A Quick Look At The Mcx

A Brief Overview of the MCX (Ref: Libra Retailers Matter) I.C. Sancheti & Co.

1. What is the MCX? Headquartered in the financial capital of India, Mumbai, the MCX, which expands to Multi Commodity Exchange of India Ltd., is a demutualised nationwide electronic multi commodity futures exchange set up by Financial Technologies with permanent recognition from Government of India for facilitating online trading, clearing & settlement operations for futures market across the country.1 The exchange started operations in November 2003. Apart from being accredited with ISO 9001:2000 for quality standards, MCX offers futures trading in 59 commodities as on January 31,2009, 2008, defined in terms of the type of contracts offered, from various market segments including bullion, energy, ferrous and non-ferrous metals, oils and oil seeds, cereals, pulses, plantations, spices, plastics and fibres. For domestic commodities with large deliverables, MCX’s electronic platform enables anonymous trades, which, it mains, leads to efficient price discovery.2 The MCX website (www.mcxindia.com) offers a huge volume of information, including regulatory matters and live quotes, etc. The registered office of the MCX is Exchange Square, Chakala, Suren Road, Andheri (East), Mumbai, Maharashtra – 400 093.

2. What is the nature of MCX as a company? The Multi Commodity Exchange of India Ltd. (CIN: U51909MH2002PLC135594 & Reg. No. 135594) is a public company limited by shares. 3 It is an “Indian NonGovernment Company” and is under the jurisdiction of the RoC – Mumbai.

3. Key Shareholders Promoted by Financial Technologies (India) Ltd., MCX enjoys the confidence of blue chips in the Indian and international financial sectors. MCX’s broadbased strategic equity partners include, NYSE Euronext, State Bank of India and its associates (SBI), National Bank for Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd. (NSE), SBI Life Insurance Co. Ltd., Bank of India (BOI) , Bank of Baroda (BOB), Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank, Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, ICICI Ventures, IL&FS, Kotak group, Citibank and Merrill Lynch.4 Since the shares of this company are not traded publicly, I have not been able to ascertain the shareholding pie-chart.

4. Issues Pertaining to Jurisdiction 1

http://www.mcxindia.com/aboutus/aboutus.htm http://www.mcxindia.com/mediaroom/mediakit/pdf/mcxfactsheet.pdf 3 http://www.mca.gov.in/DCAPortalWeb/dca/CompanyMaster.do (Will need re-sending of data) 4 http://www.mcxindia.com/aboutus/aboutus.htm 2

By virtue of the agreement that the “client” (in our case [•] Ltd.) executes with the “member” (here, [•] Ltd.) the Rules, Bye-Laws, etc. become binding obligations on the parties concerned.5 Consequently, all trades will be deemed to have taken place in the city of Mumbai only, irrespective of the trade workstations of the members connected to the exchange.6 But, more significantly, all claims, differences or disputes, irrespective of whether the exchange is a party or not, arising out of or in relation to transactions on the exchange, including any agreements and contracts, shall first be subject conciliation proceedings, failing which, the matter shall be referred to Arbitration. MCX is regulated by the Forward Markets Commission (FMC), Ministry of Consumer Affairs, Food and Public Distribution. The exchange enjoys permanent recognition of the Government of India and its operations are governed by the rules of the Forward Markets Commission. As such, the FMC does not seem to have a complaint mechanism. Nonetheless, the FMC is a specialized body which is empowered to consider regulatory and policy matters, and acts to prevent excessive speculation and in the general interest of the traders, associations and the economy.7 Being the statutory regulator, the FMC is the first door to knock for policy issues.

5. Pricing on the Exchange The MCX follows a mechanism called “price discovery” in order to discover the right prices of commodities which reflect their fundamentals and also to facilitate pricing well ahead in time before actually physical transactions take place.

5.1

What is “Price Discovery”?

Price discovery is the process by which most-likely prices of commodities that will prevail at a future point in time are arrived at the exchange market place in advance by virtue of the trading between a large number of buyers and sellers each with different sets of information about the fundamentals of the commodities and its effect on likely future prices. The buyers and sellers communicate this information through prices at which they intend to take or provide delivery of respective commodities at a future date. These prices indicate the most likely price scenario of respective commodities at a future point in time. Being transparent, exchange discovered prices help stakeholders of the economy like producers, consumers and traders take efficient economic decisions such as what to sow, when to sell, when to buy or when to hold, etc.

5.2

Who are the participants in the Price Discovery process?

The participants in the price discovery can be broadly categorised into hedgers (like farmers, producers, consumers, processors, etc), investors, arbitrageurs and speculators depending on the purpose behind their participation.

5.3

How does Price Discovery work?

Buyers and sellers of different commodities quote their prices based on analyses of the available information on technical and fundamental 5

See the ‘Member-Client Agreement’, as provide by Baljit Metals Pvt. Ltd., morespecifically, client’s clause #2 and mutual clause #3. 6 MCX Bye-Law No. 3.3 7 See the judgement dated 05.02.09 of the Bombay High Court in National Commodity & Derivatives Exchange Ltd. & Anr. Vs. Union of India & Anr.

parameters about a commodity. This, in true economic sense, would reflect the "scarcity value" of the commodity. The trading platform of a futures exchange keeps on matching these price quotes given by buyers & sellers on real time basis on a price and time priority. MCX provides a platform for buyers and sellers to anonymously sell or buy a contract.8 When a price offered by a seller is matched with the price of a buyer, the trade is executed on the exchange and it becomes the 'discovered price' at that given time. As large number of sellers and buyers operate through MCX, the price of the commodities keeps getting 're-discovered' on the best possible analysis of the information available at any given point in time on any given day. In other words, it keeps changing according to the views of the market forces from time to time throughout the life of the contract.

5.4

What is the role of MCX in Price Discovery?

MCX provides the trading, clearing and settlement and necessary regulatory support system within which all stakeholders can buy and sell commodities with different maturity for a settlement. Therefore, MCX facilitates above activities subject to its byelaws and provides necessary protection to all users of this market so that they can trade with full regulatory support of MCX as provided in its byelaws.

8

That is to say, buy or sell a forward contract, or future contract, as opposed to buying or selling the commodity itself.