The transition to new software by the country’s largest commodity exchange MCX and a one-year extension of the ban on derivatives trading in seven key agriculture commodities are the key events in 2023 that will long be remembered by market participants.
After many failed attempts, MCX last month managed to switch over to a new software developed by Tata Consultancy Services from the one developed by 63 Moons Technologies).
Last June, MCX decided to extend its software support contract with Jignesh Shah-owned 63 Moons Technologies for six months at the eleventh hour before the existing services contract expired. The contract was renewed for a consideration of ₹250 crore.
Amit Goel, Chief Global Strategist, Pace360 said like in any software there were initial troubles during the transition including connectivity issues, delayed price updates and trade confirmation issues. These issues have largely been resolved, but they caused some disruption for traders in the early days, he said. The new software offers several new features, including advanced charting, risk management tools and improved order placement options. These features could benefit traders and improve their overall trading experience.
The new platform is more efficient and scalable than the previous one. This can lead to faster order execution, improved market transparency and increased trading volumes. The shift away from 63 Moons Technologies as the sole software provider reduces risk and dependency on a single entity.
Going ahead, the exchange expects the annual operational cost to come down to less than double-digit in crore. Additionally, it has to pay yearly license fee for off-the-self software used with TCS developed platform for the first one year starting January.
Ban on key commodities
In a major blow to the agriculture derivatives-focused NCDEX, market regulator SEBI in October extended the ban on derivatives trading in seven key agricultural commodities till December 2024 to control inflation.
The commodities that were banned from derivatives trading include paddy (non-basmati), wheat, chana, mustard seeds and its complex, soyabean and its complex, crude palm oil and moong. Incidentally, these commodities generated 55 per cent of NCDEX’s trading volume before they were knocked down.
In December 2021, SEBI had suspended trading in derivative contracts in select agriculture commodities for a period of one year. Thereafter, the suspension of trading was extended till December 20, 2023.
NCDEX tried to regain volumes by relaunching once sought-after castor seed and introducing new contracts such as Isabgol Seed, but it was not very successful.
Ajay Kumar, Director, Kedia Commodities said the commodities that were banned from trading were attracting good investor interest as the exchange had worked on spreading awareness on hedging among the user industry. However, the new agriculture contracts launched by NCDEX have failed to attract large participants and may take a while to gain traction, he added. “The ban has severely impacted NCDEX trading volumes and revenue and tested its future viability. We believe that the exchange will survive but may not be able to regain its market share for a very long time,” said Goel.
MCX trading volume zoom
MCX had registered a strong growth in trading volumes due to high volatility in metal and energy prices amid geopolitical disturbances. The exchange’s average daily turnover more than doubled in December to ₹1.20 lakh crore against ₹56,751 crore in January. With the new system getting stabilised, MCX gears up to release Direct Market Access facilities to foreign portfolio investors.
In a major policy push, SEBI last March allowed FPI participation in cash-settled commodity derivatives contracts and since then MCX has seen a significant number of FPIs participating in energy and bullion contracts. The new platform positions MCX for aggressive business development, enabling the exchange to actively pursue innovative products and engage with a broader participant base
It plans to launch of India’s first rebar steel futures contract on January 15. The exchange is seeing active participation by real estate and infrastructure companies as the cost of raw materials determines their profit margin.
Others fail to make an impact
In contrast, NCDEX trading volumes plunged 27 per cent last month to ₹732 crore against ₹998 crore in January as prolonged suspension of trading in agriculture derivatives eroded investors’ confidence. The turnover on the exchange had hit a high of ₹1,311 crore last August but started sliding after the ban on trading was announced.
Trading volumes in commodity derivatives sections of NSE had risen but could not make any major impact. The average daily turnover on NSE increased multi-fold in December to about ₹308 crore against about ₹41 crore in January. On BSE, the average daily turnover dipped last month to ₹2 lakh against ₹42 lakh logged in January.
Leading volume generator
Crude oil and natural gas attracted largest volumes on the exchange due to geopolitical tensions and supply chain disruptions. The massive rise in their volatility ever since Russia invaded Ukraine contributed handsomely to the trading volumes of both futures and options. Similarly, the volatile gold and silver prices pushed the jewellers to hedge their position on the exchange. The demand for gold jewellery increased during the last festival season.
Among base metals, copper, aluminium and zinc gained traction on the back of record volatility due to the slowing economy in China and geopolitical issues.