Press Release

Multi Exchange Clearing Corporation Limited January 08, 2021 Ratings Rating Instrument Rated Amount (Rs. crore) Rating1 Action CARE AA+ (Is); Stable Issuer Rating* - Reaffirmed [Double A (Issuer); Outlook: Stable] Details of instruments/facilities in Annexure-1 *The rating is subject to the company maintaining overall gearing not exceeding 1.5x times Detailed Rationale & Key Rating Drivers The Issuer Rating of Multi Commodity Exchange Clearing Corporation Limited (MCX CCL) factors in the parentage of Multi Commodity Exchange of Limited (MCX); being a wholly-owned subsidiary of MCX, strong linkages with MCX as MCX CCL functions as the central counterparty for clearing and settlement of all trades executed on MCX, revenue sharing between MCX and MCX CCL and expected capital and operational support to MCX CCL considering the initial stages of independent operations of MCX CCL. The rating also factors in strong regulatory supervision by the Securities and Exchange Board of India (SEBI), experienced management team, leadership position of MCX in the commodity derivatives segment in India and adequate capitalization of MCX with nil gearing. The ratings also factors in adequate capitalization MCX CCL, adequate risk management framework in place through a well- defined margin framework to mitigate counterparty default risk and liquidity management through well-defined waterfall mechanism and Core Settlement Guarantee Fund (SGF) and adequate corporate governance. The rating is constrained on account exposure to single segment of commodity derivatives which is relatively a newer segment compared to equities and equity derivatives and has challenges involved in warehousing operations in delivery based contracts, volatility in income profile dependent on trading volume and limited track-record of MCX CCL as a standalone entity. Rating Sensitivities Positive Factors  Proven track record as an independent clearing house and continued parent support.  Diversification into other segments apart from derivatives on a sustained basis.

Negative triggers  Shortfall in actual SGF from regulatory requirement.  Moderation in MCX’s leadership position in or moderation in credit profile of MCX  Weakening in linkages with the parent group MCX  Moderation in credit profile of MCX

Covid-19 Impact: The Covid-19 pandemic and the nation-wide lockdown put in place to arrest its spread has affected the business of MCX and MCX CCL and those of its stakeholders such as Members, Warehouse Service Providers, assayers, etc. The curtailing of trading hours to 5 PM instead of 11.30 PM, which was effective from March 30 to April 22, 2020, steeply brought down the average daily turnover compared to that in the previous months. The resumption of trading hours from April 23, 2020 helped recover trading and clearing volumes, but at levels lower than recorded prior to the lockdown. The turnover was also affected on account of significant reduction in crude oil prices. The average turnover picked up in Q2FY21 to around Rs.38,000 crore per day from nearly Rs.23,000 crore per day in Q1FY21 and Rs.32,000 crore per day in FY20.

Detailed description of the key rating drivers Key Rating Strengths

Parentage of MCX, strong linkages with the parent and expected support and leadership position of MCX in commodity derivatives segment MCX CCL is 100% subsidiary of MCX. MCX has been in operation as a commodity derivatives exchange since 2003. Post the merger of Forward Market Commission with SEBI in 2015, in order to de-risk the process of settlement, MCX was required to set up a separate clearing house within a period of three years. Accordingly, MCX CCL was set up and it received recognition from SEBI as a clearing corporation on July 31, 2018 and renewed it for three years commencing July 31, 2019. Post start of operations of MCX CCL, MCX has infused equity capital of around Rs.240 crore until FY19. The clearing corporation provides collateral management and risk management services, along with clearing and settlement of trades executed on the Exchange. MCXCCL assumes the counter party risk of the clearing members for all the trades done

1Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications. 1 CARE Ratings Limited

Press Release on MCX. In terms of novation, it guarantees funds pay-out to its Clearing Members till marking of delivery and financial compensation (to make good losses of non-defaulting party) in case of default (in goods or funds pay-in) after marking of delivery. In view of its importance in the clearing and settlement operations and risk management, MCX CCL has strong synergies with MCX and receives support from parent in terms of technology, infrastructure and capital requirement. Currently MCX CCL receives a proportion of the total transaction charges earned by MCX as transaction fees for providing clearing and settlement services. MCX is a commodity derivatives exchange that facilitates online trading of commodity derivatives transactions and has a leadership position in commodity derivatives trading with a market share of 97.05% in terms of the value of commodity futures contracts traded in H1FY21. As on September 30, 2020, MCX has physical presence in about 1037 cities/towns across India with with 681 registered members and 55,660 Authorised Persons.

