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Multi Commodity Exchange of India Ltd
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Ladies and gentlemen, good day, and welcome to MCX Q3 FY '18 Earnings Conference Call hosted by Motilal Oswal Securities. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Sagar Lele from Motilal Oswal Securities. Thank you, and over to you, sir.
Hey, good evening, everyone. I welcome you all to the Third Quarter FY '18 Earnings Call of MCX. From the leadership team at MCX, we've got on the call, Mrugank Paranjape, who is the M.D. and CEO; and Sanjay Wadhwa, the CFO.First, I'll hand the call over to Mrugank to give a brief update on the quarter. We can follow up that -- follow that up later with questions. Over to you, Mrugank.
Thank you, Sagar. Good evening to all of you, and greetings of the new year. So from an MCX perspective, in the last quarter, there were couple of developments, both on the business side as well as on the regulatory side, which has a great significance. On the business side, in the beginning of the quarter, on the 17th of October, on the auspicious day of Dhanteras, we launched the options trading contract. Now in terms of the volumes and this success of the first contract that we had, very pleased to tell you that in spite of a fairly new design of an options contract, where the devolvement happens into the futures, and therefore, there is also margins which we have to collect from members prior to the devolvement, the entire cycle went through absolutely smoothly. We had more than 300 members who have participated in the first options contract. And from the first day till the end, the open interest was a continuous build up. So a very good response. In terms of scaling this further, there are couple of things which we are now looking at. At the subsequent meeting with SEBI and at the CDAC, we have presented what was the experience of the first cycle basis that we will now be approaching SEBI for an approval for at least 4 more option contract that we want to launch given that SEBI's initial guidelines allowed people to look at the top 5 contracts. So we are taken the internal approvals as well, and we will be filing with SEBI for more option contracts.In addition to that, given that options is a very new product from a commodities perspective, we are pursuing some schemes where we will look to have a liquidity enhancement and retail participation enhancement scheme, both of which we are discussing with the regulators, and hopefully, we will have that in the next 1-month or so, so that we can look at much larger injection of volumes into the options and get that as a full-fledged product for the next financial year.In terms of the regulatory developments, there were couple of ones which are -- which assume very significance. First and foremost, in continuing with expansion of the market, SEBI has put up the white paper for the participation of mutual funds as well as for the PMS providers. In addition to that, SEBI has done widespread consultation on how custodians can get active in this market to support all institutional members, and all the feedback is in with SEBI. Now in line with what has happened in the past, we expect that at the next board meeting of SEBI, this will get formally announced and the institutional market will really get opened up to commodities in a big way.The other big development was that at the end of the quarter, SEBI announced the date and time line for what people otherwise call the universal exchange, but essentially what will mean that we, as MCX, will get the opportunity of looking at a new segment. We have just had a discussion at our board, and we intend to look at definitely one more segment. The current view is to look at currency definitely, but at the same time, we will wait for the next board meeting to really confirm which segment we are getting into. But from our perspective, it's something which has been in the offering, which is something which we have been very well prepared for, and therefore, it gives us now the time and the vision to plan for it and make sure that we take the best use of these 9 months.Some of the other highlights, especially in terms of the physical deliverable side of our business, very happy to say that in terms of the gold deliveries, we've had some of the largest deliveries happening after GST. So for 2 consecutive quarters now, we've been delivering in excess of 700 to 800 kilos of gold on our contract, including some of the largest refineries in India. And as well for the month of December, we probably had the largest deposit in terms of cotton. So in terms of the physical connectivity of our business, which is extremely important, both for sustaining the open interest in any contracts and also something that is extremely important in terms of developing any new contract, I think on the physical deliverable side, we have a great story, whether it is cotton, whether it is gold or whether it is some of the other new contracts that we are looking at.Last, but not the least. In the last quarter, at the end of September, RBI had allowed bank subsidiaries to become members of commodity exchanges. We are very pleased that Axis Securities has already begun, and we are in the process by which the top 5, 6 bank subsidiaries will definitely become members of this exchange within this quarter. To us, this is a big opportunity to really bump up our distribution and that's something which we will make sure we pursue in FY '2018, '19. So I think those are the initial comments from my side in terms of the business and regulatory developments. Very happy to take questions, and wherever we have the answers, we will make sure we give them to the best of our ability.
[Operator Instructions] We'll take the first question from the line of Anand Bhavnani from Sameeksha Capital.
