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

Good evening, Mr. Jain and [indiscernible]. Welcome for this. Go ahead, please.

Good evening, sir, and team. Thanks for meeting us. So sir, we'll start with the recent challenges that we are facing in terms of implementation. So we understand that these are difficult things -- times and some of these processes are taking more time than what we anticipated. So maybe if you can give more insights where you are in that journey and how confident are we to resolve these kind of issues.

Sure. See, as we explained in the last investor call, we have mobilized the whole ecosystem and a good amount of members have participated, and then those who matter in terms of participation. And day in and day out, we have gone ahead and handheld them, conducted an awareness program, even if [indiscernible] technology commercialization, and almost all participants connected in that 2-months' time frame. But unfortunately, because of some [ commodities ] are taking more time since system crashes that have happened, we couldn't restore the next day trading by 9:00. Because in the normal course, you're supposed to start trading by 9:00 and you're trading 11:30 [indiscernible]. And unfortunately, we do not have [ as much intensity ] of equity markets as we have in commodities because they are paused by 3:30. The whole day is there for them to partner [indiscernible]. So being the window being very small, we have to ensure that the transition is very smooth, and we should be damn sure about starting the next day by 9:00. So have the trading by 9:00, we need to get the system by 6:00, 6:30 in the morning. And I mean, that didn't happen. On some occasions, it could happen; and in some occasions, it didn't happen. And we had to cancel some [ occasions ] also. So it didn't go well with some of the stakeholders, obviously. So that's how we have to defer the last minute. And while having before this, now we have been able to get control of the situation. And now we would be [indiscernible] come down, okay? Maybe there are some glitch, but even glitch should not be there [indiscernible] in the last few weeks [indiscernible] we are reasonably in control. So we need to now to conduct the regulation testing and then hope these things happen and then regulatory testing process, probably [indiscernible] should be done. So then we will throw it open to the market numbers [indiscernible] once again. Maybe this time [indiscernible] and we are determined to go live before the end of September. And keeping that in view, we would like to complete all the processes before that, which actually that includes even some of the audits also which [ are perfectly done ] and those audits have to be sequentially done. And so now we have to start them off, and then initial feedback [indiscernible]. Even as I'm speaking also, systems [indiscernible] with them but it's not [indiscernible] and so that is intact. We were also using [ adjusted trade generators ] to [ company as much as light ] data, [ light ] kind of load as we are trying to explain. So that's the way we're handling it. Yes.

And so volume is not a challenge, the number of trades, because options, volumes have increased so much. That is not somewhere impacted in systems.

They are no challenges. There are no challenges in the last [ 7 years ]. And I think some of the -- and once in a while, maybe the database [ has that glitches ] and then supposed to that failover of the other system did not [indiscernible] whatever configuration. Maybe the configuration, IBM glitch, the configuration that we do, whatever configurations that have. How many issues of this challenge given you an example, but they are all done, kind of.

So in this particular month, we are not done anymore like in the month of July. So we are...

[indiscernible] we are not that, but otherwise, we have been running the system.

So where are you seeing the progress? What it was like 2 months back? Whatever issues were there...

That's right. That's right. They are all getting interest. [ I don't know the only you need to get to control the year-over-year time lines, that's important ].

So what exactly are you doing in terms of managing this? [indiscernible], what changes or what...

See, what happens in [ our view ], let us say, we have to ensure that all our numbers come right, obligations are retained, there are some prevalidation checking. Now how does the system work [indiscernible] still happens? They are pushed to [indiscernible] management system. This management system [indiscernible]. So from the available collateral [ on the market is blocked ] then the same goes into the bank with the obligations [indiscernible]. Now that is the -- at the end of the day, in between some [indiscernible] in the form of let us say [ give up ] data. That is I've done great, I pass it to the custodian, so the margin will be reported on the custodian but not my -- it will not be [indiscernible]. So that's the give-or-take of each [ call ]. So I communicate the intention, then margin [indiscernible] the margin gets [indiscernible]. So all these accounting which happen [ in the process -- ] it will happen while [ already ] happens. At the end of the day, [ you get calls for all this to generate reports ] for the office or back office. Now some -- so there is the pre-validation fix. Before you go ahead and generate the brokers obligation, you need to see whether all give-or-take [indiscernible] are properly accounted for. All [indiscernible] have gone or anything you expect in an error, error [indiscernible] something they call, some of the system issues. Then you need to move it why it is catching an error [indiscernible] for some consideration, some mapping. So all these kind of things are taken into consideration. And once the prevalidation checks are all clear, then you take the extra step [indiscernible] that is where you will generate obviously [indiscernible]. Then there our third view of -- beginning of [indiscernible] part of the [indiscernible]. Then some processes can be parallel there, file generation, some process have to be necessary [indiscernible]. Just one is that we can just see where we take a space, [indiscernible], check why it is clear, correct that, reason that process, then get that process off. So it takes time for the diagnosing why it has failed and correct it and then [indiscernible]. So these are the ones which [indiscernible]. As I said, now it is coming under control substantially, and on many occasions we bought the system [indiscernible]. But yes, that's [indiscernible]. Now backups is another one. Backups also takes time. It's also [indiscernible]. Sometimes it takes more time. [indiscernible] there is a [indiscernible]. And we need to shift the [indiscernible] testing, we need to shift to the DR type. Now the DR type many people would say restriction that we must do it between [ 5 to 10 ] minutes, [ and then it's fine ], [ and the ability ] of the new system, it was taking on time and [ it's a lot between 4 to 5 ] minutes, it's more. That's -- we also again [ the quality which has to be chosen to ] also make good process. So end-to-end time, [ 4 to 5 ] minutes. [indiscernible] so they make a schedule of it will keep running [indiscernible]. So this is what the -- another thing we need to bring different approaches. That's really our key [indiscernible].

