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

Yes. Welcome. Yes, go ahead.

Sir, last couple of years have been challenging for us a little bit due to tech transition and and some other regulatory cells. So all those things behind -- how do you see the outlook? Or what are the -- what you're doing to increase the volume, increase the participation.

I think as I said in the call also, now that we'll focus more on the business growth. And some of the contracts, which were to be shared earlier, we could not due to what are of [indiscernible] business, now that we will be proposing to launch them subject to regulator goals. And we will also look at the penetration into more type of diverse of participants, Like, for example, for FDA category 1, we have permitted, but [indiscernible] and permitted. We are not denied yet. I think that we want to do. And they are also asking for DNA facility, which will be -- looking at it -- like that, we will be working on it. So some of the new contracts, what we call shorter tenure options on the underlying futures and similarly [indiscernible] our contract for futures of course. And on the gold contract, some 10 gram gold, some things [indiscernible] -- there are no contracts.

Which is, I think, metal [indiscernible] bars which is something which is very exciting, China is very big.

See with our market is -- most of the spot markets are [indiscernible]. And the success of the derivatives market on organizing market may not be in their interest. So there will be challenges. So -- but then we need to overcome those challenges. And it will take time to grow, but it will grow. That's [indiscernible].

Users find value for hedging purpose and.

Absolutely. Absolutely.

If you look at overall volume in the future and like look at [indiscernible] other exchanges, NSE for example like the number of times. So in commodities, still option volume seems to be having a lot of room to go. So, how do you see it.

So first of all, I don't compare the equity markets and the commodity markets, that is an investment and this is for hedging [indiscernible]. Secondly, their contract sizes are very big as compared to the equity markets. And so obviously, there is a limitation to the extent. The number of people who can participate, but the volatility in commodities will continue to remain in the years to come. That's what the report of [indiscernible] also says that. IMF also sees that. So keeping that in view, I think there will be a lot of opportunities for the traders as well as from the hedgers. Hedgers risk mitigate their risk and traders to actually speculate and provide liquidity in the market. So I see that way. So will it be as much as the equity markets, may not be.

There's actually comparing apple and orange, we have to be mindful of that.

That's right.

But still from the current level there is a room for it to.

There is room for. And more than a single product, there should be multiple products, which are looking at it. So keeping that in view, I think there's a lot of room. In equities, you have so many listed entities. Even if you take top 100 or top 500 that many companies are there for trading. That's not the case with commodity market. That's right. Multiple duration contract in options, yes, that is one proposal that we have. That's right.

[indiscernible].

Yes. [indiscernible] capture. It is far away.

I thought I have to look into this.

No.

So just going back to the options part, when you say quarter duration, they wouldn't be only on the energy side and [indiscernible] volumes on energy. You look to introduce multiple shorter duration contracts or it would be not the energy product [indiscernible].

Yes. You see, subject to regulatory approvals, we propose to introduce the shorter option contract in other products also, not necessarily energy. And it will be serial contracts. In the sense one contract because as far as the SEC regulation can't be less than 11 days, okay? So you will see multiple contracts expiring in every week. Okay. So you will introduce 25th December to 25th January, maybe 15th December to 15th January. So in terms of tenure, contract is one month, but the expiries, weekly expiry will get it. A serial contract is called [indiscernible]. So that will give a larger room.

And I don't know whatever I understood that -- you say you have weekly expiry -- that what you're talking about -- you're talking about weekly expiry. Is it allowed on futures, on futures you could or you'll have to launch future contracts also for...

No, no. On the same underlying future you can launch multiple options.

You would have let's say [indiscernible].

You have a monthly future contract, currently you have.

Right?

Crude expires on 20 or 19 of every month. So there are 4 weeks from the time it is launched from the time it becomes near month. Okay, one month is there. So every week one, one expiry can happen? .

On the option.

Option expiry in the underlying futures.

Got it. And why do you need a regulator approval for this?

That's what the business rules are like?

So for any new contract, because ultimately energy is a...

Not only new contract, even existing contracts where we do not have a permanent kind of or a continuous approval this far. You need to submit a calendar of 1 year or whatever it is for approval to get one and so you can impose that. Then you keep on issuing it depending on the minimum number of contracts that should be there at any given point in time. .

