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Home >Opinion >Will NSEL put the group’s other exchanges in a spot?

With National Spot Exchange Ltd’s (NSEL) 5,500 crore settlement hanging fire, it’s not surprising that some trading members at the group’s other exchange, Multi Commodity Exchange of India Ltd (MCX), are getting jittery. The Economic Times reported last week that an MCX meeting with trading members turned stormy, as many members were worried about the security of their money lying with the exchange. The regulator, Forward Markets Commission (FMC), has been equally worried. Its chairman Ramesh Abhishek told The Indian Express on 6 August that it has directed MCX to not give any loan, advance, financial assistance or any commitment to any entity corporate/non-corporate without its prior approval. But this attempt to ring-fence MCX hasn’t soothed trading members’ nerves. Clearly, FMC should do more than just give directives. After all, there are outstanding positions worth 16,000 crore on MCX—although unlike NSEL, this entire amount isn’t owed; but only the mark-to-market difference vis-a-vis the transacted price. Still, if things go awry, FMC will not even have the defense that it has used in the NSEL case — that it wasn’t the exchange’s regulator.

A pertinent question here is how MCX trading members and their clients have behaved since news of NSEL’s payment crisis became public. To what extent have they cut positions and withdrawn deposits/margins? A large Delhi-based trading member says that most members would have already withdrawn excess margins that were lying with the commodity futures exchange. On the other hand, a senior official of a large trading house in Mumbai says that participants are continuing to trade, given the fact that MCX has no direct relationship with NSEL, and the former is a regulated exchange. To be sure, existing positions haven’t been cut by much. The exchange’s reported open interest has declined by only 9% this month. Open interest stood at a little over 16,000 crore at the end of trading last week, compared to around 17,600 crore on 30 July, a day before NSEL announced that it has postponed the settlement of contracts traded on its exchange. But most of this decline is on account of a reduction in positions taken in gold contracts (fall of over 1,800 crore), which prima facie appears to be because one contract expired on 5 August and it usually takes some time before open interest builds up. Likewise, the exchange’s turnover has been more or less steady at around 35,000 crore since July and doesn’t seem to have been affected by the NSEL crisis. One of the main reasons positions have not been cut is that commodity traders have no alternative trading venue to shift positions to. In any case, the experience of BSE Ltd shows that while its erstwhile governance problems did eventually lead to a sharp drop in market share, the process was gradual and spread over years. Even so, some MCX members want the regulator, FMC, to examine the exchange’s books closely and certify if the exchange’s settlement guarantee fund, investor protection fund and member deposits and margins are in order. The Delhi-based trading member says that if there is an independent assessment that all margins and funds are in place, trading may not be hit by much. The Mumbai-based broking official says that such audits are part of FMC’s regulatory purview in any case. All said, given the high stakes involved and given the backdrop of the NSEL payment crisis, FMC will do well to put all speculation on MCX to rest. Things will be much more difficult for the group’s other large domestic exchange, MCX Stock Exchange (MCX-SX). While MCX has enjoyed a near monopoly in trading of non-agricultural commodities, and traders have hardly any alterative to shift positions, MCX-SX has strong competition in the currency segment and is an upstart in the equity segment. The reputational damage from the NSEL fiasco—which included serious lapses in risk management, inconsistency in statements given to regulators and mishandling communications with trading members and investors – could well cause trading members to shift positions. Turnover in the exchange’s equity derivatives segment has fallen to under 800 crore in the past two trading sessions, compared to around 1,800 crore about a month ago. Turnover in the currency derivatives segment has been steady at around 10,000 crore, after witnessing a sharp fall in mid-July owing to the central bank’s strictures against currency derivatives trading. It’s true that both MCX and MCX-SX are legally different entities and they shouldn’t get affected by NSEL’s problems. In fact, both FMC and Securities and Exchange Board of India or Sebi (the regulator for MCX-SX) should ensure that these exchanges are ring-fenced. After all, why should those who participated in regulated exchanges suffer because of the mistakes made by an unregulated exchange and its participants? But the reputational damage to the group owing to the NSEL crisis can hardly be undone. Many large trading firms are irate because the group has not communicated clearly and has made inconsistent statements on the NSEL issue. MCX may weather the storm because of the lack of alternatives in the commodity futures market, but MCX-SX could find the going increasingly tough.

Of course, if regulators discover serious governance issues while investigating NSEL, they may conclude that the exchange’s promoters are not ‘fit and proper’ to run other exchanges – in which case the future of these exchanges could be vastly different, depending on their new owners, if any.

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