modify that trading units. So certain challenges we had faced in 2019, that is the reason you could also see some drop now that was during that time. That time, even our options were not doing well. Options started doing well when we recently -- last year, ever seems like said after the implementation of this [emergent rate]. So the way we look at the regulatory, it's like they relax anything in a very [indiscernible] manner or you can that very stable manner. We cannot expect that everything will come in one go. So we have prepared and we are adjusting to the way they are opening us...

We have paid and we are adjusting to the...

So we cannot expect them to come in a very big way initially because even the regulator has allowed us -- allowed them only in cash settled products today. That means today, we have only 2 capital products that is crude oil and natural gas, which definitely are also traded in international market. It is not new only to the Indian market. Second part is their position limits are also been curtailed to existing client level position limits. And in case of certain category of foreign participation, it is only 20% of the existing client level. So that way, what -- the way we look at it is, it is like they are still to allow the participants in the [food space]. So it may happen in a very gradual manner. So maybe once they get the comfort, the enriched [indiscernible] Indian market. I think after that one, we can see that the markets are [indiscernible] good.

[indiscernible]

In the fall that they have witnessed in the futures is very marginal compared to the growth that we do witness. So the growth is substantial. I'll give you the number. Like I'll give you the last quarter's number which can be -- See, year-to-date in futures, this year, we have done 24,000 per [indiscernible] and compared to last year, it was INR 26,800 [crores] per day already in over compared to the options turnover, which is INR 25,500 this year. And last year, it was [indiscernible] . I mean you can see the phenomenal growth that we see in the options. So overall, if you look at the exchange level turnover, you would see that turnover is significantly higher, like we have done something around INR 50,000-plus crores together, both futures and options compared to last year, it was about INR 31,000 crores. So significant growth, but only thing what we have to look at it is the realization in options. It is not comparable to that of futures contract because [indiscernible] see, whatever we charge is based on the premium and not on the actual turnover. That is generally called as [indiscernible] turnover, okay? So initially we were -- the rough numbers, what we used to give you is about 1/3 of the turnover. Like I suppose if you do INR 3,000 crores in options, this equivalent to something about INR 1,000 crores in the futures. That was a comparison, it was about 33% of the contribution. Roughly, even though the turnover happened to be same, then the contribution would be somewhere about 33%. But the numbers happen to be good. It was something about we could see 40% of -- the realization could be around 40% of the futures. That is exactly.

So the exchange looking at to deliver model lease or areas to start trading?

Yes. So definitely, what -- now we have -- you can say that definitely we have shifted much focus on options because they're doing well. And only last year onwards, we started levied the fee on options. So for many years, it was not there. But given the trend, what we could see and the progress that was made by the options, we have levied that option. So what we plan to do is currently, most of the volumes are coming in the energy products, both crude oil and the natural gas. But we wanted to expand it. That means the spread or the share of this one you wanted to bring down relatively [reserve]. So what we wanted to do is currently in case of bullion contract, contracts are all of bimonthly contracts. We have a bimonthly investments. We have a February contract, April contract and June. So that means we don't have a contract each month. Currently, we have by Monte gold contract each month. Currently we have bimonthly gold contract. Gold means basically the main [KG] contract. Besides gold, even in silver, we have a bimonthly contract and we don't have the monthly contract. So the contracts [indiscernible] contracts are doing well. That means they have recent liquidity, but they are not -- definitely not comparable with crude oil and [indiscernible] but what we wanted to do is the value of the options currently depends on various aspects, like any [indiscernible] of the market, it depends upon the size of the contract and also depends upon the duration of the contracts. So what we plan to do is we wanted to introduce the monthly contract, which can reduce the value of the option. So with a lesser value, we can expect that greater partition can be there in this bullion contracts. So after energy, we wanted to push the bullion contract, gold as well as the silver contract. So we have, again, interestingly -- regulator have allowed multivariant in the bullion contract. So we have, even today, we have a 3 variants of silver contract like one is of a 30 kg, 5 kg and 1 kG of contract. And in case of gold, we have 4 contracts, 4 variants that we have rolled 1 kg [indiscernible] and the 8 gram contract and also on 1-gram contract. All are delivery-based contracts, all are having very good liquidity, even though the majority of the [indiscernible] is driven by the KG contract. Mean contracts are the primary volume drivers, but you could see decent liquidity across the contract variants. We have approached even the regulator for coming out with multiple variants in metal contracts, but that is yet to be [indiscernible] on by the regulator. But we are still making out representation to regulator.

Are all the contracts deliverable? As you just mentioned of gold for some [indiscernible] the financials...

All are deliverable in gold similarly in...

And other commodities?

All. Eventually levying upon the crude oil and natural gas and the [indiscernible] , all other contracts, delivery-contracts.

You mentioned the energy aspects and looking at other areas in the energy space [indiscernible] and electricity or...

