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commodity futures

Two years ago, on the auspicious occasion of Dhanteras, there was great anticipation and excitement in the commodities market as the then Finance Minister, late Shri Arun Jaitley launched options contracts in gold (1kg) on the Multi Commodity Exchange (MCX).

It was a momentous moment for market players as they had been awaiting this instrument since 2003 when the NDA began to revitalize the Indian commodities market.

Since their launch, the average daily turnover surged to Rs 450.65 crore in CY18 from Rs 29.17 crore in CY17. In fact, the MCX Gold option yearly turnover increased to Rs 1,15,367 crores in CY2018 from Rs 7,438 crores in the two and a half months of trading since its launch in CY17. For the first eight months of CY19, the turnover stood at Rs 61,754 crores and could move to cross the previous year’s high as traders hedge against imminent currency volatility and geopolitical risks.

YearTraded Contract (Lots)Total Gold Option Turnover in Rupees (Cr)Avg Daily Turnover Rupees (Cr)
2017                         25,036  Rs. 7,439  Rs. 29
2018                     3,72,697  Rs. 1,15,367  Rs. 451
2019*                     1,80,495  Rs. 61,754  Rs. 351

Source: MCX, Ventura Securities Ltd
Note: *Data up to 06th Sep 2019

The next milestone for the commodity options segment was the launch of crude oil options contracts on 14, May 2018. This European-styled crude oil option, based on the underlying MCX crude oil futures contract (100 barrels) traded on the exchange, enables stakeholders to hedge against volatility in fuel prices, such as aviation fuel, furnace oil and naphtha, which have a strong correlation with crude oil prices.

The turnover of crude oil options also climbed 80% to Rs 47,645 crore in CY19 from Rs 26,435 crore in CY18. Later, other commodity options were also launched and trading in these have gathered momentum too. Silver yearly options turnover rose to Rs 10,198 crore in CY19 from Rs 4,955 crore in CY18, marking a rise of over 106%.

MCX Commodity Option Turn over20182019* % change
Crude Rs.                     26,435  Rs.     47,645 80%
Silver Rs.                       4,955  Rs.     10,198 106%
Copper Rs.                       3,686  Rs.        1,903 -48%
Zinc Rs.                       1,002  Rs.        1,689 69%

Source: MCX, Ventura Securities Ltd
Note: *Data upto 06th Sep 2019

It’s clear that commodity options have come a long way in a short while. The base was set with SEBI and the Government’s concerted efforts to develop commodity markets in a phased manner. A significant trigger was SEBI’s merger with FMC, which paved the way for much awaited reforms in the ecosystem. For a blow by blow account of all the reform and innovation that has taken place in the market, read our blog SEBI’s Commodity Market Makeover makes it Deeper, Wider, Safer.

In a nutshell, regulatory steps introduced over the past few years have supported rising volumes in the commodity options segment. SEBI has broadened participation in the segment by allowing AIFs to take commodity exposure and including MFs and PMS would further boost institutional participation. Where distribution is concerned, allowing bank subsidiaries to distribute commodities has opened access to the large untapped retail potential. These and other initiatives should result in a colossal increase in volumes over the long term.

The next step on the product road map by SEBI is the introduction of commodity indices. MCX has already tied up with Thomson Reuters to craft a product, complete with calculations and methodology.

Once Commodity Index futures are launched, moving forward, we expect a further pick up in volumes on MCX’s commodity options segment.

Mrugank Paranjape, Ex- MD & CEO, MCX, sums up the opportunity saying, “The long wait for Commodity options has finally come to an end. I commend the policymakers for having been proactive in bringing new products as well as new participants, facilitating further growth and development of India’s commodity derivatives market. As a low risk and powerful tool, the product further extends the benefits of effective price risk management to the stakeholders at large. Options would complement the existing array of commodity futures.”

Now that you have noticed that commodity options are gaining momentum and heading for a high trajectory, how do you plan to ride this opportunity?

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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that: We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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