Universal trading licences: Equity exchanges have advantage over commexes

STOCK MARKET - After allowing universal broking licences, the Securities and Exchange Board of India (Sebi) has now allowed setting up of universal exchanges – this means stock exchanges can now enter the commodity turf and commexes can also do stock exchange business like dealing in equity and forex. The market regulator has given exchanges three quarters to prepare for facing competition. However, there does not seem to be a level playing field – commodity exchanges are perhaps on a weaker wicket.

An industry official says: “MCX has better scope to first enter forex derivatives, as forex has a natural extension for commodities. NCDEX will now discuss the possibilities.” On the other hand, BSE and NSE are preparing to launch non-agri derivatives. NCDEX seems less worried as agri is its strong point where other exchanges will not rush to enter.

Several market intermediaries, industry officials and observers suggest that commodity exchanges appear weak, despite their dominance in their respective fields. The reason: Equity markets have evolved over time and have time-tested infrastructure, participants and products, so they have much more diversified revenue streams. But commodity exchanges, among many drawbacks, do not have enough products, they need to further develop market, and they do not have co-location or institutional investors.

The strength of commodity exchanges, especially MCX, is that they have vibrant energy and metals segments, where contracts are cash-settled and prices are derived from global exchanges like the London Metal Exchange for metals and the CME for energy contracts. Since these exchanges are leaders in their respective segments, equity exchanges will find it difficult to get global reference prices for settling their contracts. Sebi has, however, told exchanges to improve physical delivery and “only cash-settled contracts are less preferred by the regulator”, said a source. MCX will also work hard to retain this tie-up before any exchange takes it away.