Hope Universal Exchange does not result in telecom like race to bottom: MCX MD

SEBI’s decision to allow exchanges to offer equity and commodity trading under the same roof will intensify competition in the commodities space, and could hit the volumes of market leader Multi Commodity Exchange. While admitting that there may be severe competitive pressure once other players enter the fray, MCX MD, Mrugank Madhukar Paranjape feels pricing alone cannot be the clinching factor. MCX’s strong technology and liquidity gives it an edge, he told Moneycontrol in an interview. Also Paranjape feels that rather than having more exchanges for commodities trading, policy makers should focus on the integration of the futures market with the physical market. Here's an edited excerpt:

Q. SEBI has announced universal exchange and MCX is expected to face the heat, most. What is your strategy to retain the business and keep intact the margin?

A. From our perspective, we have always said that if you want to develop the commodity markets, you need to work on about three-four aspects. You need to work on expanding products. There, nothing has changed for us because it is going to be driven more by when SEBI allows those products, but for us, as soon as they are madeavailable, we will be ready and we will make sure we put in all the efforts. Even today, we have gone in with complete focus on options. We have been clearabout that and we have not launched some of the commodities where we have got approvals from SEBI because we believe that between diverting our attention to a new contract versus keeping our complete focus on options, we would rather keep it on options for next few quarters because that is a new instrument entailing huge efforts on the ground.

Hopefully trading in INDEX derivatives will soon be allowed. For that, we already have prepared ourselves in terms of joining hands with a leading global player and launched our new indices - iCOMDEX. I am not getting into details of other products which we expect the Regulator will approve in near future. So from our perspective, if we want more products, the regulator will define the path but we are absolutely committed and we will keep doing that. That doesn’t change.

Second piece is around expanding the commodity markets; it is all about participation. So there again, we were the first to get an AIF (CAT - III Alternative Investment Funds) traded, and we are very confident that we will get the first MF (to trade in commodities on MCX).

Allowing institutions to participate isn’t enough because there is a regulation wherein an institution necessarily needs to have a custodian, but a change in the custodian related guidelines is awaited. Present regulations don't enable custodial participation in commodity derivatives, while institutional investors use the path of custodians for trading in the market and other allied services, and unless those regulations are changed in tandem, it won’t be easy to get institutions activated.

For that, one needs to work with the custodians and regulator, we are doing all of that. So my point is, we have been engaging but the fact is, AIFs who are using custodians have their constraints in absence of regulations.

So these are the sort of challenges which you see while we talk of developing a market and all of us are going to work towards it; but it takes time.

Q. So does Universal Exchange change anything on this? No, it doesn’t. We will continue to work on everything required to grow this market.

The third one, where we had a very positive surprise from RBI  - they allowing banks to undertake clearing in commodity derivatives and bank sponsored entities to offer broking services, there we are very confident that the entities which command large presence in securities market, the top 6-7 will all be on board within this financial year.

So what does on-board mean? They will do the application, we will grant them the membership, they will need to do their backend etc., but to get their client-base on-boarded, we need to give them some time.

Last but not the least, it is just pure simple expansion of physical market which is to say our integration – so there I think in the same speech last year where the finance minister said that we should integrate the overall securities market infrastructure, it also said that we should integrate the commodities derivatives and the spot markets and we await a roadmap as well clarity on the regulatory architecture for achieving such integration. If I look at it from the limited perspective of the commodities ecosystem, do you need more exchanges or do you need better integration with the physical market? I would say, you need better integration with the physical market.

So from my perspective, in the commodities space, nothing really changes. The only thing which changes is that yes, competition will come in. Hopefully, they will not use a 'race to bottom' strategy but it is probably going to happen. We heard some announcement yesterday which we don’t know whether it is a formal announcement or informal in terms of what people are looking at pricing, but if everybody is going to start saying that I will charge nothing, I will charge zero or whatever, we will have to look at our pricing and that creates a huge pressure on us. That is the only immediate impact to us.

From the opportunity perspective, we see great opportunity in currency and we have maintained for long that world over the equity and the commodity currency fixed income worlds are fairly segregated. In the long run we believe we would be a really good player still in the commodity-currency space.

We haven’t yet decided, it is going to be a very formal discussion at the Board on whether we look at equity or not. But there are three exchanges already with one dominating the market in derivatives space. So what would the 4th exchange really offer to the market or how would it contribute to the market? That is the way we look at it.

So universal exchange doesn’t really change any of our priorities, it probably just sharpens what we have to do, puts a lot of pressure to, a lot of that much faster and in the short-run does create a little bit of pressure in terms of pricing.

Q. The pressure for you to maintain your topline and bottomline would be immense?

A: Yes, absolutely.

Q. Do you have any plans for the corporate bond market which is the emerging market in India, but one that nobody is really thinking about?

A: I started working in 1990. I don’t remember a single year when we didn’t debate in public as to why India doesn’t have a vibrant retail corporate bond market.

Yes, you can say that this is a new emerging thing. But, I don’t see that to be a market restricted to a exchange traded corporate bond market. There will be OTC and other market, but yes over the next 3-5 years, with fundamental reforms in public finance, regulatory governance and the markets, the bond market will develop. To establish / develop all the links between ‘bond, currency, derivatives’ however is crucial.

Q: Are you looking at introducing futures products in the agriculture segment?