Got it. The other thing I had is -- [indiscernible] double click on the site in energy look to an option. Is there any hedging element over here or most of it is hedged.

There are hedges. There are hedges. There are a few hedges. Because if it is only speculators, there will not be open interest. [indiscernible] open interest is also there in all this, in contracts. Then the open interest is somebody who thinks that the -- I mean they have some position in the physical market then only they'll keep the open interest.

But the time horizon for a speculator might be let's say 20 days, 30 days so that would also.

Day speculators, they square off. Don't see. [indiscernible] on all, they are day traders.

[indiscernible] I am just saying [indiscernible].

So if they happen to be speculators, not withstanding they have an hedge position, be that so. They may not call themselves as hedgers.

Is there a risk [indiscernible] the nature of trading. In the same [indiscernible]. Does it seem that we'll say a drastic [indiscernible] volume, whatever we see are sustainable or not. That's my ultimate question to you. I'm not getting into perspective. The question is, is this sustainable or not?

Yes. That's where the sustainability comes where there is a open interest, sustainability will come because those people who have an open interest, they have to square it off. Okay, somebody sells their position. So somebody has got a buy position that many also has got a sell position open interest, isn't it. And so they need -- I mean the open interest is the one which makes the people to [indiscernible] and then start. Okay. Now if you want to exit and if there's no liquidity, you'll have a problem. And because there is an open interest, people tend to give you a quote.

Just continuing on this, can you [indiscernible] increase in production contracts. Would it be only on energy platform? Or do you have.

As I said, depending on the regulatory approval, we have.

Your intention is to launch it on multilple commodity?

Subject to approval of the, yes, that's right. But we need to see traction in one option contract, then we can introduce multiple.

Multiple durations or multiple options.

Multiple durations.

First maybe you would introduce a 1-month contract, then see traction and then go for [indiscernible].

Weekly, [indiscernible].

Get into this weekly contract, so then -- so does it relate to a lot of -- so how the GST thing actually -- is it the constraint.

GST will come in the way only when it is a delivery-based contract. [indiscernible] contract, there's no problem. And in the case of weekly options contract, option will become on the expiry become a future, provided they don't close it up. Then the future will continue until the end and then only and may delivery will come.

So with this, we are introducing multiple options like will it encourage lot of people who are not participating because when it makes [indiscernible].

The CCT is [indiscernible] the option margin in the equity in the futures contract margins are high, whether it is [indiscernible cost of trading is less.

So you, you consciously analyze the nature of participant and you try to improve the overall quality of participants. For example, in gold, I'm still [indiscernible], I think is happening [indiscernible] India.

In gold, it's not permitted. RBI banned it. It's other way, maximum hedging in energy.

Corporates are fully using or there are some other ways where they.

User who is compliant with the law, they are all doing it here. They are all doing it here. We have a few metric tons of gold open interest on it.

Looking at the debt of world market, you feel like we are acting .

How much is the hedging. You published, no.

Sir, we have given that in the press release.

Not in the press release, daily you put up on open interest no on the website.

We have that.

What is that number? You have it no, Harsh [indiscernible] sends it no, mail.

Today's e-mail sir.

Yes. Today's e-mail's is yesterday's.

How do we increase the participation of foreign portfolio investors or even.

I just said, they are looking for DMA facility. And I think we said they should be able to come. Let us see.

How sooner that will happen. The FPI participation?

We are looking at -- FPS in fine -- that is always there in our system. We have to activate that.

This category 2 and category 3 of FPI is also.

Category 2 also is already readily available. We [indiscernible] to activate.

But what is stopping you from activating. You are just waiting for the new platform to get settled.

That's what -- that's what we will do.

Sir, these 3, 4 measures you mentioned about the...

15 metric tons open interest, gold, that too 1 kilo bars There are others also.

I don't know earlier, I used to think given gold is a global commodity, and India has this [indiscernible]. There is cost of trading, right? [indiscernible] very unique to India with [indiscernible]. Our FII is very keen in participating in this [indiscernible]. Globally they find other exchanges much more lucrative from a cost of trading -- how do you think of them?

