- The Multi Commodity Exchange of India (MCX), the country’s largest commodity bourse in terms of market share, plans to enter the currency derivatives segment.
What is currency derivatives?
- The term ‘Derivatives’ indicates it derives its value from some underlying i.e. it has no independent value. Underlying can be securities, stock market index, commodities, bullion, currency or anything else.
- From Currency Derivatives market point of view, underlying would be the Currency Exchange rate. Thus it is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date.
- Currency derivatives in Indian see average daily volumes in excess of ₹60,000 crore. The BSE is the largest player in the currency segment followed by the NSE with the Metropolitan Stock Exchange of India (MSEI) having small share.
- Derivatives are unique product, which helps in hedging the portfolio against the future risk. At the same time, derivatives are used constructively for arbitrage and speculation too.
MCX plans currency derivatives foray:
- Recently SEBI allowed unified licence regime which allow all exchanges to offer trading in all segments such as commodities, equities, currency and debt.
- With the advent of universal exchange, the MCX has been mulling an entry in the non-commodity market also like currency arena for a while now.
- Starting a currency derivatives segment has been under continuous evaluation within the exchange and it has been discussed at the board level as well.
- While the board has been receptive, they have sought more clarity and hence the exchange is seeking further feedback from market participants.
- However dislodging incumbent market leaders in derivatives is difficult but as forex contracts are homogenous and not subject to licensing such as Nifty futures, the path for MCX will relatively easy.
- India has two major stock exchanges – National Stock Exchange of India (NSE) and Bombay Stock Exchange of India (BSE). Most of the share trading in the Indian equity market takes place on these two stock exchanges.
- The BSE, Asia’s first stock exchange, was established in 1875. BSE is one of the world’s fastest stock and one the largest exchanges.
- The NSE, on the other hand, was founded in 1992 and started trading in 1994, as the first demutualized electronic exchange in the country.
- The Securities & Exchange Board of India (SEBI) manages the overall responsibility of development, regulation and supervision of the stock market in India.
- Just like the equity segment, the commodity market is dominated by two entities — Multi Commodity Exchange (MCX) and the National Commodity & Derivatives Exchange (NCDEX).
- While MCX mostly has energy, bullion and metal contracts, NCDEX has created a niche for itself with agri-contracts.
- Prior to merging Forward Markets Commission (FMC) in SEBI in 2015, FMC was regulating commodities markets since 1953. After merger, the commodity futures market in India is now be supervised by SEBI, making for an integrated regulation of both the securities and commodities markets in India.
Integration of stock and commodity exchanges
- Recently SEBI approved amendments to the Stock Exchange and Clearing Corporation (SECC) Regulations to allow all exchanges to offer trading in all segments such as commodities, equities, currency and debt from October 2018.
- Currently, equity and debt exchanges such as the NSE and BSE are not allowed to offer a commodities trading platform. Similarly, Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX) and other commodity exchanges cannot trade in equities.
- Thus SEBI gave its nod for existing bourses to introduce equity or commodity trading facilities as they deem fit. In other words, BSE and NSE can now unveil commodity trading while MCX and NCDEX can start offering equity trading facilities.
- This decision will help participants in various markets a highly regulated, safer, more transparent trading, clearing and settlement framework when implemented fully.
- The BSE and the National Stock Exchange (NSE) have already announced plans for commodity trading under the new regulations framework.