Just to add a little more here, one should basically look at PTC as the biggest broker. Can a big broker shift volumes from NSE to BSE? Probably not right.
Similarly PTC is not the end consumer, its a broker. But one must also take a note here that in case of NSE or BSE, granularity of clients is a lot higher compared to what IEX has. So the stickiness in case of IEX will not be as high as NSE.
The shifting of volumes form a existing successful exchange to a new exchange sounds too good at first but if we look at all instances where a new exchange has been launched to compete with an existing exchange most have them have failed.
There was a lot of hype about nse launching commodity. Ppl kept saying that when you will get commodity in the same window as that of equity it is bound to be a hit. But that was not the case.
Disc: invested so i may be biased
pxil has been in the space for quite a long time, and is promoted by NSE and National Commodity and Derivative Exchange. PXIL’s market share has been steady at 1% and IEX has 99%.
Network effect based moats are very difficult to overcome and would require some sellers to sell exclusively on other platforms, which means if large power producers tie up with an exchange, then alarm bells should go off. If not, then there’s no big threat
Seems like there is another positive development.
But this article says
"Sources said delivery-based long-term contracts are likely to be traded on power exchanges under CERC’s jurisdiction, while the derivative contracts are likely to be traded on commodity exchanges under Sebi"
does it means that derivatives contracts of power can only trade on commodity exchanges like MCX etc and not on IEX?
Read more at:
Your inference seems correct, this segregation is on account of the spat b/w CERC and SEBI. Unless my understanding is incorrect (more knowledgeable members, please correct me if it is) even the long-term delivery-based contracts will potentially help IEX and PXIL gain volumes. The development seems to be positive for MCX and NCDEX too. Let’s wait for what the SC has to say.
This is a huge positive for Power Exchanges.
Ensuring delivery is their key “value proposition” - this is why actual users (buyers/sellers) come to the power exchanges.
Just ignore the speculative trading in electricity derivatives that will take place on MCX and other exchanges.
Note - It will take at least 12 more months for all the rules to be made and the first forward contract to be traded on power exchanges
@amey153 agreed that cheap electricity + near perfection in delivery are the core value propositions of IEX.
Please correct if you find anything wrong with the following thought process:
Price discovery would probably be equally good on both mcx and iex because both have expertise in price discovery on the basis of supply and demand
coming to delivery, mcx has little experience in electricity delivery but in order to develop the futures market for electricity, they will have to develop a delivery infrastructure too else it will have very minimal volume (and as a result very little trading). Some large buyers might consider futures as a hedge but in order for them to consider futures to be a reliable hedge, the market will need decent volumes of electricity which will come only if there is ample supply by the power producers who will come onboard only if there is delivery infrastructure in place. Adding to the complexity, there is the headache of congestion where MCX (or any commodity exchange) would likely have to collaborate with CERC to ensure power from MCX does not cause congestion in the network.
From ET Article : "Sources said delivery-based long-term contracts are likely to be traded on power exchanges under CERC’s jurisdiction, while the derivative contracts are likely to be traded on commodity exchanges under Sebi. " this makes it seem that commodity exchanges are not going to focus on delivery and power exchanges will focus on “long term contracts”. This means futures might turn out to be a dud or just a hedge but that leaves the question, who will eventually take delivery of the electricity contracts but that again raises the congestion concern.
Considering all these potential hurdles, the futures market has severe headwinds with the present arrangement. So why did SEBI and CERC even come to this agreement? Neither party seems to benefit from this. Am sure there’s something which am not seeing right, hoping you’ll throw some light on it
Another thing to note, isnt short term power the focus of IEX? Why does the source say long term contracts will be traded on power exchanges?
EDIT:
this says that derivatives market are significantly smaller than forwards contracts (slide 26). if that’s the case, then how will they provide a hedge? would be grateful if someone could address it
As of Q1Fy21 shareholding pattern Pabrai Fund Holding reduce<1%.
From CERC regulations draft ,key entry barrier =>
Can you point out which draft regulation is this?
http://www.cercind.gov.in/2020/draft_reg/DR-PMR-2020.pdf
The obvious implication of Market Coupling is that since price on all power exchanges will be common, buyers and sellers are equally like to go to PXIL or IEX, resulting in dilution of IEX’s market share.
But taking into consideration the previous release by CERC which said long term contracts will be traded on the exchange, it goes to show CERC is acknowledging the influence of power exchanges and paving the way to ensure that future growth of exchanges does not cause adverse effects primarily, congestion.