A: Let us look at it in perspective of exchange traded commodity derivatives. In the current volumes and in the past volumes – because volumes in the commodity markets have taken a huge beating post CTT was introduced but even if we take it pre or post, at its best, agriculture would have never been higher than 15 percent of the market.

So first we should just look at it in that comparison that it is one market which is 85 percent of the total, the other one is 15 and therefore, by again simple math, if 15 people were even to double but the 85 people was to do another 10-15 percent, you still probably get the same revenue increase.

So clearly, agriculture derivatives is at this point of time in India and probably for the next couple of years going to remain a niche play. There will be a certain commodity where you will find a good opportunity, which we will do. We have been doing that. So when we were convinced that there is an opportunity, we took it as a head on with competition, and at this point of time we believe the jury is still out; both of us are competing very hard to see who can do better.

We have some very niche commodities where we do very well anyways in the agriculture derivatives basket. So where we see an opportunity, where we know we have some strength, we will still look at it.

Q: What about commodities like tea, coffee, diamond?

A: We already have our product details with SEBI on coffee where we have some dialogue in the past. Now it is at a stage where it bounced back in our court because they have asked us to do some more work.

Tea, we genuinely believe cannot happen till index is allowed because of the way tea is traded and settled i.e. unless you can create an index of tea, which is how tea is bought and sold generally. It is very difficult to trade tea. So I think all these commodities we keep looking at, and we believe there will be an opportunity.

But again, the incremental delta from new commodities – and there are still commodities where there will be an incremental delta, there are some commodities where none of us have thought about it or we have thought but don’t do enough so there will be those things which keep coming up and we will continue to do that. So I don’t think that is a concern for us and it is something which we will always be focused on.

Q: Once the big exchanges also start offering commodities trading, how will MCX’s earnings be impacted?

A: We will just make sure that we work towards growing volumes adequately so that if we have to do anything to the pricing, we won’t get impacted.

Q:  How worried are you about competition from NSE, especially since it has deep pockets?

A: I don’t see a correlation. Anybody with the fattest of the balance sheets, can keep using price as a factor to compete but other than that I don’t see why we should not be able to ensure that our product remains, as it is today, the most relevant product for the market and our technology remains absolutely at a competitive stage that it is. And if your product is relevant, if your technology is competitive and if you have the connect to the market then pure pricing has never ever taken the liquidity away.

Like I said, it will create pressures on revenue but it doesn’t take liquidity away. Four years back, this exchange went through a crisis in that sense. We had the biggest of crisis in terms of confidence, we had the biggest of crisis in terms of management change, complete change of control and at that point of time also competition was there, it wasn’t that the competition wasn’t there and it was exactly the same, it came with some super low pricing. After six-eight months, they went back.

Now the difference is, to your question on deep pockets, that time, competition went back to normal pricing after eight months, here maybe we will have sustained pricing pressure for a couple of years. So that is the difference but I don’t see pricing to be the only reason why we move the business away.

Q: Organisationally, what has this meant to you?

A: As an organization it is something which we have been telling our people for the last 12 months whether it is internal townhalls or any communication, saying that competition is around the corner, we don’t know when. So that is the message, which we have been reiterating at every point of time.

And what we have also been telling our people is that, therefore we have to run twice as faster. One thing which I remember, even when I joined, we had already started doing this but we just made it a very rigorous thing - that on anything that you benchmark us, for the last one and a half years, we have benchmarked ourselves with NSE, BSE and NCDEX. Simplest of the things – if you take Margin for example, sort of collateral you take, I remember when I joined, our team had already done the analysis saying this is what NCDEX does but this is what NSE does and over time, we just made sure that what we do is absolutely at par or even better than all the others. So to us, we had already moved that internal needle to benchmark which is now no longer just an NCDEX and NSE, the benchmarking is to all the other exchanges.

That is something which we have done. It is just that it puts that much more focus back with the entire organisation to say you need that connect and make sure that you are aware of competition.

Q: There will be a war for talent now that SEBI has approved Universal Exchange. How prepared is MCX?

A: Again some of the things where we did things was in anticipation. Within six months after my joining, we introduced a variable pay. We had made sure that we have serious benchmarking of compensation. If you see our numbers of last year, the big chunk that happened in our manpower cost was because we consciously said we want to be prepared for the next couple of years.

Q: Any pending demand in SEBI which you want to complete before universal exchange implementation?

A: Whether it is more products, whether it is allowing more categories of participants, all of that has to happen at a very fast pace now. And I believe those would happen. I think it is about how you look at the whole piece - whether it is allowed, not allowed and then if you allow it, how do you still make sure it is a level-playing field because here are some exchanges where it has never been done and here are some exchanges which have been doing this for the last so many decades. So there are whole lot of things which we await there. Those are things which we have to engage and keep seeking.

Q: Will you approach finance ministry for extending the date?

A: I don’t think so. We work very closely with the regulator, we made our case, regulator has taken a call and I think we all should just move on. Otherwise we will just keep creating uncertainty for everybody.

In a lot of sense, for us it is good because I think for nearly two years since I joined, we have been talking about universal exchange happening one day.

Q: Yours is a three years tenure when you joined?

A: Yes, so by definition all tenures in exchanges are three or five; extendable or renewable, both.

Q: So yours is extendable?

A: It is the same at every exchange. You come with a three years tenure; generally I don’t think any exchange has given anybody a five year tenure in the beginning. And then people get renewed for a term of another three years, sometimes another five.