Trading activity on the Multi Commodity Exchange ? the most prominent company of the Financial Technology Group ? has dipped in the last three weeks by nearly 10%.
Besides the recently introduced CTT (commodities transaction tax) that has affected the participation since July 1, 2013, the payment crisis at the group entity NSEL has also taken a toll as brokers turned cautious in dealing with all group exchanges.
?MCX boasts of proper regulatory and risk-management systems as it is governed by the Forward Markets Commission. However, given that it has the same promoters as NSEL, brokers have turned conservative in dealing with the FT-promoted futures exchange,? said a head of commodity desk at one of the brokers.
The average trading activity in August so far has fallen to 6.5 lakh contracts, compared to 7.2 lakh contracts in July. The average turnover in the period has dipped to Rs 25,939 crore from Rs 28,745 crore in July. During the same period, rival NCDEX has observed a 1% dip in its average turnover to Rs 3,089 crore.
Brokers say that the manner in which the NSEL management handled the R5,600-crore payment crisis that broke out in the last week of July after the exchange deferred outstanding settlements, has also broadly hit commodity market sentiment.
While Financial Technologies, the flagship company of the FT group, owns nearly 100% stake in the National Spot Exchange (NSEL), it holds 26% in the MCX. Other prominent institutions that own more than 2% stake in MCX include Euronext ? the European arm of NYSE Euronext/IFCI, and National Stock Exchange.
Market observers pointed out that during the last two years, instances of sharp correction in the equity market gave opportunities to push for commodity trade ideas. However, that is not the case this time around.
?Tapping fresh investments in the last one month has become difficult as investors have turned apprehensive towards commodity market products post the NSEL issue, which was positioned and marketed as an exchange even after regulatory vacuum ,? said an expert.
An official from a domestic brokerage house that deals with MCX confirmed that investor inquiries on any spill-over impact on MCX has gone up in the last two weeks, although the same may not have lead to curtailment in trading.
?MCX has efficiently placed itself as the sole exchange that offers liquidity on the commodities like precious metals, base metals and crude oil. Given that substantial hedging activity is carried out by entities that have related businesses, it is less likely that the volume on MCX would completely slump,? he added.
Some brokers have also taken note of the stern views taken by commodities regulator – Forward Markets Commission – on the NSEL’s settlement plan. ? After the FMC raised the issue of NSEL directors losing their fit ant proper state in their Tuesday’s communication, brokers feel that the board would take greater responsibility in tackling the NSEL payouts,? said an executive of the impacted brokers.
In the letter addressed to NSEL board in which the FMC raised doubts on the exchange’s intention of settling the outstanding payouts, the regulator said ? … non-settlement of outstanding trade reflects on your credibility and reputation which is a key ingredient in meeting the criteria for ?fit and proper? person..In the eventuality of you losing your status as a fit and proper person, you cannot continue to hold directorship or share holding in any of the recognized futures commodity exchange,? the letter said.