And so once these things are up and running, we will not have any challenge in terms of coming up with new products, [indiscernible] also is very calibrated. And some of the products which are not seeing any traction or less traction, any ramp-up, so in terms of orders, we will not have any challenge whether increasing the volumes or introducing it?

Well, there's no attempts to restrict the volume growth or anything like that. At this point in time, our focus has always been on the CDP going live. Once the tech migration is done, we don't need to look back into this. And we can keep on introducing new products. We already got [indiscernible] and the gold contract also options, monthly options. We will keep on introducing 1 by 1 like that. We will do that. We'll do that.

You mentioned that we are planning to go live by September. So our contract is still there by 31st of December as of now. So how will it [indiscernible] we invite the next shift to our own [ existing ] software, what happens? Do you still have that backup in the form of [ existing ] software or how does it work that...

Parallel systems should be run.

Here, you cannot roll a parallel system. The problem is that. Because the brokers have to work and onboard the systems. I don't think they will work on it. Let us say you're doing trading, okay, one can always say that the hardest thing [indiscernible]. Okay. And there is something called a parallel run which we're doing also. Using that specifically, so what are the [indiscernible] there, we're complementing and trying to see. But the timing is not synchronize. When you start pumping in, then it will just pump it [indiscernible] so that you're taking morning till night. And it should come in that time itself to see the real-life situation. Let us say you're hitting the -- you're exhausting the margin. But in the -- but then here, you will update all the margins, not update margins, collateral, so there's no cost on you going [indiscernible] that means in the parallel run the way we are doing it. [indiscernible] parallel run of the same [ business ] is a challenge. That means you're pumping orders [indiscernible], updating the collateral of all the people at that relevant point in time, then you will only be able to [ do that ]. It is a real-time system. If it's a banking kind of system, then it doesn't matter.

Moving on to next set of questions. Are there -- because of this increase in margins for certain products, the future volumes are going down, and considering our math of almost 40% options price we get vis-a-vis 1 future. So do you think the margin equation somewhere is restricting the investors to be more efficient in terms of trading?

Yes. As I said, one is the system-driven margin because of volatility, there's a what we call [ volatility in margin is increasing ], I have no problem. But there is a -- when we [indiscernible] increase the margins because of the NGS cover in the 460 -- how much is that, 450, 460 crores -- 450, 460 crores. And we are not having, fortunately, a trading, which is not substantial with open interest. Now that open interest is improving. They have also [ 30,000, 31,000 crores ] of open interest. That shows the strength of the market, okay? People are not just day traders. Now the moment you open it decreases your -- your [ SGS requirement decreases ]. Now [ SGS ] is primarily based on what is that [indiscernible] risk that you are taking, your metrics you're taking on the open interest trading, not the day trading. So with the increase in open interest, we need to provide for more of [ SGS ] cover. And because we have to contribute some of our [ costs to the ideas ], we start looking what the numbers contribute in the form of higher margins for [ renewal fee ]. That is where it is hitting us below the belt. We had asked [indiscernible] that we may be given a choice to contribute and whenever the [ SGS ] requirements goes down, then [indiscernible]. If that kind of disposition is given, maybe it is worthwhile to invest in [ SGS ] rather than [indiscernible] any of these [ treasury ], because the [indiscernible] net-net will be better if the volume is better. And it will go up definitely.