Well, I mean that's one way of looking at it. If crude has to be hedged or traded why not trade in international markets. But there are also what we call by trading there are somebody [indiscernible] India also some margins they are earning, isn't it? So they will be earning that also. That's number one. Number two, there is a calendar spread has been a bit [indiscernible] and there will some in the U.S. in some maybe here also calendar spread. Okay. And this in and then they buy near month sell the far month, vice versa, what all -- they are doing it.

Happy to do it in the international exchange.

But if the price difference is more here then they will do it, no. it's in Indian rupees, that is in dollars.

One question. I don't know, this day [indiscernible] in the city. Is that a risk? Or is that something which for the practice is more in big city rather than [indiscernible].

See, most of are trading here for all these years. We said that, yes, we were [indiscernible] all domestic. GIFT city, domestic players are not allowed except for the [indiscernible] or whatever.

Got it. So GIFT city for you will not be a major.

We don't consider them. As of now, there's no trading there.

Would you say from your exchange [indiscernible] how much would be or retail [indiscernible] would be. I don't know that, but how much would we.

You have disclosure?

No we have not disclosed.

Indicators [indiscernible] key dominant is it retail for you. Are you a retail oriented or.

Algos are there [indiscernible]. Algo players are there no we [indiscernible]. We have about -- yes, algo is 52%, non-Algo is 47%, 48%.

But algos could be both, right? It could be proprietary as well as institutions, isn't it.

But you see the proprietary is 47% and client is 52%, [indiscernible].

How much your retail grew. Very difficult for you to [indiscernible].

[indiscernible] only set client, it could be a high networth. When you say retail.

I don't know any, I mean [indiscernible] commented. How many of them are [indiscernible] would not have the. So the reason we coming to this is when we look at certain discount broker, and when we look at their market share, whatever [indiscernible] -- that is quite high [indiscernible] 53% for the other commodity market share of [indiscernible]. I'm just trying to understand, [indiscernible] retail [indiscernible].

50% to 52% of what, what is the [indiscernible] is taking.

That's what, I was trying to get to. So 3, 4 drivers which you mentioned, right. One is obviously a shortcome contract. Second is your number of products, which you can add [indiscernible] and [indiscernible] in the DMF facility.

FPA and other the [indiscernible].

Out of these 3, which you think would be major driver of your volumes. I mean, which can trigger really 3x, 4x, 5x kind of increase in volumes.

I would not like to put any number on that.

Just trend-wise, which can be the potentially the largest?

No, see, again, we've not done any market survey as to which product will fly and then which product will not, okay. When we look at it, again, we look at the utility of the product to the market hedges, especially industry whether it will benefit or not. The other players like traders and other thing, they will anyway come if there is adequate liquidity, etcetera, etcetera. And so keeping that in view, whenever we introduce a new product, we look at what is beneficial in the market? That is the main thing, not the trader pursuit or [indiscernible]. The second, the entry of these new players, they are category 2 FPS. And I think it is too early for me to assess the impact of it and they are in big number currently operating. But more important for me is some of these algo players, who have not participated [indiscernible] exchange platform. They were waiting for the exchange transition to happen, so that they can settle and then also, they don't need to develop price the platform [indiscernible] for the older system and new for new systerm. So some of them are looking at now -- they have become members, but they have not started, now they will start. So that is another dimension of distribution.

[indiscernible] level, is there a fungibility of margin between equity and commodity, very seamless. So you see that getting addressed?

You see, fungibility will not happen because the way that we are looking at is, I mean, the solution that we have given and when we are asking is not approved or anything [indiscernible] just -- the numbers have after 3:30 capital left in the other exchange, we don't frequently moving that capital to the MCX now. We are looking for some kind of [indiscernible] where the NSE can block or BSE or any exchange block certain amount to the exchange that is needed, rest they can confirm to us, this number and these are the clients, who have gotten excess capital, then if member want to exercise that, use that -- they should be allowed to use that. Okay. In the [indiscernible], that's not what we are looking at.

But you see this will happen soon.

Well, the recommendation and suggestion of members also and the industrial support is also significant [indiscernible].

Is there a resistance towards this?

Resection may be there from competition, not from other.

Sir, third on the [indiscernible] pricing side, at least on the futures prices have been very, very stable for the last 6, 7 years at around [indiscernible]. Do you see any room for increase in the pricing, you believe that in the equities, they change every 6 -- 5, 6 years, 6 years.

