Apples, freight, and weather, coming soon to a derivatives contract near you

Recognized national stock exchanges such as MCX, NSE, NCDEX and BSE will need to submit contract plans.
Recognized national stock exchanges such as MCX, NSE, NCDEX and BSE will need to submit contract plans.

Summary

  • The finance ministry has notified 13 new commodities for derivatives trading.

MUMBAI : Apples, cashews or the weather? You may soon be able to trade on the prices of these and several more on an exchange platform, with the finance ministry expanding the list of commodity derivatives that can be offered on national stock exchanges.

The finance ministry has notified 13 new commodities for derivatives trading, including manganese, freight (road, shipping and airways), weather, cement, bitumen, apple, cashew, garlic, skimmed milk powder, white butter, timber, bamboo and palladium. The move aims to provide a more diversified price risk management mechanism to Indian companies and other participants.

Recognized national stock exchanges such as MCX, NSE, NCDEX and BSE will need to submit contract plans for approval with Sebi before they can launch derivatives trading in these new commodities.

Commodity market analysts said if India is to become a manufacturing superpower, domestic companies need to be able to effectively hedge their price risk on platforms offered by domestic exchanges to become a global price influencer.

“The entire infrastructure for hedging—a nationalized platform where actual users can efficiently cover their price risk and become price influencers like China, for industrial metals, for example and funds to take contra calls —should be put in place," said Kishore Narne, director, Motilal Oswal Financial Services. “If India is to become a manufacturing superpower, this is imperative and the expansion of the list is a step in that direction."

The latest notification dated 1 March, which Mint has reviewed, takes the total number of commodity derivatives to 104.

Commodity derivatives hedging enables a company to protect itself from fluctuations in input or final product prices by locking in prices on exchanges like LME, Shanghai and home-grown ones like MCX and NCDEX, which offer bullion products and crude oil options.

According to Harish V., head of commodity research at Geojit Financial Services, new products like freight indices can help corporates which have utilized domestic exchanges to hedge gold and silver price risk especially in the past five years. Commodities like MCX offer products like copper, nickel, lead and aluminium where small users can hedge price risk.

“The new items, if launched by the exchanges, will give a bigger bouquet of products to corporates to hedge their price risk and speculators to take informed punts," Harish said. “They can replicate success in gold seen in the past five years."

MCX is the country’s largest commodity derivatives platform with a 98.3% market share in January ( 30.28 trillion turnover). The second biggest is NSE with 1.2% market share ( 0.38 trillion), followed by NCDEX (0.5% or 0.12 trillion).

The MCX specializes in metals and energy contracts, NSE in crude oil options and NCDEX in farm products like guar, cotton, castor and jeera. MCX and NCDEX were founded in 2003, while NSE began its commodity segment in 2018 and BSE last year.

Commodities like pulses, edible oils and sugar have been banned for trading by Sebi. The most popular commodity derivatives are gold, silver, crude and natural gas, copper, zinc and aluminium. An MCX spokesperson said the newly notified commodities will help in “deepening and developing the Indian commodity derivatives market."

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