COMMODITY EXCHANGES THE SCOPE FOR GROWTH OF INDIAN COMMODITY EXCHANGES
DR. BANDI RAM PRASAD
[email protected] September 2015
Views are author’s own Not to be viewed as a comment or recommendation on any aspect of the subject. Growth Markets Advisory Services and its constituents hold no responsibility whatsoever for views in this briefing which is primarily made to promote academic discussion on the subject.
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The challenge ahead of the commodities markets regulation (Forward Markets Commission) with the securities regulation (Securities and Exchange Board of India) curreently in process is just not about integrating regulation of two market segments. True, comprehensive regulation of commodities trading in India which has seen so much delay is now getting the much needed reform, though the most important task ahead of it goes much beyond the scope of integration. India had more than a decade of experience in the development of the commodity exchanges. On the market infrastructure the evidence is extensive. The website of the FMC lists six national commodity exchanges and 15 regional commodities exchanges (some of which might be defunct now). The range of commodities launched by these exchanges is also quite wide and varied though bulk of the trading is often centered around a few. The concerns however are quite many. It is just one product, futures, which is what is all about commodities derivatives in India since exchange trading began in late 2003. The purpose of creating a national market for commodities, based on which few national spot exchanges came into being, is no where near reality or the expected outcome as the regulation of it was seeped in so much ambuity that the issue surfaced only after the sudden failure of a national level spot exchange. It is either overcapacity or suboptimal performance in the commodity trading space, that the top two national exchanges account for most of the trading with several of the regional exchanges functioning on the fringes. India has mostly lost out on gaining from the scope of market innovations and instruments during the major commodity supercycle that lasted through a fairly longer period in the last two decades. What is lost could be evident from the following. During the nine year period of 2006-‐2015, volume (number of contracts traded) in agri related futures and options worldwide grew three fold from 489 million to 1.4 billion and non-‐ precious metals, over seven times from 116 million to 872 million. Chinese commodity exchanges made rapid strides in taking global positions in the trading of several commodities that include agricultural and non agricultural. Dalian Commodity Exchange established leadership in Palm Oil (5), Egg Futures (9), No.1 Soybean (13), Coke Futures (4), Coking Coal (5), Iron Ore (3); Zhanghzou Commodity Exchange in Rapeseed Meal (1), White Sugar (3), Cotton No. 1 Futures (10), Rapeseed Oil (18) and Shanghai Futures Exchanges in Rubber (4), Steel Rebar (1), Silver (2), Copper (4), Zinc (7), Gold (11), Aluminium (16) (Figures in the brackets are global ranking for volume of trading) Development of the commodity exchanges in China has been very planned and pointed. From a chaotic 50 odd exchanges that prevailed in the early 1990s many of which were indulging in a speculative binge were brought down to three major national exchange by 1995 by a well coordinated policy intervention that within a decade saw all these three growing to become major commodity exchanges of global scale and significance.Commenting on the rapid growth of chinese comodity exchanges in trading of agricultural commodities, the recent report of the Futures Industry Association observed “In the agriculture category, the Chinese exchanges dominated once again. Ten out of the top 20 agricultural contracts by volume were traded on exchanges based in China. Futures on rapeseed meal, one of the main sources for animal feed, topped the list, with an 89.6% surge in volume. Futures on sugar, rubber, cotton and soybeans all rose by double or even triple digit percentages. CME’s Chicago Board of Trade was the leading agricultural futures market outside China.” That India has potential and could show progress could be evident from two aspects. In 2011, MCX accounted for nearly eight of the top 20 globally traded contacts such as Gold, Silver MIC Futures, Silver M Futures, Copper, Gold Petal Gold M, Silver Futures and Nickel etc. MCX was ahead of Shanghai and Zhanghzhou exchanges in volume of trading till as recently as as 2012. It was one of the first from the Asia to list in public equity markets and had a wide participation of pedigree investors. However, Crisis at the National Spot Exchange (NSEL) a subsidiary of Financial Technologies which promoted MCX and the regulatory actions that followed thereafter leading to changes in the ownership and management have badly dented the growth prospects for MCX in the last couple of