So definitely, we are looking at electricity. We tied up with Indian Energy Exchange, this -- again, it is the license type of agreement so that we can be able to use their day head prices, that they trade in and day head contracts some term contracts. So we have signed an agreement with them. And now the Central Electricity Regulator, CERC and our regulator they are actually discussing upon the terms of the contract, like how the contract can be there. And recently, the CERC have come out with some regulation in terms of -- they have put a cap on the prices of the electricity. So now they are not immediately in vision to come out and with all the regulations for the electricity contract, they are looking at it. And I think once they come out with that kind of guideline, how the contracting division and all those things, I think you can able to get the approval from from outside, we have already applied to our regulator or offering these contracts. But once we get the approval, we will be going there and...

And given the income sharing between the exchanges...

Its small fraction, I can say that fee, whatever fee we get it, we'll give them a share. Percentage, we'll give it to them.

In terms of pricing, generally [indiscernible]. How involved is [ SEBI ] in pricing? [indiscernible]

Our prices have been constant for a very long time. Currently, it is like we have a 2-slab transaction fee structure where in the first slap is up to INR 350 crores, which is INR 270 -- INR 260 per crore. And anything over and above that INR 350 crores, it is INR 175 per crore. That is our 2-way slab system in case of futures. And we have a similar slab structure in options also which is between INR 50 and INR 40. So that is like an incremental slab system like everybody will be charged at INR 260 as long as the turnover is beyond that one, but the incremental turnover, they will be charged at one INR 175...

Is this based on the contract business or...

So it is -- if I remember, we look at the member -- and we look all the contracts together, we won't differentiate contract to contract. Together in the futures contract, how much volume they have done. And for all the contracts technically in that sense, it is the same. I mean the fee structure we made...

And is the pricing terminal or [indiscernible] volumes on the change [indiscernible] in last year as far as price goes?

Today, definitely, it is not giving any benefit to the competitors because we've been charging while the competitors are not charging any fee. But still, we have the 96% of market share is with us. So in a way, you can say that it is definitely not going to impact. That means that given the transaction fee, you have it, whether it is options or futures, we are not seeing any volumes going away to any other exchange. Secondly, whether what is the scope of increase or decrease in this one? And currently, we are not looking for any change in our transactions. We are focused -- more focused on improving our options turnover for them because we wanted to capitalize on the growth that what we have seen in the options turnover. So we are more interested in what participants to get added to the system and the products added to the system. That is what we are finally...

And you mentioned that this means [indiscernible] I noticed that the number of active clients applied from [indiscernible] Why has that been that sudden growth? Could you give us a line of sight type discipline in that 9 million?

So currently, what -- the number that we are giving UCC registration. So you may have a number of registered UCC across exchange. But what you have to look at is traded UCC rather than registered UCC because people -- many people could have registered. I'll give you the reason for it because today, ever since we came under the regulator SEBI because prior to that one, we were under forward market condition. Now we are under the SEBI regulations. Under this one, there is like integration has happened between market [indiscernible]. That means today, there is no need to have 2 or different entities need to be there for trading in commodities and equities. One entity can serve the clients in multiple segments. So why -- once we have migrated from that one to this kind of regulatory framework, we could see that as and when any clients get registered, and that means with any broker, they will ask him like what are the segments you are interested and they will restrict him across all the segments. But it depends upon the client to client, whether you would like to trade in one segment or not? Some of them are like after new [indiscernible] wherever they feel, wherever they get the returns, we would like to trade in that one. Some are maybe the people who are more -- that means on to commodity market, they will -- the focus on [indiscernible]. I'll give the numbers so that you will get the number. So as I'm looking at the active registered UCC -- if you look at the traded UCC year-to-date, and our market is INR 3.74 lakhs. Okay? Compared to last year, it was INR 3.13 lakhs. This is a year-to-date number. If you want to have some number for the previous year FY '21, '22, it was INR 4.7 lakhs. That is how the traded UCC participation look like.

And those [indiscernible] clients, they registered in their own right or they registered through a clearing process [indiscernible]

So anybody wanted to trade on the exchange, how to get routed to the numbers...

As which have [indiscernible] ?

We have around € numbers that out of them you can say that [indiscernible] numbers...

So there's 9 million clients that must trade through the [indiscernible] under the [indiscernible]. How does that relate -- how does that then develop through to settlement. Is it a member that's responsible for the settlement? And if there's a trade fall were a guarantee system plan? And you have a separate funds set aside for a contingency in that regard?

[indiscernible]

And I think the corporate will be around [INR 516 crore] or more... But that is only used for in case of any member defaults and [indiscernible]

And it is the member who is responsible for trade licensing and [indiscernible] exchange doesn't do that?

No. It is a member who is responsible.

[indiscernible]

So currently, we are working on like mocks are happening at our new trading platform. We are also planning to soon start the parallel [indiscernible] like both it happens numbers the system, that kind of mechanism that also we want to get it tested. Then after that one, there will be a migration. So what we are planning to do is we wanted to get it migrated by end of December. That is our plan.

Instead of contract houses, their are contract [indiscernible]

[indiscernible] In what are the frozen on the [indiscernible] so do it more than to fixed fee...

Yes, because like it terms have already been agreed upon. Was it the earlier contract earlier was there a...

[indiscernible] and opportunity for some of the competitors [indiscernible] to expand the injunction. Do you see in the recent [indiscernible] ?