Sir, with respect to derivatives -- commodity derivative market as a size of a country GDP, in one of the presentations on our website, you have given examples of various countries, like in U.K., it is above 6; in case of China, it is 1; in case of Australia, it's 0.12. So different countries, due to structural features, have commodity derivative markets which are either very big or minuscule as compared to their GDP? Sir, how do you see in the long run this panning out for India? At what kind of ratio do you think we might see it in the long run?
So our view is that in the long run, a number that we should be looking at is probably may be a bit lower than the U.S., but definitely in the range that you have a Malaysia, China today, which means that if today we are looking at a U.S. which is at somewhere in the range of a 2.4 or China is at 1.98 as you said, Malaysia is something which is very close to the Indian number. So to us, the aspirational number will be to basically be in that China, U.S. range. We believe that's definitely doable, especially with the slew of reforms that we've seen. So institutions getting allowed, options being allowed, there is already a discussion on how index can be allowed, bank distribution opening up, all of these are things which were not there for 13 years in this market and have all happened in the last 9 months, we believe that should be the reason why we should be looking at a size of the Indian market, which is in that range of what the China, U.S. is.
And sir, any of these international markets have tax which is analogous to CTT? Just wanted to understand structurally, how they are similar or different?
So structurally, I think CTT is unique to India. It's not something which is prevalent elsewhere. And that probably is one of the reasons why -- when we did not have all the other developments, that became one of the reasons why our turnovers fell. But we believe with a lot of these developments, which have happened over the 9 months, the growth will come back to this market.
And sir, finally, one last question. Sir, any discussions with the government to incentivize hedging on Indian exchanges? Currently, a lot of large corporates, they find it liquidity wise and transaction tax wise better to hedge it internationally, and RBI does allow them given they have sufficient underlying businesses. So that actually takes a volume from MCX. So any discussions on those lines? And what can we expect there?
So I think amongst the things, as you mentioned, I think we've never said that you should not allow the underlying clients to make use of the best market where they get what they want. And from that perspective, if today, somebody is using an international market, that's not something which we are lobbying against. What we really want is to make sure that the Indian market is at par with the international markets. And there, we believe the long-term is in 2 parts: one, the institutions coming in, and for that, it's multiple reforms, of which custodian was an integral part, which also is hopefully getting addressed now. Institutions will create the demand and the liquidity that we need in the slightly far end of the contracts; on the other aspect, yes, tax is something, which always has played a role. That has been a request that we've always had. This year, in our representations to the Ministry, we have stressed. And knowing the history that there has been a reluctance to look at CGT, there is also a section 88E, which is something which all our members have been asking for. So restoration of the benefits under section 88E itself would be a big jump and that's something which we have represented to the Ministry.
Okay. Sir, I'll come back in the queue, but before I come back, I just would request if you can elaborate on section 88E? I'm not sure if I as a participant and investor and others understand it well. So if you can just...
Yes. So when -- way back when STT was introduced, what you paid as STT, you could claim as advance tax payment. So in a way, it was offset against your income tax liability. That benefit was taken away somewhere in the year 2008. When was CGT introduced, therefore, that benefit was anyways not available, either for STT or CGT. And what we've, therefore, asked is that what people pay as CGT or STT should be treated as a part of advanced tax and help people reduce their tax liability.
We'll take the next question from the line of Arihant Bardia from Catalyst Global Equities.
I'd like to understand with respect to the universal exchange license, it's likely to increase the competitive intensity. Why do you think that this is not going to impact your revenue significantly?
So one, yes, competitive intensity will go up. I think there is no doubt. Now the question is that, again, we already know that some of the exchanges have indicated what is their likely strategy, which is more going to be driven by sort of a predatory pricing. But from that perspective, we've been through this cycle once where 3, 4 years back when there was the crisis at MCX competition tried by sort of giving extremely low pricing to move away liquidity. So that's not the only way and not the only reason why liquidity moves away. So yes, competitive pricing will force us to give some discounts, but it's not as if it's going to completely dry up the revenues. And in the meanwhile, if all the measures that have happened in the last 9 months go well, if we are able to capitalize on that and grow the market itself, the pie will grow much larger and therefore -- and I think there are so many examples in India where competition has really grown the pie and not really eaten away people's cake. So I think that's the reason why we believe that overall the market will grow and that gives enough opportunity for all of us to play in it.
So sir, you are believing that the market will grow in that much size, overall your volumes will not get impacted.
Yes.
Okay. My second question is with respect to the options. Now I'd like to understand what is the kind of revenue you are targeting since we are down the line from options? And would that by some way impact your futures volume as well?
So there are a couple of things which we need to understand when we look at how we want to get a feel of options, both revenue potential as well as volume potential. One, except for equity index, I don't think there is any other number where options-to-futures ratio is a very, very high number. Internationally, options-to-futures number is, even in mature markets, at 20%. Our view is that in the long run, especially after index has also been allowed, in the commodity spectrum, maybe the options-to-futures revenue, volume can be something in the range of 50% to 60% at a healthy ratio. We are targeting to get to at least 20% in the first 6 months of the contract. Now having said that, if you then factor in the pricing that happens and because options you pay on the premium and not on the underlying, the overall impact to revenue in a longer-term, 3 to 5 years, is probably in the range of 15% to 20%.
We'll take the next question from the line of Kunal Shah from Edelweiss Securities.
Yes, sir. So particularly with respect to the...
Excuse me, this is the operator. Mr. Shah, may we request to use the handset, please.
Yes, sir. So particularly with respect to the activity levels, despite the movement -- positive movement in the commodity prices or at least they, in fact, being stable all through, still the overall volumes are slightly lower. So maybe when we are seeing that maybe overall we would look to expand the market. But I think as against the expectation, maybe Q3 was not that exciting and even as we go into January, the activity levels are not that high. So how do we look at this, maybe it's somewhere around INR 20 crores or INR 1,000 crores for pretty long despite all the efforts which have been made?
So I think, one, already the January numbers, if I just look at the last 10 days, is roughly 10% up. It's been close to INR 22,100 in the last 10 days. The second thing, which we'd like to point out is that one of the continued weakness in terms of the volumes has been the bullion sort of set of contracts. So in spite of having a very good number on base metals, which are up more than 20% on year-on-year basis, energy, which is not down too much, but it's really the bullion which has taken away. And there, we are -- again, looking at the indicators, we seem to be poised for a sort of clear rally in terms of all the bullion volumes. But in terms of the numbers impact, I think bullion is the reason why you've seen the subdued numbers in the last quarter as well. And coming back to what has happened, like I said, since January, it is already up 10%. And just in terms of what we are seeing in terms of the numbers in the last couple of days, even on the options contract, on the days when there has been little a volatility itself, the options contract typically tends to do about twice the previous day's volume. So interest is building back, and we are absolutely sure that this trend will continue as we progress during January.
But what do we assign this rational to in terms of...
Excuse me, this is the operator.
Yes, so sorry. What do we -- how do we see in terms of the rationale behind it? Because I think when we look at the prices, be it on a year-on-year basis or maybe on a quarter-on-quarter, it's almost flat, okay. But still like volume -- in a volume term, it is almost down, like say more than 30-odd-percent. So what is -- which kind of activity levels is actually coming off? Is it speculation, arbitrage? What is happening out there?
So I think since predominantly it is the bullion segment, that segment continues to face issues which don't seem to go away. We had demonetization, we had GST, we had PMLA, and all of which is continuing to add to the woes of that underlying segment, which is what is sort of creating a downward trend. And our belief is that as that segment really stabilizes, and as more and more people move into the regular and the organized market within that market, we will see the upside. So participation is not going down. The other thing you must appreciate is that, in the bullion segment, volatility has been at probably the lowest in the last 6 to 7 years. And that's another reason why bullion volumes are really very low. So very low volatility impact to the physical market and that together has created a sort of real low for the bullion segment.
Okay. And just lastly in terms of this bank subsidiaries, so now be it in terms of all the securities the way you highlighted in terms of Axis. So maybe in terms of be it HDFC or say ISEC or Kotak Securities, everyone could now become the member of COMEX, and they can trading on that, is it that way?
Absolutely, correct. Absolutely, correct. And that's what we said that, if you look at the top 6 or 7 bank subsidiaries, we expect all of them to be our members definitely within this financial year.
We'll take the next question from the line of Hiten Jain from Invesco Asset Management.
Sir, Q-o-Q basis, your other OpEx is up 20%, and your other income is down 36%. So basically, other OpEx has gone up from INR 10.4 crores to INR 12.6 crores, and other income has reduced from INR 24 crores to INR 15 crores. So what happened in these 2 line items?
So I'll come to the income very quickly, but which line item are you looking at?
Other OpEx, other expenses.
Okay. So 2 things here. So let me just address the expense part. One, we've sort of maintained from the beginning of the year and right till now and we are very confident of this going forward, that if you take away the variable expenses, and variable expenses in this case is the line B, that you see in the results that we have put out. So the 4b that is the variable expenses. Everything other than the variable expenses, we are absolutely confident that the full year number for this year will definitely be lower than the full year number of last year. Having said that, within the quarter, we had definitely a one-off expense, both of -- all of which was towards member engagement. So we had a couple of activities for our member engagement in terms of basically some activities that we do with members. So we've now started. And on a full year basis, these are 4 activities that we continue to do. We have an annual awards function. We have a annual meeting, which is conducted, where we also include that with some sort of an offsite visit to a location. We also have the India Commodities Day, which we organize. Again, these are all activities, which we believe deepen our engagement with the market. From a timing prospective, 2 of these happened in the last quarter. And that, along with options launch, is why you see a INR 2.2 crore jump there. But rest assured, that in terms of the overall expense line, we will definitely come at or below what we were for the full year last year -- for the full year this year except for software support charge and product license fee, which is completely linked to revenues. On the other income, as you would be aware, there has been a steep increase in the bond yields. What this has done is where we have investments in mutual funds and especially, where we have investments in mutual funds in the debt segment, about 83% of our portfolio is subject to mark-to-market risk. That particular piece is what has given a negative return over this quarter, also because we have been holding some of these instruments for quite some time. So if you look at these individual instruments, they probably have a, from inception till now, returns of excess to 9%. But we can't liquidate them because we will end up playing short-term capital gains. So it's not something where we could have reshuffled the portfolio and got out of it. At the same time, that's the reason why the other income is down. In terms of, I think, the debt market, this is a phenomena which everybody in the financial services is going to go through in this quarter because of the divergence in the yield curve and the sharp rise that we saw in the bond yields.
We take the next question from the line of [ Anand Iyer ] from Canara Robeco.
Sir, just based on your past experience in terms to transaction charges, what is the sensitivity of transactions to -- transaction charges to the impact on market share on volumes? I'm asking with respect to say commodities, where it would be -- it would be common commodities between NCDEX and MCX?
So Anand, there are few things on this one. One, there are very few common commodity, so I think it's very difficult to get that correlation. Second, I think if you take that 2x or 3x when people have done this. One, let's just go back 3, 4 years when competition dropped prices drastically compared to what we had, did it really impact liquidity in any big way? No. What it does, however, is that it forces you to probably react and respond more in terms of market sentiment and in terms of ensuring that your members don't feel very upset. We went through, as all of you would recall, a price hike, which we did in October last year. And while it's difficult to, again, segregate events because almost immediately after that, there was demonetization. But if you take the 40-, 45-day period between when we did price hike to the demonetization date, we believe that we were able to do the hike that we did last time with a corresponding drop off. So we had a hike of about 20%, 25% on the fees, but the drop in volume was close to 5%. So yes, there is a sensitivity, both when you raise fees as well as when you drop fees. But we believe that there is no very scientific way of saying that if you drop the next, you will get a wide result.
But it's safe to assume that in case any of your new competitor enters and they substantially reduces the transaction charges, you will be forced to match the price?
So going back to what I mentioned about the 3, 4-year experience, we will have to respond with some definite reductions, but I don't think we will have to match.
We'll take the next question from the line of Sagar Lele from Motilal Oswal Securities.
Mrugank, in the beginning in your initial remarks, you suggested pursuing some schemes for illiquidity enhancement on the options front. Could you elaborate a little more on that in terms of what they could be?
So essentially, we're looking at 2 or 3 aspects on the liquidity enhancement. One, we want to look at a market-making scheme, where the focus will be on ensuring that there is liquidity at all points of time on the various active contracts that are there. So the scheme is designed looking at that as the aspect and not really turnover. So the focus is on making sure that there is a bit an arc available with a specified spread and nothing more than that at all points of time, and it's the performance that the market maker will have to do. We are also looking at some few things in terms of additional incentives for -- especially the retail, where the incentive is more for activating clients and not really to make them trade as well as some incentive for open interest build up. So those are the 3 aspects that we are looking to do as we look at the liquidity enhancement scheme.
Next question is from the line of [ Ajit. M ], an individual investor.
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We'll take the next question from the line of Ashi Anand from Allegro.
Sir, my question was, there is a belief that post-demonetization, the fairly sizable dabba trading market could actually move towards organized exchanges. If you're looking at volumes, it doesn't really seem like that has happened in the case of commodities. Just wanted any thoughts around this?
