London Metal Exchange Is Changing How It Does Business In India

The world's largest setter of metal prices is in talks with Indian companies to set up warehouses in the country as the market regulator seeks a phased transition towards physical settlement of all commodity derivatives.

The regulator's move has created an opportunity for exchanges to launch physical delivery of contracts in India, Matthew Chamberlain, chief executive officer of the London Metal Exchange Ltd., which provides reference rates for trading base metal futures, told BloombergQuint in an interview. “If they did that, our prices won't be needed.”

As of now, cash settlement of commodity contracts is based on LME prices. But once delivery becomes mandatory, they will be based on local prices and also factor in taxes, and freight and warehousing costs.

The Securities and Exchange Board of India, which so far allowed delivery-based contracts for gold options, indicated that it will soon look to allow delivery in commodity futures, Deepak Mohanty, whole-time director at SEBI, said at MCX's India Commodity Day on Nov. 16 in Mumbai.

That comes after the regulator allowed unified exchanges to boost commodity trading. SEBI is also opening the commodities derivatives market to foreign entities having direct exposure in India. It wants these “eligible foreign entities” to hedge their exposure in the country.

There would be a need to provide these entities comfort of warehousing and the LME is looking to provide that comfort, Chamberlain said. “Physical delivery can have many forms in India—it could be discovery of premium price or any other form. If the contract is based on LME pricing, we can give that comfort to eligible foreign entities as it's based on our global delivery network and price.”

Watch Matthew Chamberlain's interaction with BloombergQuint here:

LME has more than 500 warehouses in the U.S., Europe and Asia. These are not owned and operated by LME but provide services by storing LME-approved metals.

In India, it has an exclusive agreement with MCX Ltd.—the nation's largest commodity bourse—to provide reference rates for all metals, except copper. It recently signed an agreement with BSE Ltd. and NSE to provide reference rate for copper as the two bourses launched the futures contracts in the metal after SEBI allowed unified exchanges from Oct. 1

SEBI has been in discussions with the universal exchanges to expand the scope of physical deliverable contracts, and timelines have been agreed, Mrugank Paranjape, managing director and chief executive officer of MCX. “It would be fair to assume that in the next one year, or so, we would see physical deliverable contracts across all products, especially in base metals.”

But for physical delivery to succeed, Indian commodity markets require depth. It doesn't have much depth in terms of participation by institutions, Paranjape told BloombergQuint. “It is important to get the Indian corporates to participate in the Indian commodity derivatives markets.” At present, 22 Indian companies prefer to trade on LME.

Watch Mrugank Paranjape's interaction with BloombergQuint here: