BSE Agreement with LME Means Credibility for Indian Traders

BSE Agreement with LME Means Credibility for Indian Traders

January 17th, 2019 - Financial, Global Connectivity

By Praveen Pondichery, TNS Country Manager for India

 This past October, it was announced that India’s leading bourse, the Bombay Stock Exchange (BSE), entered into a licensing agreement with the London Metal Exchange (LME) – a move that is expected to bring much closer cooperation, order and efficiency to commodity trading by implementing price transparency and a set of rules to increase the safety of transactions.

This is a significant step for Indian traders – one that will go a long way toward integrating the Indian market with the global market more effectively. Before the India International Exchange (IndiaINX) opened in 2017, the strict Indian commodity markets prohibited Indian traders from trading internationally. These restrictions exacerbated price differentials between commodities quoted on the LME commodities and Name Market Indian markets, and meant traders were inefficiently trading on the LME.

Now that Indian traders can trade LME legally, the BSE has gained a newfound credibility because of its efficient price discovery and greater market efficiency. As large trading houses invest in trading globally from India, it creates the opportunity for individuals to invest (often through mutual funds) and provides a greater level of protection for those investments.

Previously, equities were also banned for Indian traders; now, IndiaINX offers Google, Apple, Facebook and Amazon as single stock futures to Indian traders.

Importantly, the licensing agreement will allow BSE to peg its proposed base metals futures contract prices to LME’s own base metals contracts. Characteristics of a rapidly growing economy like India’s are strong construction and infrastructure business sectors that consume huge volumes of base commodities, which, of course, includes metals. Producers and consumers operating in the region need transparency on commodity prices – which are volatile and responsive to global events, whether economic, political or environmental – to run their projects and businesses efficiently.

The LME is the world center of industrial metals trading, with most non-ferrous metal futures business transacted on LME platforms, and thus is key to providing reference prices upon which firms can make purchasing decisions. Although these firms will not be buying directly from the BSE, they will use that information to make decisions about forward orders and stock holdings.

The licensing agreement will also provide a mechanism for producers to hedge against future price movements. With standardized products/contracts being traded in two major centers (Europe and India), it creates an arbitrage opportunity for globally active traders to identify opportunities to profit from price movements and differentials. This is a major reason why speed and low latency are so critical for these traders – the faster they can get information on these movements and make trades, the more successful they will be.

This is clearly a much-needed deal that should satisfy the demand for efficient trading from India’s increasingly affluent society, which has disposable income and is seeking to invest. As the market grows, this new accessibility is expected to become more important within the globally traded commodities market. The opening of IndiaINX made this deal possible, and it is expected to continue to substantially impact global trade.

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