Sir, actually, you're right. There was an expectation that post-demonetization, the sort of -- whatever, white economy or the regular economy would grow much faster as compared to the people who are not paying the taxes, et cetera. However, that has not actually realized in anyways. And that's true probably not just for our market, but for any other part of the economy as well. So clearly, there hasn't been a significant change. We don't know whether the people who used to be doing what is, as you mentioned, called dabba, don't do that anymore or whether they'll stop trading there, but they don't -- haven't come in here. But yes, it hasn't had any impact in terms of people moving in to the organized trade.
Okay, perfect. Just secondly, you mentioned institutional participation on the SEBI white paper for MFs and PMS'. As I understand AIF's already allowed or any sense in terms of what's been the kind of -- or how has the market feedback been on AIFs on commodities?
So I think while AIFs were allowed, one of the things which as you would know for institutional participation is mandatory is the appointment of a custodian, and the custodian regulations have unfortunately not been changed in tandem with that change in the AIF regulation. So today, while AIFs are allowed to participate, most of the custodians in India, especially because a lot of them happen to be bank entities, are not in a position to actually support them. So that is one sort of bottleneck, which we are all trying to work with SEBI and address. And we expect that, that will be taken care off in the next round of changes are announced by SEBI. To us, that is probably the biggest reason. There are other concerns, which the AIF community has expressed, especially in terms of some of the investment norms, but I think that SEBI will look at once they see how much trading is really happening.
Okay, excellent. And you're expecting the custodian issue to be taken up say over this next 1 quarter, hopefully?
Yes, yes.
We'll take the next question from the line of Prakash Kapadia from Anived Portfolio Managers.
Mrugank, on the bullion side, you were explaining to an earlier participant. So contrary to what larger organized players have reported in terms of sales or the strong outlook in terms of bullion and they benefiting as compared to the unorganized guys. So that seems like bit of contradictory, because if you looked at any larger player who is in the bullion segment, they seem very, very bullish from not only what reported numbers, but a stronger outlook going forward. So why is it not reflecting at our end? And in addition to that, if I look at metals, crude, directionally, all of them have gone up. So unless and until that doesn't reflect into ADT, so I can't understand this jigsaw?
So I think in terms of directional -- price directly resulting in volume, it's not always true, because the directional flow has to be backed with similar volatility. So it's in the base metals that you see a lot of volatility over the last couple of quarters and that's where you are seeing some increase in the volumes, but you don't see the same volatility in all of the energy segment. So NG, for example, clearly, during the winter seasons, has an upside and always goes up and that's what it has reflected this time as well. To your question on bullion, I have to be honest, it's something which we are ourselves trying to understand to the extent and we've met a lot of jewelers in the last couple of months as we are working towards the options launch. Our understanding is that while the larger participants, subsequent to demonetization and GST, have actually sort of reaped the benefit of being organized and therefore, getting the upside of all these reforms. Probably it is the participants who are not in this bracket and who are not really in any ways of participating and benefiting from these reforms are probably shying away from even participating in the derivatives market, so that's a hypothesis, but it is just possible that because of the deep linkages that GST has in linking everybody across the value chain, maybe some participants are hesitant to come on to the platform just now as they were earlier. But as you rightly said, we ourselves see the large participants who use MCX, their volumes are growing, but the overall volumes are not coming through. And we believe that is because there is still enough in the bullion segment, which is not in the organized sector.
Okay. And gold options, what is your feedback from some of the participants? Because post that Dhanteras, I think we were hitting some INR 3,500 crores in October, so it's been trending down, and we're down to, I think, at the current rate may be less than INR 1,000 crores. So what will change this? Will it be rupee depreciation? Will it be volatility? How will this spike come? What -- obviously, you talk about volatility. So it is just going to be volatility or currency? Because globally gold seems to be doing okay recently.
So if I just get it correct, there are 2 parts. One, if you're talking about the futures volume, definitely, it is linked to the low volatility that has gone down, and we believe the volatility is coming back and therefore, we will see volumes come through that. If your question is towards the options, I think there, there are 2 things that will need to happen. One, clearly, when we are competing in terms of share of mind from the trader community, we have only one options contract, whereas, they have 6 or 7 or maybe 8 contracts from the equities and other world to look at. So clearly, one strategy is to make sure that we are able to launch more options contract. The second is that retail, as we all know, doesn't get activated in 1 single day. So it takes time to build up, and we believe that build up will take like a 3 to 6 months period. And that's the one for which we are now going to make sure that we are also able to incentivize the market to get retail convergence happening. So options turnover, I think is completely linked to the retail growing to the extent that it becomes sustainable and also our ability to provide some sort of a liquidity enhancement initially. And third, getting more options contracts. But on the futures side, yes, volatility is what we'll have to wait for.