We've not thought of it. But the more important is every pricing, it does impact them because the trade will be profitable of meeting expenses that are being paid in the form of taxes are covered. So to that extent, the definitely come down if you increase the price. But the liquidity may impact.

Larger part of the overall cost, right?

That is what you and I think. I mean, I wish that others also think that way, so that we will get benefit.

There no internal pricing mechanism, which we follow, let's say, as a discipline. That lets every 6, 7 years, we take 20% kind of increase or something like that.

No, we have not done that, but I don't think 6 years it is 6.

No, generally any tenure for that matter.

No, I think the future prices have been very, very similar, at [indiscernible].

[indiscernible] crores in last 5, 6 years. Only options have done very well, and that has been the biggest. So [indiscernible] mechanism as such, it's just we take a decision with the [indiscernible].

I've been asked the question to impose on options, the budgets for the long term. Let [indiscernible] minimum critical mark of [indiscernible] process -- and after that -- so I think you should allow that maturity to get in then we can do.

In last 6 years option, futures [indiscernible].

[indiscernible] asking charges. [indiscernible] slab structure is changing irrespective of the quality.

This question [indiscernible] future [indiscernible] will not go anywhere, right?

No. It went up right up to 33,000. It has come down because of the peak margin has been introduced. The upfront margining has been introduced. Then brokers have not -- and increase in pool quarterly. 45% upfront margin, 50% upfront margin, 75%, 100%. With the 100% [indiscernible] -- and margins being very high. Then the [indiscernible].

I didn't see the impact in the increase [indiscernible] from an equity exchanges we still see in futures [indiscernible]. Not to be extended through that?

Equity market, futures is not big. Option is big and that too index options.

[indiscernible] They also went down, but they are back to the level.

No. The people have shifted from the futures to options. That's the [indiscernible].

[indiscernible] on the future side. So let's forget option.

So while option is good, you want the futures also should now remain at.

I think it's almost a year now.

2 years.

[indiscernible] rule has been adjusted [indiscernible] because September 22 [indiscernible] And you got to [indiscernible]. It's been a year, so it should have gone up. But even this quarter, [indiscernible] think about what's really happening on the futures side that that you're not seeing this in a fraction where you've seen an often and learned.

Because the margins are also very high, no. Crude is 40%. Okay. NG is 30%. This 40%, 30% continuing quite for some time. Upfront margin of 40%, 30% is not a small number. As equity markets, you don't have this kind of [indiscernible].

Reducing lot sizes [indiscernible].

[indiscernible] that's why we have introduced mini. Now, minis have picked up.

And I was just thinking when you introduce shorter duration contract. So even in options the percentage of [indiscernible].

That [indiscernible] which drives volume, the shorter ones. Shorter option contracts. Premium is more.

But does that mean sir from a revenue per sale? .

From client [indiscernible] -- that's not [indiscernible].

You see today, I think it's [indiscernible] right on the option premium percentage of [indiscernible] around 1.8 to 2, whatever that range is.

It keeps varying, absolutely.

When you introduce shorter duration, this 1.8 will go down.

But you get 4x, no.

That's okay. But sir, you will also see volumes, longer duration. Actually, it might not see that revenue increase the same. What I'm trying to be approved and if you can correct me if you are doing [indiscernible] basically INR 100 of volumes over you're making -- on the shorter duration, you will make INR 1, but the actually 200 or 2x [indiscernible] in the absolute amount.

The quantum of premium it is less for a weekly. Quantum of premium may be less, but our rate per lakh will remain at INR 40 and INR 50, 2 slabs are there. So slabs do not change. But this particular volume, what you're talking about. Okay, will reduce, but then you have 4 weeks. For somebody, which is this 4 weeks. currently, it's 1 monthly contract. okay? More than 4x it will be because more greater participation will come in.

We don't think the loss from that 2 months going [indiscernible] volumes will increase [indiscernible] actually and we [indiscernible].

It will not be lessened, [indiscernible] 4 weeks. All this is equal to 1 month. Even if you break it into smaller ones, the sum of 4 weeks will be at least 1 month, but my expectation will be much more than the 1 month revenue, premium amount. [indiscernible] Yes. Premium amount only we are assuming no.