Currently they don't have any market. Don't expect that the numbers will immediately get shifted and they will be taking away the market. So that we do not see any competition gaining auto, media...

Given your comments of share of 90% in the market, I suppose on [indiscernible] myself, why does this other exchange exist, some of the teams very, very passive. How do you think about that environment [indiscernible]

Everybody has the strength, like if you look at our competitors, they are in [indiscernible] currency derivatives market. Somewhere into some of the like mutual trading cycle. So everybody specialized it in their own area. And once you create a market and you have the liquidity. Liquidity is creative, then you cannot expect that liquidity will split between 2 markets. So this is a very rare occurrence that is going to happen typically in any market, whenever you create the liquidity after that one, it is very difficult for somebody use [indiscernible]

Back to your collaboration with the [indiscernible] On electricity, we give you the options and futures. That can be both financially settled. Can it also basically sell electricity?

Currently, they have not come out with the guidelines. They have traded annd joint committee CERC and SEBI. They created a joint committee. They have to come out with some balance and related to the electricity derivatives, how they should be, how can they be settled. I think once they come out with all these variation, then I think we can go and look in it.

In terms of collaboration [indiscernible] with overseas exchanges and how benchmark yourself in terms of expenses or these technology have collaborated.

We have several strategic alliances. And we said that some licensing agreements that earlier we used to have even licensing agreement with London Metal Exchange. Today, still, we have a licensing agreement with Chicago Mercantile Exchange. Besides this licensing agreement, we also have, what do you say, knowledge sharing agreement with several exchanges like Dalian, [Jang Yong], then you have Thailand futures exchange then London Metal Exchange, we have -- so we have several such agreements, and we are also a member of [IESCO]

[indiscernible] ?

So we have signed a consultancy agreement with the [Chittagong] stock exchange wherein we'll be providing the consultancy services to [indiscernible] so they wanted to set up a commodity derivative streaming amount [indiscernible] Still the quality is going on [indiscernible]

[indiscernible]

Well, we are open to that one. We have to see that how many such opportunity we do find, because currently we are not providing any technology that returns turnover. Rather we are more interested in providing the consultancy services. Whatever [indiscernible] knowledge we have gained over the year. Those things we want to share with that other exchanges [indiscernible] we can be happy to say see...

[indiscernible]

If you take the case of gold today, no matter whether large or small, they're not allowed to trade in overseas markets. They have to net how to trade in domestic market because RB has [indiscernible] certain regulations. So today, you find -- name any entity, you will find them on [indiscernible] completely hedging on [indiscernible]. In case of metals and other come items, our regulators have come out with some [indiscernible] DR regulation all the listing. So any Easter company, but all they have any exposure in commodities, we are supposed to make the disclosures to come up and what kind of commodity we have, [indiscernible] how the hedging exercises are is [indiscernible] on to operate. Anything all those things are in -- but they don't have any mandate fee -- there in other compel them to trading only in the exchanges. But now today, the our mission of in mutual fund once they start doing and their participation increase also liquidity, we can much anticipated... participating in our exchange. Even today if you look at it [indiscernible] open interest, 20% to 30% or so but [indiscernible] So that way it is like our hedges participation in domestic market is far better than the participation in global market...

[indiscernible] 24 hours a day...

So current regulations allow us to trade 11:30 am [indiscernible] depending upon the [indiscernible] 9 to 11:55, so roughly around 14 hours.

Feel as an exchange as we need the global commodities to...

So today, most of the liquidity what we see in the late evening. And we are immediate present in the late evening -- because after 5 o'clock , we see a lot of activity happening in the global exchanges which coincides with our market hours. So the this evening 5:00 to 11:55 it very much coincides with the U.S. markets. But if you see the potential, definitely, we will approach our regulator for any increase in the trading hour.

[indiscernible]

Stable growth we can, I don't see a very big growth that can happen in this space because our global markets, they can sell any data. But here, our regulations are very tight. We will not be able to sell that kind of...

[indiscernible]

What is the other major elements that you're seeing from a are [indiscernible]

Because we have around [indiscernible] do you have a back that has been deployed in intimate have on mainly data, net interest. Yes. The data is part of our operating income [indiscernible] Now we have not got any clarity on that, but we need some money... [indiscernible] Up some subsidiary something within a -- we have totalized I mean we need some cash. appropriate time on Board bank --

So what do we mean by [indiscernible]?

[indiscernible] Is around the existing market in the PD market for members to set up the servers very close to exchange server. So if you see [indiscernible] model, we have substantially more [indiscernible].

Whatever region I mean is there a rate of in the situation revenue are at one or how contracting that should be on...

I suppose the other way why don't we [indiscernible] might be relied and we have an outside in developing software on our behalf why we not own?

[indiscernible]

That TCS is bring to sell that software for the [indiscernible]

[indiscernible] After taking Welsh...

Thank you directors. Any of you else you would like to talk about? [indiscernible]

[indiscernible]

And do we have an active staff training program? We send our staff overseas to other exchanges to learn...

We do.

And finally, could you confirm that we have not discussed any material [indiscernible] information today please?

We are not disclosing...

Thank you very much.