We'll take the next question from the line of Rahil Jasani from ICICI Securities.
I'm sorry. My question was answered.
Next question is from the line of Aksh Vora from Praj Fincorp.
Sir, just wanted to know on the margins front, is there any delta between options and futures margins?
So when you say...
Margins we gain on the profitability side.
Because when you say is there a delta, are you saying, can you use, whatever, unrealized profit or anything towards the other one? I don't get what you say in terms of margins. Margins have to be paid for every contract and they are distinct, and you need to pay the margins, both for your options and for your futures. When you're calculating the margins, especially in the 2 days prior to expiry, we also levy an additional margin, because for the buyers of options, we generally do not pay a margin. On the 2 days prior to the expiry, we start levying some margin because if they are in the money and they exercise, there will be some sort of a margin shock on the day of conversion. So -- but I don't know whether I got your question right, so I don't think the answer may be right.
Just I would say I'm -- like if we are earning -- in terms of earnings, if we are earning, say, a 20% margin on futures revenue, what kind of margins we are earning on options currently? Is there a big difference or probably just similar margins?
Okay. So you're talking of margins as of our earnings versus -- so there we are absolutely same. On every rupee that we earn, there is a percentage of our fees that we have to pay for our software vendors. There is a percentage of our fees which goes to regularly fees. And there's some percentage of our fees which go to product license fees. So the product license fee is currently not payable for options. So clearly, there is a slight delta there. But in terms of the net revenue from both the contracts and thereafter, it's absolutely the same. Profitability on both the contracts, therefore, is the same.
Okay. All right. And just sir, [indiscernible] question actually. There is actually what -- there is a very lack of awareness about commodity exchange or the metal-based commodity exchange or the products that we are serving or that is there in India compared to equity. Just my thought was that BSE or NSE, they have a barometer, say like Sensex and Nifty. So in layman -- for layman people who don't understand markets very clearly, they have a idea about markets from Sensex or Nifty. So there is no clear any such thing or barometer in commodity. I don't know if it can be possible or no. But it can give a benchmark to compare between equities or commodities and it can give a little bit of awareness of -- about the commodity. I don't know if it's possible or no. I just wanted your view on that.
So couple of things. One, you are right. Index is an extremely useful instrument when it comes to giving you some sort of a gauge of where the market is. And you have spot-on that index is something which people use to track markets. Second, we, at MCX, have had indices which are both sectoral as well as broad-based commodity index, both of which we have been calculating and publishing for the last 7 years. What we announced earlier in this financial year is that we have done a tie up with Thomson Reuters. We have branded our index under this iCOMDEX series, where you will see some indices which are broad-based and some which are sectoral. We are also working with SEBI to get index-based trading in commodities allowed. So absolutely taking your point, we are well prepared for the launch of an index. We have the data, we have the ability and we have the distribution capability for that index as well. And as and when SEBI allows trading in index, we will make sure that we get that message propagated across. So thank you for that suggestion as well.
We'll take the next question from the line Meet Jagani, an individual investor.
I was just trying to understand the prices which MCX platform takes is of one of their international exchange, right, they take the price of international exchange. Why so? And how as a local hedger we get exposure to a local price?
So I'm not too sure which commodity you're talking about, but there are -- the commodities that we refer to international prices are the ones where the exposure itself is very heavily linked to the international price. So if you are talking of something like anyone of the metals, if you're talking of even CPO, which is an agricultural commodity, the benchmark price in the world over is something which is determined somewhere. We believe where India is predominantly an importer of those goods, the price exposure can be very effectively hedged by the importer irrespective of the fact that you are taking a price from a foreign exchange. So the ability to hedge does not go away. In fact, the reason we take some of these prices are because they are the gold standard, if I may use the same word, in terms of what the price should be, and therefore, they give a very effective hedging tool. So for many of the base metals, they still look at the LME prices. There are, like I said, CPO still looks at Bursa Malaysia in terms of tracking the price. And the same with the crude oil. It still goes much more in hand with either the WTI, the Brent. So those are the prices to which you are exposed to as an importer or as a consumer of that commodity. And all of our contract give a very effective hedging mechanism to the investor for that.
Okay. And one more question which one of the previous participants also asked. Allowing -- giving memberships to them which allow themselves to trade on MCX or I'm misunderstanding something?
So if you see the RBI notification, it allows bank subsidiaries, which are currently allowed to do the distribution business of equity and equity derivatives, are now allowed to also do commodity derivatives. So this way you're talking of bank subsidiaries. Banks themselves hedging on commodity exchanges is not yet been permitted by RBI.
Next question is from the line of [ Shailesh Chathbar ], an individual investor.
[Foreign Language] And if answer is yes, then what is base for that?
[Foreign Language]
We'll take the next question from the line of [ Varun Dhanuka ], an individual investor.
I wanted to see if you could add some more color to the decline in volumes that was witnessed from the crude oil? I know you mentioned that the volatility was low on the crude front. But we start seeing declines even in the month of October, whereas volatility really just declined a lot in December. So if you could add some more color to the declining volumes under crude oil that we saw this quarter?
So again, I think, if you just look at the numbers, November was particularly actually again back in terms of the crude oil volumes. It was about INR 5,300 for November. It's only in December that we see a slight decline. And again, there, it did get compensated to some extent from natural gas perspective which saw an increase. So one, in the energy segment, in basket, of course, there is people who are using these contracts interchangeably from a status perspective. But lack of volatility was probably the only reason why we saw a slight decline in December. Nothing further that we think we can add in terms of that particular commodity.
[Operator Instructions] We'll take the next question from the line of [ Milind Doshi ], an individual investor.
I have two questions. One is, if I look at globally, the composition of breakup between future and option volume, it is 90% futures and approximately less than 10% in option segment. So what believes you that you will be able to drive volume in options? And second one, if we are to assume that like NSE, we will have a significant volume in options, then won't your future volume will get affected?
So I think on the second part, the thing is that most trading strategies also look at, what is called, delta hedging, and therefore, a lot of options trading strategies don't really eat away into the futures volumes. So to your point, as and when we see volumes build, we don't believe options will be in anyways a cannibalizing effect on our futures numbers. We haven't seen that even in the current launch, and we don't think that will happen. To your second question, the reason we believe options will do better, and you are absolutely spot on that internationally, options as a percentage to futures turnover, especially when it comes to commodities, is probably at about 20% number. The number goes up in India on 2 counts. One, it is in the equities market that we see that number drastically different. And the second is that within the equities market, it is the index which really does a phenomenally high volumes. So our belief as well is that from an Indian trader and investor perspective, index is something which they understand very well and index-based trading is something which they will understand very well, and that is where we will probably see better traction and volumes when it comes to options.
Okay. And my final question would be, we are saying that because competition coming in, we will still be able to retain our market share. But I want to just take a step forward saying, BSE will be offering currency commodity and equity segment. And as you know, it seems to be a universal exchange, you can use the same margin. But MCX will not be offering equity segment. So is that going to be a disadvantage to us?
So I -- that's something which raise an important point, and I would like to take this opportunity to inform all the people on the call that this is one of the misconceptions. We need to work very hard, I know, knowing that this question comes up everywhere. The reality is that, even today, the regulation allows for this to happen, and that is because the end investor actually pays margins to a member. The end investor pays the margins to the broker. And since brokers are already allowed to have equity, currency, commodity, all of that in a single-entity license, today itself if a customer walks in and pays some margin to a member who has membership across the segments, he or she can get the benefit of these multiple memberships. So effectively, as the entire market and from our top 150 members, who probably constitute 90% of the volumes, we have seen more than 120 of them have as well a membership in the equities currency segment. And all of these members are working towards unifying their memberships. So we expect that in FY '18, '19, almost our entire membership base will be a unified membership base. And if that is in place, the benefit of this multiple asset classes being available to the end investor with the same margin and across the same screen will be a benefit which will happen without the need of the exchanges getting into that segment. So you have a valid question, but I think it will get addressed with the members unifying and just BSE coming in with multiple asset classes will not pose a big threat to us because of that.
Okay. Just wanted to add one more color to that, that probably, while your thesis may prove right on the long-term, but probably for the next 1 or 2 year, where BSE wants to capture the market share and offers incentives probably that may affect negatively to MCX, right, because they will give lower pricing to attract market share.
It's a fair point, and I have answered this before as well. We don't think liquidity just goes of pricing, but yes, a very aggressive pricing by any new member, new exchange will force us to relook at our pricing strategy and could have some impact in terms of what the pricing result is.
