Markets
MCX makes another stab at getting more FPIs on board
Summary
- MCX has allowed FPIs under the categories of individuals, family offices and corporates into oil and natural gas derivatives, which made up 77% of MCX's March turnover.
MUMBAI : India’s largest commodity derivatives exchange has opened its doors wider to foreign investors in its biggest segment, after a previous attempt to secure their interest did not take off as expected.
On Saturday, the Multi-Commodity Exchange of India Ltd (MCX) allowed FPIs under the categories of individuals, family offices and corporates into oil and natural gas derivatives, which made up 77% of MCX’s March turnover. The move, which takes immediate effect, comes at a time of increased activity in energy derivatives worldwide.
Crude oil and natural gas derivatives contributed ₹20.74 trillion to MCX’s total futures and options turnover of ₹26.83 trillion in March. MCX said FPIs will be allowed position limits of up to 20% of their client-level position limits in eligible derivative contracts and indices.
Saturday’s decision follows a master circular from the Securities and Exchange Board of India (Sebi) on 4 August 2023, that laid down eligibility criteria for FPI participation in commodity derivatives. Sebi’s master circular states that initially, FPIs can trade only in cash-settled non agricultural commodity derivatives, laying down two sub-categories—one whose position limits are equal to other client limits, and the other, which includes the three sub-categories MCX announced on Saturday with 20% of client limit.
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MCX has fixed the client-level position limit across crude oil futures contracts at 480,000 barrels and across natural gas contracts at 6 million mmBTU (million British thermal units).The three sub-categories of FPIs (individual , corporate and family office) will be allowed to trade 96,000 barrels and 1.2 million mmBTU.
Market stakeholders see this as MCX’s bid to raise FPI participation on its platform, which is the country’s biggest for energy and metals derivatives trading. As precious and base metals are all delivery-based contracts, the FPIs mentioned earlier will be able to take positions only in crude and natural gas based derivatives, which are cash-settled contracts.
“This is a good move to increase market depth and participation," said Narinder Wadhwa, managing director of SKI Capital, a broker which has a few FPI clients who trade on commodity derivatives. “It could potentially increase FPI participation, which currently is not significant."
An MCX official was not immediately reachable. The listed exchange presents its March quarter results on Tuesday.
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Naveen Mathur, director (currency and commodities) at Anand Rathi Shares & Stock Brokers, said that as MCX offered the most liquid platform for commodity derivatives, FPIs who participate in Indian equities could “well use their margins to trade in oil and gas after equity markets shut at 3:30pm".
Commodity derivatives, which are rupee denominated, are traded from 9am to 11:30pm, and to 11:55pm in winter.
“The move has the potential to boost volumes as the categories of FPI mentioned in the circular tend to be more aggressive than other categories like banks and investment managers," Mathur said.
Crude and natural gas futures and options contracts are among the top contributors to MCX turnover, especially with Brent oil rising by almost a fifth from December to $87 a barrel now, Mathur said.
Crude oil and natural gas derivatives contributed ₹20.74 trillion to MCX’s total futures and options turnover of ₹26.83 trillion in March.
Interestingly, most FPIs trade on the National Stock Exchange’s (NSE’s) equities segment, with its clearing corporation clocking consolidated net profit of ₹369 crore in Q3FY24. Against this, the MCX’s clearing corporation posted a profit of ₹22.94 crore in the third quarter.
However, in terms of turnover on commodity derivatives, MCX is the leader with 97% market share. In February, out of total commodity derivatives turnover of ₹26.35 trillion, MCX alone posted turnover of ₹25.56 trillion , followed by NSE (2.6% market share) which posted turnover of ₹68,600 crore. Agri bourse NCDEX, backed by the NSE (0.4%), posted volume of ₹11,429 crore, while BSE’s market share was nearly zero, as per Sebi data.
MCX participants largely include hedgers and speculators in precious and base metals and energy contracts.