Looking forward to hearing from others on this
Continuous news flow on both sides…
i discussed with CERC, the biggest risk factor i felt was the cap on Exchange fee. this was till date not capped but now they are going to propose which in my view is a concern for a future growth and profitability. the reason is to ensure consumers are protected esp when in a monopolistic scenario though the Monopoly was not of IEX making while others could not get the model IEX brought in. Yes, we need to see how IEX is able to bring the market from DEEP portal which has a volume of 4% . if this can be brought in through LTC, then there is real chance of growth.
OTC platform has been introduced which is good for the market as a whole. many compliances have been relaxed and they don’t need to go back to IEX everytime to introduce new products.
RTM has been successful, daily 30 MUs apart from DAM and RECs. other than that i dont see any great trigger. Regulator can be a spoiler and overall i have seen though they are forward looking but this socialist mindset sets in when for eg they are trying to cap the exchange fees. if other exchanges can come in aggressively and the competitive forces should take care of such fees.
“NoPower Exchange shall chargetransaction fee exceeding such fee as approved by the Commission:Provided that the Power Exchanges which have been granted registration by the Commission prior to the date of notification of these regulations shall be required to obtain approval of the transaction fee to be charged by the Power Exchange within a period of three months of the date of notification of these regulation”
For any increase, the exchanges have to get approval from CERC , thats always been the case. Whats changed ?
Hi as i said IEX can go and seek hike in exchange fee and now they are going to cap the fees , that’s the difference
Just to give a perspective of how Power exchanges fees have evolved, i am putting across the few snippets of orders and parts of business rules from 2015 atleast.
The below para was in CERC Order Dated 08.04.2015 – Commission was only approving the Bye Laws and Rule which specifies the transaction fees
The Power Market Regulations, as of now, do not impose any cap on the transaction fees levied by the Power Exchanges. The Power Exchanges are allowed to levy transaction fees as prescribed by the respective Exchanges as per their Business Rules approved by the Commission.
For IEX, the Business Rules also give them flexibility to specify the transaction charges
Transaction Fees - Fees payable by buyer and seller to Exchange for the quantity approved by nodal RLDC at delivery point as specified by the exchange from time to time.
Rationale was kind of what IEX says : The Commission had allowed exchanges to fix their fees structure for trading at exchange platform, which is similar to the approach being followed by other Regulators like SEBI for Stock and Commodity Exchanges, wherein the Regulator has not fixed transaction fee being charged by the respective exchanges and leaves it to be regulated by the competitive forces. Therefore the approach being followed by the Commission is consistent with the approach being followed by the Stock and Commodity exchange regulators.
IEX Business Rule till CERC order of 9th Oct 2018 - No need to take separate approval
The Exchange will charge a transaction fee as may be specified from time to time on the transactions carried out through the Exchange. Such transaction fee will be computed on value basis or volume basis, as may be decided from time to time, which will be computed on both purchases and sales separately. This will be billed separately on periodic basis and will be recovered from the settlement account of the Member or the Clients, as applicable
IEX business Rules based on CERC Order 9th of October, 2018 – They introduced that they have to take Commission approval before hiking such fees
The Exchange will charge a transaction fee as may be specified from time to time on the transactions carried out through the Exchange. Such transaction fee will be computed on value basis or volume basis, as may be decided from time to time, which will be computed on both purchases and sales separately. This will be billed separately on periodic basis and will be recovered from the settlement account of the Member or the Clients, as applicable. Any changes in the transaction fees shall be effected by Exchange with prior approval of the Commission
Now in 2020 – Power market regulations clause 23, they are introducing the following
“No Power Exchange shall charge transaction fee exceeding such fee as approved by the commission
@bajji_s hypothetically speaking, if PXIL and IEX offer power at the same price (possible due to MCO), what factors would DISCOMs and Gencos consider when deciding which exchange to use?
this is my limited understanding. Even today, most of the times the price in both IEX and PXIL are the same. IEX had invested heavily in its software as well as the overall technology and could handle huge volumes while PXIL mostly did price discovery in the backend, may be lately they might have improved but largely they were unable to take huge volumes. Lots of clients were not comfortable with PXIL and stuck to IEX. IEX gives complete certainty of delivery which is very important for both Discoms and generators. Though in both cases adeaquate access from NLDC are allocated, in some instances certain transactions could not be completed in PXIL, so IEX created that trust in Traders etc while PXIL in their earlier avatar were dismissive of traders and traders bring in large amount of volume while IEX encouraged Traders.
with MCO coming should obviously give certainty in prices and agnostic to exchanges, the clients look for other business aspects and still i feel they would prefer IEX.