Experienced management The management of MCX CCL is led by Mr. Narendra Kumar Ahlawat, Managing Director and Chief Executive Officer (MD & CEO). He was earlier associated with National , Metropolitian Stock Exchange of India and MCX. He has more than two decades of experience in successfully managing clearing & settlement, risk management, trading operations, surveillance and other regulatory processes of commodity derivatives and stock exchanges. The Board of Directors of MCX CCL is headed by Mr. Ved Kumar Jain (Chairman) who has more than four decades of experience on advising corporates on finance and taxation matters. He has also been regularly involved in the consultation process of the Ministry of Finance and Ministry of Corporate Affairs and member of various expert Committees/panel constituted by the for fiscal and commercial legislations.

Moderate capitalization levels with nil gearing MCX CCL had nil borrowings as on September 30, 2020 (Nil borrowings as on March 31, 2020) and therefore there is low on- balance sheet leverage. The net worth of MCX CCL as on September 30, 2020 stood at Rs.335.17 crore (including SGF contribution of Rs.274.68 crore). The SGF of MCX CCL stands at Rs.448.16 crore as against requirement of Rs.366.42 crore as per regulations for the month of September 2020.

Strong regulatory oversight with adequate corporate governance The clearing and settlement operations of MCX CCL are closely regulated by SEBI. SEBI also directs MCX CCL towards mandatory maintenance of Core SGF for which the contribution is done by MCX CCL, MCX and clearing members to ensure settlement of transactions in case of failure on part of its clearing members to fulfill its obligations. MCX CCL has put in place its own board of directors and management team which is separate from parent company. The Board of Directors of MCX CCL comprises seven members including the Chairman, MD & CEO, three public interest directors and two shareholder directors.

Adequate risk management framework with well-defined margin framework, waterfall mechanism and SGF to mitigate counterparty default risk Being the central counterparty for clearing and settling the trades, MCX CCL bears credit risk of default by a clearing member which is rigorously managed by collecting regulatory prescribed margins from its members. MCX CCL has in place strong operational risk management measures which are applicable to the members who fail to meet their pay-in obligations by the scheduled date and time. Any failure to settle the pay-in obligation by scheduled date and time is treated as a violation and attracts penal action as may be stipulated by the MCXCCL from time to time which includes blocking of collaterals, suspension of trading terminal and the member being put in square-off mode. MCX CCL follows a comprehensive and stringent margining system for all commodity derivatives contracts traded on MCX. The Clearing Members are required to maintain minimum liquid net-worth requirement of Rs.50 lakh against which no exposure limit is given to the member. In addition, the members of MCX CCL are required to pay interest free security deposit as prescribed by MCX CCL at the time of admission, which will be used as margin deposit against exposure of the members. The same shall be given minimum 50% in the form of Cash and balance in the form of Fixed Deposit Receipts / Bank Guarantees. MCX CCL may ask for additional margin in order to increase the exposure limits for trading, the members may remit additional security deposit in the following forms. The CCL also takes margins like Extreme Loss Margin, special margin, etc., depending on the market conditions. Further, the Mark to Market (MTM) loss is monitored on a real time basis by the system to curb any default in the process of day trading. The cash (7%) + Fixed deposits receipts (56%) + Bank guarantee (20%) of overall client margin forms nearly 83% of overall margin held by MCX CCL as on September 30, 2020. Overall client margin stood at Rs.6,919.87 crore as on September 30, 2020. As defined by SEBI guidelines, MCX CCL is required to maintain adequate Settlement Guarantee Fund (SGF) to meet readily and unconditionally available to cover the counterparty default risk. The minimum required corpus against which the CCL has to maintain SGF is computed based on the results of stress test conducted based on historical data considering several

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Press Release extreme loss scenarios. Further, SEBI guidelines define a waterfall mechanism to make good the loss which helps uninterrupted operations in case of member default, which is applicable to all the clearing corporation. The SGF to tangible Networth stood at 134% as on September 30, 2020.

