09 October 2018 14:17:03 IST

Deputy Editor, Business Line Research Bureau. Writes on farm sector and insurance

The basics of trading bullion on a stock exchange

Here are a few things one must know before buying or selling gold/silver futures on equity exchanges

From October 1, the Bombay Stock Exchange has been offering gold and silver futures contracts for trade, thanks to a SEBI order in December 2017 permitting commodities to be traded with equities and other securities on the same exchange. Brokers who have a BSE licence can now allow customers to trade in gold and silver futures contracts of the exchange and offer them the benefit of margin fungibility (being permitted to use the margin in your equity trading account against new positions you take in gold/silver futures).

The exchange has launched two contracts — gold (1 kg) and silver (30 kg). The NSE has announced that it will launch its gold and silver futures contracts on October 12. The exchange will offer two contracts in gold — a 1 kg contract and a 100 gm contract — and a 30 kg contract in silver.

Investors, however, need to know that SEBI had permitted brokers last year (September 2017)to integrate their stock and commodity derivatives businesses, and give clients the benefit of margin fungibility. Motilal Oswal and Geojit Financial Services are examples of brokers that have integrated their equity and commodity operations. So, what do BSE/NSE bring to the table?

One, competition will increase and brokers will benefit as exchanges cut transaction costs in the race to gain greater market share. Two, the market may expand, bringing in more participants. For investors, however, not much will change. If brokers pass on some of their cost savings, brokerage will reduce, but that’s about it. Below are a few things one needs to know before playing gold/silver futures on the equity exchanges.

Margin fungibility

Today, if you have an account with an equity broker who holds a licence to trade on the BSE, she/he will allow you to trade gold/silver futures on the exchange with minimal formalities. You can use the margin in your existing trading account against new positions you take in gold/silver futures. Similarly, when the NSE launches its gold and silver futures contracts, members with an NSE licence can let their clients trade in those contracts, with margins being fungible across equity and commodity contracts.

Margin fungibility across equity and commodity derivatives among BSE, NSE and MCX, and NCDEX is, however, possible only if the broker has a presence in both segments and has integrated the operations.

In September 2017, SEBI allowed integration of broking activities in the equity market and the commodity derivatives market under a single entity by amending the Securities Contract Regulation Rules, based on the logic that all stock exchanges and their members are under the same regulator. Previously, a stock broker who bought or sold securities other than commodity derivatives was not allowed to undertake buying/selling in commodity derivatives, or vice-versa, unless he set up a separate entity.

Contract specification

If you are used to trading gold/silver futures on the MCX, you may be well aware of the features of the two contracts — the lot size, margin requirement, delivery conditions, and so on. However, note that new commodity contracts launched in on the BSE or the NSE may not come with the same specifications. For now, though, BSE’s gold (1 kg) and silver (30 kg) contracts have same specifications as the gold and silver contract in MCX. When the NSE launches its gold and silver contracts, the specifications may be different, so watch out before you take the plunge.

Also, if you are new to commodity trading, find out the margin requirements. Margin requirements in commodities may be relatively higher as lot sizes are bigger; and not all contracts are cash-settled.

Buy/sell in the same exchange

The commodity derivative contract bought in one exchange has to be sold in the same exchange. Say, you have gold futures contracts bought on the BSE, you can’t sell them at MCX, though contract specifications may be the same. You have to sell, or square off, your long position in a contract at the same exchange. Even if you play on arbitrage opportunities, the contracts bought/sold at one exchange have to be squared off on the same exchange.

Check for liquidity

Look at the liquidity aspect of the contract of the stock exchange before you take a position. If the bid-ask spread is wide, your transaction cost will go up. In such a case, buying the gold/silver futures contract on the MCX may make sense.