Commodity exchanges - Volatility likely to boost near-term earnings

MCX witnessed a large spike in its adjusted ADTV (futures + future equivalent option volumes) as volatility (especially in crude) increased in the wake of geopolitical concerns. MCX futures' daily traded value clocked Rs516bn on 24th Feb'22 (second-highest since 9th Nov'20). Feb/Mar'22 futures ADTV was Rs252bn / 353bn, up 13%/40% MoM, while adjusted ADTV stood at Rs305bn/407bn in Feb/Mar'22, up 18%/34% MoM. Mar'21 rise in MCX ADTV has been in line with other global commodity exchanges. With expectations of adjusted ADTV of Rs407bn in Mar'22 (Rs407bn is March thus far), MCX can register EBITDA of ~Rs440mn (+15% QoQ) in Q4FY22E.

• Spike in volumes can be temporary; sustenance is the key: Historically, we have seen sharp volume increases to ultimately come down in near term. Driven by heightened volatility, overall ADTV between 24th Feb-4th Mar'22 has risen 1.6x compared to volumes traded between 10th Feb-23rd Feb'22 with largest spike seen in energy segment (1.8x) followed by bullion (1.5x) and base metals (1.4x). MCX Feb'22 ADTV was up 13% MoM driven by higher volumes traded coupled with higher prices while Mar'22 ADTV growth came largely on the back of higher volumes traded. Common factor that drove growth in Feb/Mar'22 was crude whose ADTV was up 43% and 113% in Feb'21 and Mar'21 respectively. Share of crude in overall ADTV has risen from 17% in Jan'22 to 33% in Mar'22.
• Globally, volumes on key commodity exchanges have risen: Based on media reports, we have seen volume pick-ups in crude, natural gas, and gold. Between 19th Jan'22 and 9th Feb'22, the number of US crude options traded on CME averaged roughly 126k daily. The average has since spiked to 178k, according to exchange data, including the first two days of Mar'22, when more than 240k contracts were traded. As per data from CME, gold futures and open interest have been higher in Mar'22-TD and natural gas volumes too have seen a similar trend.
• Breakup of volume growth for MCX: Compared to Jan'22, the ADTV increase for MCX in Feb'22 was Rs30bn split Rs14bn/16bn between volumes and value. More than 50% of the ADTV increase was driven by crude followed by 21% gold, 10% silver and 12% aluminium. On similar lines, Mar'22 ADTV was up Rs101bn over Feb'22 contributed by crude 62%, gold 16%, nickel 15% and aluminium 8%.
• How other commodity exchanges are faring: BSE futures/options ADTV was up 2%/39% in Mar'22 MoM while NSE futures ADTV was up 6%. INX Commodity derivatives ADTV rose 11% MoM in Mar'22.
• Summary of recent regulations. (a) As of now, FPIs are not allowed to participate in exchange-traded commodity derivatives in India. Only foreign entities having actual exposure to Indian commodity markets, a.k.a. eligible foreign entities (EFE), are allowed to participate. In its recent consultation paper, SEBI has proposed that FPIs be allowed to trade in all non-agriculture commodity derivatives and a few selected broad agriculture derivatives. This move is expected to increase the depth and liquidity in the commodity derivatives market. (b) BSE has got nod from SEBI for trading in electronic gold receipts. (c) ICEX has applied to SEBI to shut down its commodity trading due to shortfall in requisite funds to meet the regulatory criteria.
• Modification in crude oil and natural gas contracts: On account of recent geopolitical concerns between Russia and Ukraine, international markets are witnessing high volatility in prices (especially energy segment). In order to ensure that sufficient strikes are available and appropriate price range is covered for options trading for the market participants in Crude and Natural gas segment, MCX has increased the number of strikes from 15 (each on in the money and out of money) to 40 (each on in the money and out of money).

Source : Equity Bulls

Keywords

CommodityExchanges MCX Volume ICICISecurities Volatility EarningsOutlook