Bank-backed brokerages eye opportunity in commodity derivatives space
The Securities and Exchange Board of India (Sebi) had in September allowed brokers of stock and commodity exchanges to do both the businesses under one entity. The regulator has given the go-ahead for a unified exchange system, to come into effect from October. Accordingly, stock exchanges NSE and BSE are working towards launching commodity derivative segments which is likely to throw up a challenge for existing commodity bourses -- NCDEX and MCX
Bank-sponsored stock brokerages are gearing up to enter the commodity derivatives space, a move which is expected to mobilise retail investors for these products and help the markets grow manifold, say industry experts. The Securities and Exchange Board of India (Sebi) had in September allowed brokers of stock and commodity exchanges to do both the businesses under one entity. The regulator has given the go-ahead for a unified exchange system, to come into effect from October. Accordingly, stock exchanges NSE and BSE are working towards launching commodity derivative segments which is likely to throw up a challenge for existing commodity bourses -- NCDEX and MCX.
"With the entry of bank-sponsored brokerages in the commodity trading space, the turnovers of commodity markets are likely to increase manifold as it would expose commodity derivatives to mass retail customers," Axis Securities chief business officer Amit Golia told PTI. "Our strategy would be to activate existing equity derivatives trading clients to start trading in commodity derivatives as well. As of now, there is no incentive planned; however, the strategy will be to cater as much as possible to the traders in terms of the technical research ideas by presenting opportunities to make the most of their money," Golia added. Axis Securities has applied for licences with MCX and NCDEX as these exchanges are the leading turnover generators for bullion and agricultural commodities respectively.
Kotak Securities MD and CEO Kamlesh Rao said that with Sebi enabling consolidation of commodity and equity broking business, both at member level as well as at the exchange level, the brokerage is open to exploring organic and inorganic opportunities in this space. "We intend growing the commodity and broking business and capitalise on synergies between common customers," he said. Kotak has membership with MCX and NCDEX and intends to apply for membership with BSE and NSE once they launch commodity derivative trading. "BSE and NSE are well established trading platforms and we could see trading interest pick up once commodities are launched by them," he said.
With large footprint of bank entities, penetration of commodity derivative as a product will increase," he added. The brokerage plans to target new corporate entrants who want to minimise their business risk by hedging their commodity price risk. Similarly, stock brokerage HDFC Securities has also applied for membership with MCX and NCDEX and plans to deal with bigger corporates for the product given the trust factor and comfort of the HDFC Bank. "Being a Bank sponsored entity , the reachability is much higher and the existing registered customers in equity broking (highest is amongst bank based brokers) can be engaged on this product. The market currently is scattered and being a bank sponsored entity, we can have bigger corporates deal with us," HDFC Securities whole time director Ashish Rathisaid.
The brokerage's first strategy would be to make the offering to our existing customers, educate them on the product and get them on this platform.
"Since these customers already have a KYC in place, they can be onboarded with minimum paperwork as we understand," Rathi said. "With the help of HDFC Bank which has wider reach for agriculture, we will have a targeted approach," he added. Taking a contratarian view Commtrendz's Gnanasekar Thiagarajan said: "Even if banks and institutions apply for membership, expecting them to provide liquidity will be highly misplaced.
"Their risk departments will not approve of liquidity risk. And, with the kind of volumes they might deal, liquidity will be a important criteria based on which they might even decide if it is safe to trade," Thiagarajan said. He added: "But, as an investment they can become a member, which has no restrictions at all." Angel Broking head advisory Amar Singh expressed confidence that as one of the top most player in market share in both equities and commodities segment, the convergence will be beneficial for the industry as a whole. "Bank based securities entering the broking world will result in a world of opportunities for their pie on the market share. However, those who have already well suited plans in place, with existing set of clients, good service and digitization of activities, will ensure that they succeed in this industry," he noted.