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Informist, Tuesday, Jul. 1, 2025

 

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--SKI Cap Wadhwa: Both NSE, MCX may thrive in electricity futures trading
--CONTEXT:SKI Cap MD Wadhwa's comments to Informist in exclusive interaction
--SKI Cap Wadhwa: More commodities needed in F&O trading, will aid hedgers
--SKI Cap Wadhwa: More chance of retail losses in equity F&O than commodity
--SKI Cap Wadhwa: Unbundling of clearing charges needed for transparency

 

By Rajesh Gajra

 

NEW DELHI – The National Stock Exchange of India and Multi Commodity Exchange of India may both emerge winners in electricity futures trading which they are launching soon, said Narinder Wadhwa, the managing director at brokerage firm SKI Capital Services. In an exclusive interaction with Informist, Wadhwa, former president of Commodity Participants Association of India, said the energy market is too big with large number of participants like electricity producers, distributors, and consumers, who want the ability to hedge, and other participants like jobbers, speculators, and arbitrageurs who can provide intra-day liquidity. 

 

Wadhwa said everyone in the country uses electricity and energy cost is a major input cost for some industries, companies, businesses and other consumers. He said though the scope of trading in electricity futures is large, it will be interesting to see if any one of the two exchanges is able to take a lead in volumes. But he thinks both the exchanges will thrive in electricity futures trading.

 

"Like in currency derivatives market, many exchanges offered contracts and the participation was widespread, in electricity futures the exchanges will have their respective share of the expected volume," Wadhwa said. He expects trading interest to be there, given the volatility in underlying spot electricity market. Recently, due to summer, the electricity prices ranged from INR 5 to INR 11 per unit, according to Wadhwa. 

 

NEED NEW CONTRACTS

Wadhwa also believes there is a need for a variety of commodities on which futures and options contracts are permitted. Given that India is said to be the second or the third largest economy soon, it should have contracts for every commodity to hedge, he said. As a former member of the commodity derivatives advisory committee of the Securities and Exchange Board of India, "we were chasing for it," he said.

 

Wadhwa acknowledged there are regulatory concerns around the likely success of new commodities' contracts but said, "Unless you try it how will you know whether it will work or not." For any commodity that is used in a significant way in the economy, there must be an ability to hedge the exposure, he said.

 

 

EQUITY F&O LOSSES

On SEBI's recent study papers on losses being made by retail traders in equity futures and options trading and whether a similar phenomenon takes place in commodity derivatives trading, Wadhwa said retail investors are not that active in commodity derivatives. The underlying in equity and commodity markets are different.

 

"In the equity market, the stocks have a perception value which can move the price of a stock from INR 500 to INR 1,500, or vice versa, in a short span of time," according to Wadhwa. There is a portion of perception in valuation of stock in addition to fundamentals, he said.

 

But in commodities trading, the fluctuations are much lower because the underlying has an intrinsic value, he said. "The price of gold is the price of gold," according to Wadhwa, indicating that perception holds little significance. So, there are less chances of commodity derivatives prices misfiring, Wadhwa said.

 

On the losses incurred by retail investors in equity derivatives trading which the SEBI study papers for 2023-24 (Apr-Mar) and FY23 showed, Wadhwa said while it was true the younger lot of retail investors had lost money, the figures need to be understood in the overall context of trading in the market, including the cash segment.

 

"Suppose I am participating in cash market and I have made money. But I have lost some amount in the F&O segment. So, net of net, I have made money," he said. But Wadhwa agrees with the concern over new investors, of all ages, who are attracted to gambling of all sorts including equity options trading. "We can't do anything...only thing is you can do is to raise the financial awareness in the country in a big way," he said.

 

CLEARING CORP INDEPENDENCE

SEBI recently put on backburner the matter of clearing corporation separation from the parent stock exchange. In a post-board meeting press conference on Jun. 18, SEBI Chairman Tuhin Kanta Pandey had said the market regulator has set up a working group to examine the issue of unbundling clearing charges so that the charges are levied in a manner where the clearing corporation is having the right kind of fees in order for it to be self-sustaining.

 

According to Wadhwa, the nucleus of this matter lies in the concentration risks in the market ecosystem. "Over the last few years, the market regulator has been continuously focusing on concentration risks in all intermediaries and market infrastructure institutions," he said. The regulator is really worried about it, Wadhwa said, adding unbundling of charges is good for transparency.

 

Further, clearing interoperability in equities has meant brokers can choose to settle their trades on one exchange with the clearing corporation of another exchange. In the equity segments, around 94-95% clearing is done by NSE Clearing Ltd., a wholly owned subsidiary of NSE, and 5-6% is done by Indian Clearing Corp. Ltd., a wholly-owned subsidiary of BSE, according to Wadhwa.

 

Clearing charges are currently bundled with all the other charges an exchange imposes on a broker. According to Wadhwa, there are exchange's transaction charges, SEBI fees, stamp duty, and for clients, brokerage as well. It is only through slicing one can know how much charges are for clearing, according to Wadhwa.

 

He said the unbundling will be good because the participants will get to know the major contributors to their transaction costs. One more thing in the clearing corporation independence issue, according to Wadhwa, is the fact that the clearing corporation is responsible for maintaining strong settlement guarantee funds in each trading segment. It is the legal counterparty to all cleared and settled trades. "Here, it is high time that the SGF (settlement guarantee fund) is optimal," he said.

 

Commodity derivatives products are currently excluded by SEBI from the purview of the framework on interoperability among clearing corporations. This is largely because "there is no commonality in contracts," according to Wadhwa. In equities, many companies' shares are listed on both NSE and BSE. But in commodity derivatives, the contracts on commodities-only exchanges and stock exchanges vary widely and even where the same commodity is available on two or more exchanges, the specifications are different.

 

But there is a need for movement of brokers' collateral across commodity and equity segments, Wadhwa said, adding he had first mooted this idea two years ago to the regulator. Currently, SEBI does not allow this. Wadhwa said a broker can manage his capital efficiently if he can move equity segment collateral to his positions in the commodity derivatives segment in the evening after equity markets are shut, and then transfer it back to equity segment next morning. Trading in commodity derivatives in some contracts takes place till around 2330 IST while the equity markets close for trading at 1530 IST.  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Akul Nishant Akhoury

 

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