InvestorQ : What do you see as the benefits of permitting commodity derivatives on NSE and BSE when there are already existing commodity exchanges?
indhumathi Sayani made post

What do you see as the benefits of permitting commodity derivatives on NSE and BSE when there are already existing commodity exchanges?

shrinidhi Rajan answered.
2 years ago

IT is basically about bringing more competition and allowing BSE and NSE to bring in more global best practices to the table. Some benefits will accrue to the specific exchanges but there will also be some benefits to the commodity trading segment as a whole.

· For BSE and the NSE, it will give them an additional product offering to their clients and that will be an advantage since now all the key financial products like equities, equity futures, equity options, currency derivative, ETFs and now commodity futures can be traded on the principal exchanges itself. This makes the exchange a one stop shop.

· These exchanges bring a long standing reputation of investor education, investor awareness programs, risk management and supervision which will now be extended to the commodity segment also. That will make the commodity trading a lot more safe and secure and also ensure that more participants are drawn to these markets due to the presence of established names.

· It will now be possible for traders to actually do cross trading between equities and commodity. For example, companies which are into commodity businesses normally see their stock price trending with the commodity price and often it is a lead indicator.

· The advent of NSE and the BSE into commodity will enable the gradual institutionalization of the commodity markets. Currently, global investors are permitted to hedge their risk through commodity derivatives but there has not been much enthusiasm shown by institutional investors. With their long standing relationships with the NSE and the BSE, FIIs should be more comfortable dealing in commodities since they are familiar and also comfortable with the RMS at the two exchanges.

· It is still not clear if the two exchanges would create additional liquidity or result in more volume in the commodity markets. However, that would largely depend on how the two exchanges roll out the products and implement them over the next few months. It will done in a phased manner.

From the markets point of view, there will be more competition among the exchanges and that will ensure better products and also better pricing for the traders. In the last 15 years, MCX has dominated the non-agri futures while NCDEX dominated the agri space. That is likely to change with competition. We have seen in the past how the NSE changed the contours of competition in the industry. You can have something similar happening to the commodity space too. And that will be good for all.