Major push for commodities trading:
India now has a unified exchange regime wherein stock exchanges are allowed to offer trading in commodities derivatives. BSE’s newly-introduced commodities derivatives trading platform has begun on a successful note with futures trading in gold and silver contracts hitting alltime peak with the traded value logging `5.78 billion on 23 October 2018. The gold contracts recorded a traded value of `5.21 billion. BSE has registered 170 trading members and 27 clearing members in the commodity derivatives segment. BSE envisages launching many commodities out of the 90+ commodities approved by SEBI.
Two experts - Aurobinda Prasad Gyan, vice president, Kotak Commodities, and Pritam Patnaik, head, Commodity, Reliance Commodities – give their views on bullion trading in the future.
Mehul Dani: What will be the impact of derivatives trading on bullion market?
Pritam Patnaik: The commencement of bullion trading in NSE and BSE will help develop the commodity market universe in general. While bullion as an asset class was one of the most actively traded segments in the current commodity derivative space, the scope to develop is immense. Existing exchanges have so far done well to develop the markets, but they have merely scratched the surface. Given the exchange’s existing equity/currency base, network, product capabilities and infrastructure, it is expected that the overall commodity market volumes will develop in due course. Additionally, higher competition generally leads to product innovation, competitive pricing, improved servicing, etc; all-inall a better client experience. Considering that fact that despite being in the top two importers in the world, we are price takers and not discoverer. Thus, with entry of more exchanges, apart from improved price discovery and trading volumes, there will be not significant difference in the spot markets. India imports roughly 800 tons of gold annually, and to add to this it has a sizeable scrap market, despite this only a very minuscule section of the trader/ jeweler community uses the exchange platform to hedge their exposures. With more exchanges catering to this market, we could see increased participation from the physical market participants.
Aurobinda Prasad Gyan: BSE and NSE are renowned names in equity trading and have now ventured in commodity markets. It should have a positive impact on overall commodity market in ways of attracting new market players and creating more depth in form of trade volumes. Bullion prices will continue to reflect demand supply dynamics and will not be affected by multiple trading avenues however more avenues will increase transparency. Hedging activity will increase if new market players enter the commodity space.
How are the transaction volume & value of gold-silver at all the participating exchanges likely to be impacted by the end of the current FY?
Pritam Patnaik: One needs to be realistic as far as trading volumes growth from new exchanges goes. These exchanges will take some gestation time to make inroads into the bullion markets. The exchange’s existing brokers will take some time to seamlessly integrate commodity backend operation and technology into their current equity platforms/operations, thus, one will have to set reasonable expectations. We can expect volumes to pick-up closer to the financial year ending.
Aurobinda Prasad Gyan: The idea of having multiple trading avenues is to increase investor base and this will likely result in higher trade volumes. We have already seen a pick-up in gold and silver volumes with onset of options trading. Diwali is high demand period for gold and silver and spot activity usually picks up and this will reflect in derivative trading as well. With launch of various paper products, Indian government is trying to make a shift from physical gold. Bullion derivatives can be used as the ideal tool to switch from physical trading.
Will there be a new class of investors traders added on the exchanges in goldsilver? Is a likelihood of flight of clients from one exchange to another?
Pritam Patnaik: With number of exchanges increasing, we expect to see the market depth and product innovation improving. Further, these exchanges collectively will be in a better position to represent their recommendations in front of the regulators, thereby paving the way for product innovation. The regulators have been already very supportive by facilitating a fillip to the commodity markets, in a short span of time we witnessed the introduction of options, AIF (alternative investment fund) & PMS (portfolio management services). With time, we expect this trend of innovation to only grow. The focus of the exchanges hopefully is to grow the market
by adding new market participants and not by cannibalizing existing participants. The potential of the market is immense, and the exchanges will focus on unlocking this very potential by reaching out to each participant in the value chain.