So this increase in open interest, do you think is a structural phenomena, because some [ royalty ] out-of-the-money options, their volumes have also increased, our premiums have dropped. So putting these 2 things together, do you think that this is something structural or because markets are trending, that's why I think this is happening?

See, when there is a volatility and then there is a directional movement, obviously, this will tend to go out of the money market because one day it will come in the [ money center ]. So for this reason, these contracts start holding [ some position than building that ]. But it's not just that the open interest can improve, although options have marginally improved, the open interest [ is involved ] almost INR 10,000 crores, INR 10,000, INR 11,000 crores of open interest we have it [ involved ]. And the [ LNG ] about 7,000, 6,000. And crude is how much?

[indiscernible]

Because their margin requirements is higher in crude, that's why 10% higher margin requirement. Is that the reason?

Come again?

The margin requirement in crude is 10% higher.

What? 10% higher? How much is it? I think 10% in H2 marginally improved. The assets [ is about ] 38%, 40% margin currently.

And that additional is lesser in gold, only [ 2-odd percent ].

Only 2%. That's right, 12%. But that is not the only reason. It's not the only reason. The gold could never be at a 38% in terms of margin. [indiscernible] But then the -- internationally, gold prices are [ not performing ] -- is going down in that sense. And I think the dynamics suggest that if we want to hedge in gold better, more and more hedging [ is needed ]. [indiscernible]

So in conventional terms, do you think that future volumes will continue to trend down and options volumes will continue to grow?

Option volumes going up, I can -- I would say, I can accept that kind of sense, which is going down is something which is not [indiscernible]. That's what my own assessments are. I think once we get the margins right, I think interest will also increase, [ is my rule ]. Because if the option writers are to hedge, the only correct that they can hedge is cash in certain market, only the [ unremaining futures ]. In the case of others, maybe [ the physical assets ]. In the case of gold, we don't need to take position of underlying [indiscernible] but then still have a gold [indiscernible] without hedging [indiscernible].

Have you also seen contraction in the volume -- [indiscernible] volume?

Yes, we are seeing that. But then it will take time. We just need to do in the month of March, if I'm not mistaken. It will take some more time.

But what could be the reason why there has been that kind of [indiscernible], we were very excited about this [indiscernible]?

Madam, when [ meaningful ] trading, it took time for the -- [ to gather mark ].

One more point, to look at it, there were all practical concerns [indiscernible] today, there are all delivery-based contracts. [indiscernible] trading unit as well as delivery unit, those should be the same...

Be the same. That's why we couldn't reduce -- only [ 3 main contracts in the matter ], whereas in the case of copper and nickel, we couldn't configure because of trading units -- delivery units is very big, almost [ 13 lakh ].

Who -- or [ do we see the thesis of this ] or focus on technology, obviously, we lost out on certain focus in terms of marketing or something which would have -- resulted in more volumes in our other categories? So has there been also a reason why like in the derivatives or these contracts, all these things have not synched up?

Well, we have a separate team, which is concentrating on the processing on the business development. They continue to do what they're supposed to [ do ]. And personally, I'm not ready to spend time in business development, no doubt about it.

But you don't feel that there's no reason why -- we could have done a little better in terms of...

Maybe we could have done a little bit better, whatever we see increment in the [indiscernible] margins.. But otherwise, sitting here on [indiscernible] pick up the phone and then speak to the client.

Coming back to the premium part of it. If this thing continues, again, I'm just trying to understand, if this option premium goes down and then our take rate also comes down, normally, is there something like, for example, [ basic ] or illiquid softer increase that [ commission ] for some of these stocks [ certainly ] traded.. So when your premium is lower, can it come down to, because I think it is 1.89 now, can it further go down? Or do you think that there's a floor at least?

The way that -- a way that the idea goes through, that you must not increase more fees on the illiquid context. You should then try them to get activated [indiscernible] whether it is near term or near in the money or far away from the money what we are talking about, if people trade in far away from the money, then obviously, [indiscernible] sections will also follow. So people don't trade in those, obviously, contracts otherwise also, because there is a fear of misusing the illiquid [indiscernible]. Certainly, it happens and then people do [indiscernible] of that. So I mean we cannot say that we will charge more for the illiquid contracts are some of the far away from the money part [indiscernible] I don't think that...

Then, there could be any floor for this premium, it increased, also grew to 4.5%...

No, but we have currently, how much it is, 1.5% or so...

1.9%.

1.9%. So that is not a small one in certain cash markets, that is the way to happen, okay? And I mean, delivery basis of the options from [indiscernible] that is data cost targeting. I have seen that the other day, whereas index option, it is just -- how much at this point? 2.0%. Okay.

But stock options [ really ] are more.

