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Will Index Futures Offer Real-Time Price Discovery?

Author: Dasari Sreenivasa Rao/Wednesday, October 21, 2020/Categories: Exclusive

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Will Index Futures Offer Real-Time Price Discovery?

India's first tradable base metal futures in indices available for trading on MCX from October 19

With the launch of futures contracts on commodity indices, the Indian commodity derivatives market has entered a new phase. India's largest commodities exchange 'Multi Commodity Exchange of India' (MCX)  formally launched its base metal futures indices- MCX iComdex base metals index futures, on October 19 (Monday). MCX had already started trading on bullion index, Bulldex, with good volume and making it the country's first such index on underlying bullion futures contracts. iCOMDEX base metal Index futures is India's first tradable base metal futures Index. The base metal index futures trading in five metals- copper, zinc, aluminium, lead and nickel- is expected to provide real-time domestic prices. Generally, base metal prices in India are hinged to trading pattern on London Metal Exchange (LME).

The market regulator Securities and Exchange Board of India (Sebi) had granted approval for the bourse to launch trading in base metal indices on June 29, 2020. After the approval, MCX begun mock trading in base metal futures indices on July 31 and made it a real-time trading from October 19. Further, MCX tested bullion index futures trade in mock trading exercises in July and launched bullion index 'Bulldex' on August 24. METLDEX is second commodity futures contract from MCX. The bullion index, Bulldex, India's first such index on underlying bullion futures contracts, is witnessing good volumes on MCX.

The base metals future contracts expiring in November and December 2020 and January 2021 are now available for trading from October 19, 2020, onwards.

Like MCX iCOMDEX Bullion Index, MCX iCOMDEX Base Metals Index (METLDEX) is also one of the sectoral indices in the MCX iCOMDEX family, and real-time Excess return index. METLDEX futures, a futures contract based on METLDEX, an index on the five liquid base metals traded on MCX platform, viz copper, zinc, aluminium, lead and nickel provides investors and traders an opportunity to participate in the sectoral index of metals, a barometer of the economic activity in the global markets. 

MCX METLDEX, tracks the real-time performance of flagship near month MCX Aluminium (5 MT), Copper (2.5 MT), Lead (5 MT), Nickel (1.5 MT) & Zinc (5 MT) futures contracts. The Index is an efficient tool for investors looking to manage their investments in base metal and, being an excess returns index, it is ideal for benchmarking and trading.

Each contract will start on the 15th day of contract launch month and trading takes place Mondays through Fridays from 9am to 11:30/11:55pm on MCX. The futures contract in base metal indices has a lot size equal to 50 times of the underlying base metals index and the tick size is Re 1, while the contracts will be settled in cash at the end of the expiry of each contract.

Excess return index : The return generated by an excess returns index such as the MCX METLDEX comes from not only the changes in the price of base metals commodity futures (the ‘price return’), but also the profits /losses realised by rolling commodity futures (the “roll return”) from near to subsequent month futures contract. The sum of the price return and the roll return associated with investment in the MCX METLDEX is the ‘excess return’ of the index. Zinc, Aluminium, Copper, Lead and Nickel form the index for basemetals, says Dilip Kumar Nath, senior research analyst, SMC Global Securities Ltd.

"The weightage reflects the volumes of the underlying base metals trading in India. Each commodity within the index is weighted three-fourths by its liquidity and one fourth by its physical market size in India, determined by local production and imports. The MCX METLDEX is rebalanced annually before the start of the January roll period," remarked Nath. 


The criteria to be eligible for inclusion as a new selection or to continue as a selection at a rebalance in the Base Metal index are:

They are in existence on MCX for at least previous twelve months.

They have a traded history for at least 90% of the trading days during preceding twelve months.

Average daily turnover during the previous twelve months is at least Rs 500 Crore.

Advantage of MCX iCOMDEX Base Metal Index

Elaborating the benefits of the new products, Nath further added that "they have the ability to transform commodities trading for retail as well as institutional participants. Retail investors and traders can now participate more efficiently using lesser margins than the underlying commodities. Moreover, they can avoid the worry regarding compulsory delivery process of five days for every contract month. Being a broad-based index comprising important industrial metals, the index also is an indicator of the fundamentals and performance of the industrial sector, particularly the metals-using manufacturing industry."

Further, being a diversified index, it would not get largely affected by micro-economic events relevant to one commodity market or sector. Long-term investors can use the MCX iCOMDEX Base Metals Index to gain from exposure to the Base Metals sector as a whole.

Nath said: "The Index can be used to make a powerful portfolio diversifier, with sound returns and low volatility over time as well as low correlation with equities and fixed income assets.  Institutional participants can now allocate funds under PMS, MF route to the METLDEX as a tactical allocation, long / short participation as well as create products like ETFs for their investors. Further, the diversification potentially reduces volatility in comparison to single commodity exposures. Protection can be established regardless of overall market direction."

The writer is a business journalist with 27 years of experience


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