Commexes have delivered

Updated: Oct 29 2007, 08:05am hrs
MCX has not only grown to become the countrys largest commodity futures exchange but also a player of global scale in metal and mercantile contracts. In a freewheeling discussion with N Madhavan and Dhimant Bhatt of The Financial Express, Joseph Massey, deputy managing director, talks about the status of the commodity futures market in India and future plans of MCX. Excerpts:

What is the current status of the commodity futures markets in India

Typically, a futures market is evaluated on three parameters - liquidity, basket of commodities, and market efficiency. We have succeeded on the first two fronts. Today, we have a large number of commodities and enough liquidity for domestic companies to come and hedge their risk in the futures market. Efficiency in price discovery is also there. So we can say we have achieved quite a bit. A small problem that has remained is the last mile - how the farmer can benefit more from the futures market.

Can you explain the price discovery part

Physical markets are spread all over the country. Earlier, spot markets were fragmented and werent talking to each other. So if a farmer goes to a large market, he gets a better price than what he gets from a smaller market. The two prices were not correlated. In fact, the correlation was less than 40%. But ever since the futures markets came about, the price is transmitted to the entire nation and the spot markets got aligned. He gets a price which is correlated with the futures market.

Why are farmers not participating in the futures markets

The fact is that farmers will never queue up to the futures markets and deliver standard products. Also, futures markets will not replace the physical market but because of the futures market, physical markets will become more efficient. Today, because the physical market is so inefficient, people want to have the comfort of tendering delivery in the futures market. We have made significant efforts in the establishment of the National Spot Exchange (NSE) that link production centres with consumption centres for spot transactions.

What more do you think needs to be done

Firstly, intermediaries should to be allowed to come and participate in the futures markets. Secondly, institutional participation such as banks, FIIs, mutual funds is not there in the market. This is necessary if large corporates want to hedge their risk on long term and on a large quantum. This cannot happen in the absence of institutional presence. The other issue is product innovation. We are trading in generic products now but the market needs greater flexibility. We need synthetic products.

To what extent are corporates hedging in Indian commodity futures market

We have made available to market stakeholders - big corporations or ordinary investors - an opportunity to come and hedge themselves against volatility and price risks. While most Indian companies have until recently preferred to hedge themselves against price risk and volatility either on OTC markets or overseas exchanges, they are now realising the benefits of participating on the MCX platform. Our strategy of offering globally benchmarked commodities in bullion, metals, and energy that are settled in local currency, has started paying dividends. Even domestic companies are realising that by hedging themselves against one risk on overseas exchanges they give rise to another risk, namely, currency, against which they have to hedge themselves by buying a currency contract.

Where does MCX stand now and what are the future plans

Data up to July 2007 shows that in gold MCX has emerged as the fourth largest exchange in the world in terms of contracts traded after Comex (part of Nymex), Japans TOCOM and CBOT. In silver, it is the worlds largest exchange, in copper, the second largest after LME, in crude oil the third after Nymex and ICE and in natural gas, the second after Nymex. This attests to the fact that MCX has emerged as one of the worlds leading metals and mercantile exchanges. We should scale up in terms of reaching out to all users so the next drive is to ensure that we integrate those missing pieces of the puzzle. We believe that in the next one year, there would be an electronic spot market and a physical market as we see in the stocks markets - spot and futures. In the new products side, we have readied 30 synthetic products for launch and are working on 50 more. We would launch them once the law is suitably amended.