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years with volumes taking a plunge in 2013 and 2014.. China, which has trading only in futures saw its global market share rise to impressive level of 18 percent of the global futures volumes ((12165 million contracts), most of it achieved in the last few years where as India has just managed to scrape through a little over one percent market share. Table 1. COMMODITIES DERIVATIVES TRADING : A SNAP SHOT GROWTH OF FUTURES AND OPTIONS VOLUMES IN MAJOR COMMODITIES GROUPS ( number in million contracts) 2006 2007 2008 2009 2010 2011 2012 2013 2014 AGRICULTURE 489 645 894 927 1305 996 1270 1209 1400 FOREIGN CURRENCY 240 334 597 984 2525 3147 2434 2496 2119 PRECIOUS METAILS 102 105 157 151 174 342 319 433 370 NON PRECIOUS 116 150 198 462 643 435 554 646 872 METALS OTHERS 4 4 44 114 137 229 236 347 355 TOTAL OF ALL 11862 15186 17678 17700 22424 24981 21170 21511 21867 CATEGORIES OF F&O* GROWTH TRENDS OF EXCHANGES IN INDIA AND CHINA EXCHANGES MCX 45 68 103 160 197 346 388 264 133 NCDEX 53 34 Na$ na na na 45 32 30 SHANGHAI 58 85 140 434 621 308 365 642 842 DALIAN 120 185 3139 416 403 289 633 700 769 ZHENGZHOU 46 93 222 227 495 406 347 525 676 MEMO ITEMS CME GROUP** 2209 2804 3277 2589 3080 3386 2890 3161 3442 INTERCONTINENTAL 140 195 234 257 328 381 473 2558 2276 EXCHANGE** EUREX** 1526 1899 2165 1687 1896 2043 2291 2190 2097 NSE** 194 379 601 918 1616 2200 2010 2127 1880 BM&F BOVESPA na na 741 920 1413 1500 1635 1603 1417 LONDON METAL 86 92 113 111 120 146 159 171 177 EXCHANGE CBOE HOLDINGS** 675 945 1194 1135 1123 1216 1134 1187 1325 KOREA EXCHANGES** 2474 2709 2865 3102 3748 3927 1835 820 677 HONG KONG** 42 87 105 98 116 140 119 130 142 *including equity, interest rate, currency ** Mentioned to show the size of the F&O market in the respective exchanges as several of these have more asset classes than commodities and some have only equity segment. FIA Listing contains the number of exchanges that vary from 20 to 50. When the listing contained smaller number, certain exchanges are not featured. Volumes in number of contracts is one indicator though value of a contract may vary in size across exchanges that reflect on the value traded. Source : Futures Industry Association, Annual Volume Surveys , various years, With proper policy and support, Indian commexes too could catch up with the distinction that the Indian stock exchanges such as NSE and BSE have achieved in reaching the global derivatives league tables. Volume size of National Stock Exchange’s CNX Nifty Options was languishing in the 15th rank globally in 2006 which leaped to 1st position by 2014. Bank Nifty Options of NSE is ranked 18th and S&P BSE 100 Options is ranked 19th among the top 20 contracts globally traded in equity market
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segment. In 2014, BSE reported a 185% growth in the futures volumes following its launch of USD-‐INR Futures contracts that has seen huge surge in the volumes. An equally important trend that policy and regulation in India should take note of, thought it might not be such an urgent imperative for India in the current context, is the wave of consolidation taking place in the global exchange industry that could have significant influence on generation of global liquidity pools and its likely impact on the price discovery. Two of the most prominent global exchange groups, NYSE Euronext and NYMEX which were synonymous with powerful markets till very recently no more display their distict identity but come as a part of other exchange groups. The emerging trend is blurring of distinction between exchanges trading different asset classes and market segments as exchange groups such as ICE today own exchanges of all classes and types. Reforms on structural issues were always shied and kept away from serious policy initiative and intervention in India throughout the reforms be it in banking , insurance or capital markets except select instances of directed amalgation that the central bank carried out whenever a bank is found to be in distress, It is important to create exchange networks that hold signficant influence either through organic growth (as in the case of China) or through consolidation which is ever is found possible and relevant. As the regulation for commodity exchanges will now bealigned with securities regulation within a single regulatory agency, it is important to address not only issues of governance and management, market conduct, risk management and survellinace and supervision, but also strategic issues that will have long term impact and implication on the scope of the Indian exchange industry and its influnece in global finance. The true test of any policy is how strong the system will emerge and this will apply equally to Indian commmodity exchange industry. Table 2. THE CHANGING STRUCTURE OF THE EXCHANGE INDUSTRY
2007
2014
AUSTRALIAN SECURITIES EXCHANGE Australian Stock Exchange Sydney Futures Exchange
CBOE TOTAL
CME GROUP
EUREX
Chicago Board Options Exchange/ CBOE Futures Exchange
Chicago Board of Trade/ Chicago Mercantile Exchange/
Eurex International Securities Exchange
Australian Stock Exchange/ Sydney Futures Exchange
CBOE HOLDINGS Chicago Board Options Exchange/ C2 Exchange/ CBOE Futures Exchange
Chicago Board of Trade/ Chicago Mercantile Exchange/ NYMEX
Eurex International Securities Exchange/ ICE Gemini
INTERCONT INENTAL EXCHANGE ICE Furures Europe/ ICE Furures US/ ICE Futures Canada
ICE Futures Europe/ NYSE Amex/ NYSE Arca/ ICE Futures US/ ICE Futures Canada/ Singapore Mercantile Exchange
NYSE EURO NEXT Liffe UK/ Liffe Amsterdam / Liffe Paris/ Liffe Brussels/ LIffe Lisbon/ NYSE Arca Options/
NYMEX
NAXDAQ OMX
HKEX
New York Mercantile Exchange/ Comex Clearport/ Dubai Mercantile Exchange/
NASDAQ
Hong Kong Exchanges and Clearing
Nasdaq OMX PHLX/ Nasdaq Options Market/ Nasdaq OMX Nordic/ Nasdaq OMX Boston/ Nasdaq OMX Commodities/
London Metal Exchange/ HK Exchanges and Clearing
Source : Futures Industry Association
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