Aurobinda Prasad Gyan: India has a huge investor base but they are yet to try commodity trading. With renowned names like NSE and BSE coming into the commodity market, we are hopeful that new investors will come in. Flight from one exchange to another is not healthy for development of commodity market and should not happen if new participants and new products are targeted.
As a commodity broker, what kind of movement, preferences in asset classes have you observed since the launch of these new commodity derivatives?
Pritam Patnaik: The bullion, base metal and energy futures together constitute almost 80% of the exchange volumes. Since these commodity segment’s contracts are mirror contracts of internationally traded commodities, it has attracted higher participations and volumes.
Aurobinda Prasad Gyan: There is definitely more awareness about commodity market with new products and new exchanges coming in and we are set to see more queries from people who have so far refrained from investing in commodities. Commodity is still a small market in India compared to equity, currency or debt market however its share is likely to increase. We may not see a switch from one asset class to another, but we may see more market players venturing in commodity as an additional investment avenue.
How are gold ETFs likely to be affected?
Pritam Patnaik: There is no impact envisioned in ETF’s due to the growth in commodity markets. They cater to a different class of investor/trader.
Aurobinda Prasad Gyan: Gold ETFs have not seen much success in India due to a well-developed spot and derivative market. We may not see much effect of launch of gold and silver futures on ETFs.
How do Indian exchanges now compete with the major universal exchanges in leading countries? Have Indian exchanges been able to employ global best practices?
Pritam Patnaik: Indian exchanges have a lot of catching up to do with their global benchmarks, as far as volumes goes. Till very late, the commodity markets were restricted to futures only. In the last few years we have witnessed significant opening-up of the markets by the regulator. With the entry of options and institutions, we can expect the domestic exchange volumes to grow significantly. As for operation, technology and risk management, Indian exchanges are at par with the international standards. If OTC, international participation, institutional activity, etc, is allowed, the volume and operational/technological gap between domestic and international exchanges will narrow significantly.
Our current commodity platforms have been customized to best address the needs of all the participants in the commodity space, which were not a part of the basic offering. It is increasingly being witnessed that online trading has been the preferred platform for clients, especially in the retail segment. Within online base, mobile/app based trading has witnessed significant growth off late.
Aurobinda Prasad Gyan: Indian exchanges are still behind international exchanges in volumes. However, this is more due to nascent participation in domestic market. Exchanges are employing start of art technologies, competitive trading costs and adequate risk management policies and have wide range of products. We have an efficient platform which will develop further once it is challenged by higher participation.
How will different stakeholders - Indian farmers, exchanges, traders, investors, brokers, economy, spot market, government, etc - stand to benefit after derivative is extended to the entire spectrum of agri & non- agri commodities?
Pritam Patnaik: The issue is not of coverage, as existing exchanges cover the broad spectrum of agri and non-agri; the issue is of inclusion of market participants. A serious effort needs to be made to ensure increase in participation by actual value chain participants, be it farmers/miners, traders, processors, industry users, etc. This can primarily be achieved with the help of comprehensive educational plan for all the participants.
Aurobinda Prasad Gyan: Traders, hedgers and speculators are the three important parts of commodity market. Farmers, producers and consumers will increase hedging activity if they find appropriate products to match their product risk as well as good depth in form of trade volumes. Exchanges and brokers will benefit in form of higher profitability if there are more products and more participants.
Most derivative products are linked to spot market. Once we see more participation on derivative front, it will lead to more deliveries and activity in spot market as well. This will create further stronger link between spot and futures price and will also help curb price volatility in physical markets.
Government has been promoting hedging activity as it reduces impact of price fluctuations. It has launched various gold schemes to reduce exposure to physical gold and thereby demand for imports. If derivative products become more popular, government may be able to achieve its target.
Pritam Patnaik indicates that the exchanges will focus on unlocking the immense potential of the market by reaching out to each participant in the value chain
Aurobinda Prasad Gyan sees stronger link between spot and futures price. He believes more participation in derivatives will help curb volatility in physical markets