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BSE Ltd, Asia’s oldest stock exchange, is creating a platform to attract more retail investors to trade in government bonds and is planning to add a separate segment for trading in commodities, even as it struggles to maintain its share in its mainstay equities business.

The exchange has moved from a single-product (equity) exchange till 2007 to expand into equity and currency derivatives, and interest rate futures. The aim is to offer investors more asset classes, according to managing director and chief executive Ashishkumar Chauhan.

“An exchange has to have a framework to provide as many instruments to trade, including government and corporate bonds. Till now exchanges have offered high-risk trading instruments, now risk-free assets have to be provided," Chauhan said in an interview on Monday.

While presenting the first monetary policy of the current fiscal year on 7 April, Reserve Bank of India (RBI) governor Raghuram Rajan proposed to throw open the government bond market to retail investors to deepen the market currently dominated by banks and financial institutions. Trading in such bonds is expected to be through stock exchanges.

Although BSE has made a quantum leap from where it stood five years ago, it has little choice other than adopt a scaled up “department store" exchange model, according to Patrick L. Young, executive director at DV Advisors, a London-based capital market advisory firm.

BSE is known for its equity segment and used to command a market share of nearly 45% till the early 2000s. In January 2000, the average daily trading turnover on BSE was 3,441 crore while that on the National Stock Exchange of India (NSE) was 4,297 crore.

Since then, while the overall size of the equity segment has increased to 21,584 crore, BSE’s share has declined to below 17% in most of the recent months with an average daily turnover of approximately 3,600 crore. NSE has registered a steady increase in its share with an average turnover in excess of 18,000 crore and a market share of nearly 84%.

Chauhan is betting on commodities trading, which is currently dominated by Multi Commodity Exchange of India Ltd (MCX) with a market share of more than 80%, with the rest being accounted mostly by National Commodity and Derivatives Exchange (NCDEX).

“Commodities’ trading is one piece that is missing and there is a big overlap among investors and members that trade in equities as well as commodities. Our competition also has a stake in a commodity exchange," Chauhan said.

NSE has a 15% stake in NCDEX, according to the commodity exchange’s website. While NCDEX is strong in farm commodities, MCX has the bigger share in bullion, metals and energy commodities. NCDEX has tried to compete with MCX in the metal space but has not met with any success.

The proposed regulatory regime with a single regulator for equities and commodities markets makes it easier for stock exchanges to launch commodity trading, but the launch does not guarantee liquidity, said Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities Pvt. Ltd, a brokerage.

The board of BSE has already created two subsidiaries to launch the commodity exchange and its clearing corporation. It is now waiting for further clarity on regulatory aspects due to the proposed merger of the Forward Markets Commission (FMC) with the Securities and Exchange Board of India (Sebi).

“Commodity trading is now a natural extension for equity exchanges like BSE and NSE. From a regulatory point of view, it is easy, but one has to wait and watch to see if they are able to get liquidity. Investors would surely prefer BSE or NSE due to cross-margining benefits as there is a huge overlap between investors in equity and commodity segments," says Bandyopadhyay.

When asked if BSE would look at acquiring a stake in any other commodity exchange, Chauhan said that BSE has tried to grow organically over the last five years and will continue to do that in the near future.

One can always differentiate itself in terms of speed, cost, quality, products or a combination of these factors to create additional liquidity in a segment, says Chauhan.

BSE has been trying hard to create a niche in the equity and currency derivatives segments, where NSE has a majority share. Based on its market-making scheme in the equity derivatives segment, wherein clients get paid for putting in trades, BSE has been able to clock significant volumes.

The quantum of incentives in the derivatives segment has seen a steady decline since it was launched in September 2011. According to BSE, the average daily turnover has been inching up even as the pay-out per crore is on a declining trend.

The third quarter of 2011-12 saw average daily turnover of 1,246 crore in the equity derivatives segment with a payout of 2,496 per crore. The quarter ended 31 December saw an average daily turnover of 1.29 trillion with a payout of 10 per crore.

In the currency derivatives segment, BSE had a 12% market share in December 2013, which has since then risen to more than 37% in March. In March, the average daily currency futures turnover on NSE and BSE was 11,095 crore and 6,540 crore, respectively.

“The key is offering a broad spread of products, which ensure a strong growth profile from the fastest expanding instruments. I never tire of my catchphrase ‘It is a derivatives world’, but at the same time, India’s stunted markets structure has vast expansion opportunities for instance in bonds. Can BSE win? I don’t know but I delight in better markets being built through head on competition with NSE," said Young.

While the competition between BSE and NSE impacts their market share in various segments, the two national exchanges have been able to maintain steady profits.

In the third quarter of 2014-15, BSE saw net profit rise nearly 14% to 36.88 crore, compared with 32.38 crore in the year earlier.

NSE reported a net profit of 169.50 crore in the third quarter of 2014-15, lower than 277.69 crore a year ago. The profit was lower since the year-ago quarter had recorded a one-time gain of 122.92 crore from the sale of shares in two subsidiaries and an associate company.

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