Regulatory process of giving approval for new products? Like is it very smooth -- is there a [indiscernible] or like at times we have to [indiscernible] for the first time we'll see so many kind of so initially, we [indiscernible] take more time? And is this.

Because of the migration, we will not introduce this one, but now it should be passed regulatory. It should not be a part [indiscernible].

Tech migration now absolutely, we are like, where we stand.

Fairly stable, that's all I can say. fairly stable. There are no problems. .

So our arrangement with [indiscernible] will parallelly continue for at least this [indiscernible] till...

No, it's only for 2 quarters, no. Till the end of December. Current quarter only, I think yes. you want me to [indiscernible] 1 more.

No, we don't want. It means now this is in December, it will just come to end. And is there like any compensation mechanism for the -- I mean, finally, like can we get damages from software provider or any contract [indiscernible].

[indiscernible] one-sided contract, it was entered in 2014. So obviously, if at all if there are any trials it will be in their favor, not in our favor.

Can you remind us, after you migrate to the -- I mean, you've already migrated its platform, as software support charges go down by how much.

[indiscernible] we are not disclosing.

Irrespective of whatever wins you do on [indiscernible].

Yes, it is based on the contract value, rather than..

[indiscernible].

[indiscernible].

Will it be lower than technology expenses, which we've been incurring the rate of INR 85 crores to INR 90 crores prior to the [indiscernible].

Between FY '20 to '22, I think the technology expenses was typically INR 85 crores, INR 90 crores.

In terms of [indiscernible] AI -- have you evaluated how much of the operating expense [indiscernible] cost in terms of [indiscernible]. So just [indiscernible] expense part -- what efficient can we be over there [indiscernible] that.

I'm not too sure whether we can reduce the expenses on the [indiscernible] and all. In fact, it will keep, some [indiscernible] there will be some [indiscernible] because the regulatory compliance requirements are increasing day by day. And so probably either we go the expectation from MI is that we would be able to have complete control over the focus also. So [indiscernible].

Okay, so you are responsible even if the brokers are not compliant.

So that is where our focus should be, so you must ensure and you sit there and monitor or automate the processes. And whatever is happening, you should be able to know all [indiscernible] of expectations there, [indiscernible] so something of that kind. So obviously, we need to increase while automation is good beyond a point automation does not help.

And just on the SGS that we saw this quarter, what is this [indiscernible] and is it [indiscernible] something recurring? Or is it linked to the volumes you do in this [indiscernible].

It is linked to the purchase scenarios, that [indiscernible] formulas are there, different scenarios. I don't know how many more, how many, maybe 100 or 90 or whatever it is. So also they take 15 year historical high low [indiscernible] for each product. And then also they consider 2 [indiscernible] going bust. And top 50% have been open interest members help position going burst. . And if you have to wind up those positions and [indiscernible] what will be the loss [indiscernible]. Okay, after account for the margins that you have collected at is what we should be providing in the form of -- OI keeps on increases, then this will increase. Either we have to increase the margin.

Correct, that sets of the requirements [indiscernible].

Okay. That is why we are not reduced [indiscernible] margins from 40 to 30 or 30 to 20. For [indiscernible]. Okay? So it is a good to have problem because as I said open interest is the one who brings more liquidity to the exchange. That this is good for the [indiscernible].

This formula given by the regulator or [indiscernible]. The formula is already known to you.

Everybody, everybody.

Okay. So if you [indiscernible] say to borrow the [indiscernible].

You can average for the whole month. Open interest [indiscernible] then speaking our open interest is INR 45,000 crores or INR 6,000 crores. And whenever there is a -- what you call expiry, the crude oil options will expire, then gets closer. Then it will again build some. Okay. The future will expire on 20th of the month. Then again, that will go down and something else will be peaking in.

This is something. No, you can't in margins, right? You increase margins because [indiscernible].

You increase margins, but then again -- then the cost of trading will increase. Okay, so the way that we need to look at it is, I don't mind you contributing more to the LCS, reduce margins, increase volume. What you earn on your funds is 7% or 8% whatever it is by deploying funds there in the form of by reducing margins more trading volume [indiscernible] much higher. You need to do that trade off all the time. So it is done.

Yes, it's done.

Thank you. Thanks to all of you.