Currency options trading comes to a halt at MCX-SX
Exchangeawaitsapproval to launch fresh contracts after it says it submitted net worth and business plans, as asked by Sebi
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Mumbai: Currency options trading at MCX Stock Exchange Ltd (MCX-SX) has ground to a halt, depriving India’s youngest exchange of one of its last sources of revenue.
On 15 September, the Securities and Exchange Board of India (Sebi) had renewed the licence for the exchange, originally promoted by Jignesh Shah’s Financial Technologies (India) Ltd (FTIL), citing specific conditions.
According to two people familiar with the matter, currency options trading was suspended as market regulator Sebi did not give permission to launch fresh options contracts until there is clarity on its net worth and long-term business sustainability.
In its licence renewal letter, Sebi had said that the exchange will have to prove an undisputed net worth of ₹ 100 crore within three months and submit a business plan on the “long-term sustainability of the exchange".
It had mentioned that the exchange will not be allowed to launch any fresh contracts till the net worth requirement is fulfilled.
On Monday, the data on MCX-SX website showed zero volume in currency options, while the futures segment clocked a turnover of only ₹ 964 crore. The exchange last reported an open interest position in currency options on 29 December.
Open interest refers to the number of outstanding contracts at the end of the day.
A relatively low open interest-volume ratio indicates a higher dependence on day traders who close their positions by the end of the day.
The overall impact on the exchange can be gauged from the fact that turnover fell to ₹ 692 crore on 1 January from figures over ₹ 1,500 crore seen in the recent past.
On Monday, MCX-SX registered a turnover of ₹ 1,203.09 crore in its currency segment. Currency derivatives is the only functional segment of MCX-SX, which launched equity trading in 2012, but failed to attract volumes in cash and derivatives segments.
“The exchange has replied to all of Sebi’s queries. In December, the exchange wrote to Sebi saying that its net worth is around ₹ 136 crore. A chartered accountant’s certificate was also given. A letter from Financial Technologies India Ltd (FTIL) has also been submitted, stating that there is no dispute with the exchange," said one of the people wanting not to be named as Sebi is yet to take a final decision on the matter.
In reply to a query, an MCX-SX spokesperson said that while the exchange has complied with the conditions relating to undisputed net-worth as stipulated by Sebi while renewing its licence, it is in continuous dialogue with Sebi to launch new contracts soon, and is awaiting formal communication from Sebi.
An email sent to Sebi last week remained unanswered till the time of going to press.
“By December, the exchange formally submitted all documents that the regulator sought from time to time, but the latter is yet to give the go-ahead. The indecision is impacting the turnover as many currency traders prefer to do a so-called pair trade, which involves taking positions in futures and options contracts to hedge the risk," said the second person familiar with the matter on conditions of anonymity as he is not authorized to speak to media.
The shift in currency volumes from MCX-SX to its rivals—BSE Ltd and the National Stock Exchange of India Ltd (NSE)—has been gathering speed. MCX-SX, which accounted for nearly half of the total currency derivatives turnover till a couple of years ago, now has around 6% share.
Meanwhile, BSE has gained ground rapidly and now registers volumes higher than NSE on most days in the recent past.
On Monday, the currency derivatives turnover on BSE and NSE were ₹ 10,018 crore and ₹ 8,135 crore, respectively.
“Providing liquidity is important for any exchange to survive, and any product that is offered has to be in totality. This would also impact the investment of recent investors in MCX-SX," said Deven Choksey, managing director at Mumbai-based KR Choksey Shares and Securities.
On Monday, The Hindu Business Line reported that MCX-SX could face regulatory issues as FTIL is yet to completely sell its stake in the exchange.
This, according to the report, has led to Sebi not allowing the exchange to launch fresh options contracts.
On 19 March, Sebi had declared FTIL unfit to hold stake in any stock exchange or clearing corporation, and gave it 90 days to sell its holdings in such entities.
The order declared FTIL promoter Shah and the firm unfit to hold equity in any exchange, after the ₹ 5,574.35 crore fraud at the Shah-promoted National Spot Exchange Ltd came to light.
In November 2014, FTIL said that it has sold its entire stake in MCX-SX, comprising 27 million equity shares and 562.4 million warrants, for a total consideration of ₹ 88.42 crore.
On 24 December, FTIL said that one of the buyers—SKS Capital and Research Pvt. Ltd—expressed its inability to purchase the warrants and, hence, the sale agreement was terminated and the warrants were transferred to the escrow account.
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