We'll take the next question from the line of Rahil Jasani from ICICI Securities.
Yes. So just one question. In terms of futures contract, we have -- we had announced that we'll launch around 7 to 8 new contract, and we have already launched RBD Palmolein, pepper, et cetera, [indiscernible] till now. So which are the contract are you looking at in futures?
So I think at this point of time, we have just received approval from SEBI for a deliverable contract in brass. We are actively looking at launching that. The reason we are looking at it as well is because in the metals family, on the precious metals as you all would know in both gold and silver, we have the expertise and we've been managing deliveries for a very long time. But with this, we will be able to establish the ability to manage deliveries in the base metal segment as well. So that's what we are looking for. And after that, we will think of more lunches, again within the metal segment. Specifically to the energy segment, we are evaluating couple of energy contracts as well. So both in metals and energy, you would see another 4 or 5 contracts from the exchange in the next 6 months.
We'll take the next question from the line of [ Rajesh Choudary ] from [ Zenith ].
I just wanted to check on the bank subsidiaries. As I understand like SEBI had given permission to allow bank subsidiaries to be traded on the commodity exchanges. So where are we at the moment?
Yes. I thought I just answered that in the beginning. Axis is already on board. Their membership is done, and they should be starting business very soon. As for the other top 5 or top 6 bank subsidiaries, which constitute bulk of the market, we expect all of them to be on board within this quarter.
So how much impact do you see in the volumes if they all come on board?
So I think in the longer run, if they have a similar impact that they have in equities, that should add about 25%, 30% distribution strength to what we have today.
Okay. And secondly, in the last call, you had mentioned about new products like diamond and rubber being -- coming onto your platform. Where are we at the moment and the index features also?
So it is correct. Diamond, we are still working with SEBI. We don't have an approval. Rubber, we did get an approval, but looking at the market conditions, we decided not to launch. Index, we continue to work with SEBI to see how index-based trading can be allowed in commodities.
Okay. Because in the diamond like would it not be logical synergy between the current bullion segment, if you launch the diamond product.
Absolutely, agree. We are therefore, pursuing with SEBI, and we hope we can get an approval at the earliest.
Okay. And lastly, by when do you see the mutual funds and the PMS coming on -- to be allowed in the commodity exchanges?
Like I mentioned, the SEBI white paper closed for comments on 31st of December. We expect that in line with what SEBI has done in past, SEBI will now take this feedback, incorporate it, and hopefully, at the next SEBI board meeting, which will happen somewhere in February, they will approve mutual funds and CMS participation in commodity markets.
So they are also allowed to do some modifications in their papers also, mutual funds?
I didn't get your question.
Basically, they also need to seek permission from the regulator to come onto the commodity exchanges. Are they requested to do some modifications?
So I think, I would expect that if SEBI makes the modifications, they will do it across the 2 divisions. One is that commodity markets will allow mutual funds. And the mutual funds division will allow them to invest into commodity markets. They'll make changes on both sides.
Okay. And by how much do you see the increase in volumes if both of them come, mutual funds and PMS? Any rough idea, ballpark estimate.
Yes, let's look at it that, a, institutional participation is always slow to pick up. That's been our experience in equities as well. For those of us who were in the markets way back in 1994 and in 1999 when options were -- and derivatives were introduced, institutions do take the longer time to adopt to new products. At the same time, I think what it really will do for the market is build the longer-term interest and that's really what we are hoping to get in terms of build out of liquidity in the far-end contracts. But would be very early to have that against on what volumes do we expect them to generate.
Okay. And do you foresee any mergers and acquisitions being happening in this commodity space, after unified exchanges are allowed?
Okay. So nothing that I'm aware of.
Ladies and gentlemen, that was the last question. I would now like to hand the conference over to Mr. Sagar Lele from Motilal Oswal Securities for closing comments.
On behalf of Motilal Oswal Securities, I'd like to thank MCX to have given us the opportunity to host the call and to all the participants for joining in. Have a great evening ahead. Anything from you, Mrugank?
No. I just like to wish all of you a Happy New Year. We take on the next 9 months as a key execution challenge, because we believe that the regulatory developments in the last 9 months have really opened up lot of opportunities for the commodity markets. So yes, to a great and happy executing 2018. And thank you for being on the call.
Thank you very much, sir. Ladies and gentlemen, on behalf of Motilal Oswal Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.