The stock options is high. Stock options. Index options -- and what is the [ second for index options ] [indiscernible]? It's just the volume is more. So to come to the point, to address your concern, if this is less, at least the volumes will be increased, so that we get compensate. That's a fair point, I understand.

Okay. Nickel, you said some of these fines are blocked. So there is possibility of lower other operating income also. So are there any other changes that we need to pay attention to where -- so because these fines by regulation, our requirements have gone high, and some of the float money also that we were getting those regulations, again, because of certain changes, that float is going down. So -- because in terms of our other income also has started coming down. So can you just give some perspective of what's happening there?

See, obviously, the float money is basically, when taken, are coming in the books of the clearing corporation. While float money is important, but many of the members and the clients are also becoming [ proactive ] and they want to reduce cost [ and they do ] more and more bank guarantees rather than cash. The cash will come in only, that volatility has a shorter duration, and they want to trade and pending new bank guarantee, the use of cash. So nobody would like to deploy the [indiscernible] permanent. Nowadays, the rates have gone up. So they would like to earn more interest on that. Why they would do [indiscernible]?

So kind of becoming more efficient structure...

That's finished.

Okay. How about, sir, onboarding new members. I think this quarter we have added 556 now the number of members.

Don't go by that number. My suggestion, you see how many [ reactors ]. So definitely, we have almost all 550, 580 numbers kind of thing. But actually, almost 400 are active, okay? Now some of them -- some of them may be having multiple memberships [indiscernible]. But [indiscernible] what is important for us, and that is what...

So that activation rate increasing, improving or remains the same on there?

The way that I look at it, while number of members is important, number of members are also going down because unified membership substitutions have come down. Okay. So you don't need to have in fixed commodity a member of financial services, a member [indiscernible]. But they are merging, we can move them into [indiscernible] unit. So the numbers will come down. It's a consolidation process that is happening. But otherwise, they are all trading. That's the way it is. [indiscernible].

And also the authorized person there declined again there. Should that also -- are we pruning some of these?

Well, while the number of authorized persons has come down because we introduced a fee about 2 years ago. [indiscernible] INR 1,000 or more? INR 1,000 annually. [indiscernible] so there are [indiscernible] and were able to do it. So there are so many people authorized and they all are shut down, cleanup. That's good for me anyway. It doesn't matter. Okay. But at least [indiscernible] INR 1,000 more, and that is adding a few -- maybe not big, but a few crores to our bottom line. I'll stop there.

So far we can see one brokerage had an issue with [indiscernible] they are asked not to onboard new distributors. These kind of exercises also help us to have better checks and balances with our members?

Well, I knew that order [indiscernible] but I do not know the antecedents of it [indiscernible] happened. But the CREs are coming to issue [indiscernible] the ones who are doing it. We don't find any breach in it [indiscernible], et cetera, okay, like operating from Bombay, you have said that maybe some other minor or something like that, this kind of thing happened, but I don't think -- linking of other is [indiscernible]. And all records are -- other than the [indiscernible].

Right. So there is a decline in trading volumes in July. So isn't there anything concerning [indiscernible]?

I see the problem and you are benchmarking against our own heads first, which is fair, nothing wrong doing it. But on a month-on-month basis, if you [ get it ], yes, there may be some months which are bad, some months which are good. And yes, I would not be able to say why in a particular month it was that. I understand that.

So in terms of electricity contract?

No further development. No further. But we are continuing our engagement with the regulators, with stakeholders, all that is happening.

Okay. And also one last thing, does clearing corporation is a separate entity? So we need to prepare that. It is not part of the responsibilities [indiscernible]?

Come again, I didn't understand.

Is clearing corporation [indiscernible]?

The clearing corp that is being developed is both clearing and risk management.

So risk management and clearing?

They are all part of the [ same region ]. Probably it is going from your percent, that [indiscernible] for some risk management solution. So that may be the reason why this was -- I mean look, currently, it [ has kind of latency number issue ]. If traded, you would [ tell ] how fast it goes to the risk management system and coming back [indiscernible]. So that is 2 microseconds -- no, milliseconds [indiscernible]. Okay? And maybe they benchmark on some of the other [indiscernible] should have [indiscernible]. Well, my personal view is it's good to have it, but how much incrementally you want to improve it, it will all depend on the competition between nations and all that kind of [indiscernible]. If some fine tuning can improve it, it's fine, right? But [indiscernible] also, it's not millisecond, that is great achievement. And we are doing online. I don't think most of the exchanges, even online, it's a bad [indiscernible] risk management.

So sir, you have answered all our questions. Thanks for your time.

Thank you. Thank you so much.