BSE, NSE may face challenges in getting settlement prices for non-agri commodities

The National Stock Exchange and BSE  may face challenges in getting settlement prices for non-agri commodity contracts, once they start offering commodities trading .

Both exchanges have already filed papers with the Securities and Exchanges Board of India to start their own commodity exchanges.

Once their applications are approved by SEBI, they can start commodities trading from October 1. Both exchanges are planning to start with non-agri commodities like base metals, precious metals , crude oil and natural gas.

The non-agri segment is currently dominated by Multi Commodity Exchange of India (MCX), which has agreements with both Chicago Mercantile Exchange and London Metal Exchange for settlement prices of energy and base metals.

For gold contracts, MCX gets settlement prices from the Ahmedabad gold spot market.

“BSE and NSE are also in  talks with CME and LME for settlement prices; but MCX has some exclusive contracts with LME. If they (BSE, NSE) do not get settlement prices, then it would be difficult for them to compete with an existing exchange,” a source told Moneycontrol.

New commodity exchanges need to have arrangements with exchanges abroad to get settlement prices for  crude oil, base metals and natural gas contracts that they offer.

SEBI’s norms require all commodity contracts to mention the name of the exchange from which it is getting the settlement price.

BSE is learnt to be talking to all leading overseas exchanges, including CME, LME and Inter Continental Exchange (ICE), for energy and base metal prices. A source said that NSE could have an edge over BSE in discussions with ICE, as the foreign bourse  already has a stake in NSE-promoted National Commodity and Derivative Exchange.

Apart from international exchanges, BSE is also in talks with the India Bullion and Jewellers Association to get settlement prices for gold contracts.

The NSE is also in talks with leading exchanges for settlement prices. Moneycontrol spoke to a source, who confirmed the development but declined to name  any particular exchange.

The problem here is that most of the leading exchanges BSE and the NSE are in talks with already have contracts with MCX. So MCX could approach its partners with an offer that would help maintain its exclusivity for settlement prices.

Meanwhile, commodity market participants are requesting that base metal contracts be settled in Indian prices. SEBI is already looking at ways to curb resident Indians from speculating on international exchanges and encourage them to trade in the domestic commodities market.  In the past, Bombay Metal Exchange had made number of representations to the erstwhile Forward Market Commission to make all base metal contracts delivery settled with underlying domestic prices instead of they being cash settled based on CME/ LME prices.

Many local  commodity traders are against the current norm of energy contracts being linked to international prices, which have no relevance with the domestic underlying. The energy contracts are also compulsorily settled in cash.