Key Rating Constraints Single Segment of operation of MCX Limited Although, MCX has a leadership position in the commodities derivatives in India, it has present in a single segment (commodity derivatives) which poses business risk in case of any adverse conditions in commodity markets globally. Also, within commodities market it has presence in Metals, Energy, Agri–commodities. During H1FY21, the top four commodities traded on MCX viz. Silver, Gold, Natural gas and Crude oil account for more than 80% of total turnover on MCX, which again poses a concentration risk. Any adverse movements in these commodities in terms of price, volume will lead to significant effect on overall turnover and income of MCX Limited. MCX CCL being directly dependent on MCX Limited for its revenues and business, is prone to these concentration risk.

Limited track-record as a standalone entity Post the merger of Forward Market Commission (FMC) with SEBI in 2015, in order to de-risk the process of settlement, MCX was required to set up a separate clearing house within a period of three years. Accordingly, MCX CCL was set up and it received recognition from SEBI as a clearing corporation on July 31, 2018. On standalone basis, MCX CCL started its operation on September 03, 2018 and has a limited track record of operations. However CARE takes support from the fact that earlier MCX used to perform the functions of clearing and settlement and the same team and infrastructure has been transferred to the standalone entity MCX CCL.

Business subjected to volatility in trading volume Being the initial stages of operations, the revenue of MCX CCL is predominantly dependant on revenue of MCX as it earns a part of transaction charges levied by MCX to its clients. Revenue of MCX is in turn dependant on volumes in the derivatives market exposing the revenue of MCX CCL to the volatility in trading volume on derivatives market of MCX. MCX CCL also has treasury income from the deposits, margins and collaterals received by its clearing members and its own funds by way of investments in bonds, mutual funds and CDs. On the basis of volatility in the trading volumes, the deposits and margins from clearing members are also subject to change leading to change in investments and in turn affect the profitability. The Crude Oil futures contracts expired on April 20, 2020 was settled based on NYMEX WTI crude oil front month contract’s settlement price at (–) Rs. 2,884, as specified in the contract specification. The settlement of the contract was completed on April 22, 2020 with no member defaults. Core Trading and Clearing Systems/software’s have been upgraded to handle the negative and zero price transactions, to handle events such as crude oil segment events which occurred in April 2020.

Increase in competition for MCX due to unified exchange regime This is likely to bring competition from. In view of the change in regulations for unified exchange regime, BSE and NSE received approval from SEBI to launch trading in commodity derivatives from October 1, 2018. With both the exchanges launching commodity derivatives trading in past year, the competition for MCX has increased. However, currently MCX continues to have the majority market share in commodity derivatives trading and CARE will monitor the market share of MCX going forward. Further, with an aim to reduce trading costs, SEBI came out with a framework for interoperability among clearing corporations (CCPs), which was operationalized by June 2019. However, the interoperability is not applicable to commodity derivatives as of now and would not have any impact on MCX CCL as of now, but any developments regarding the same will increase the competition for MCX CCL.

Warehousing MCX CCL has a separate Warehousing Operation division that caters to the storage requirements of various members and their respective constituents/ depositors who are willing to store goods and give delivery on MCX CCL platform. The division co-ordinates with the Warehouse Service Providers and accredits warehouses for safe storage and preservation of goods deposited by various business participants for delivery on MCXCCL Platform. As at March 31, 2020, MCXCCL had agreements with Seven WSPs for facilitating physical deliveries in agricultural commodities and Base Metals. As at March 31, 2020, MCXCCL has accredited 46 warehouses of these Seven WSPs, of which 40 warehouses are registered with the Warehousing Development & Regulatory Authority (WDRA) and remaining 6 warehouses for metals do not require WDRA registration.

Analytical approach: CARE has analyzed standalone credit and risk profile of MCX CCL and has factored in the shareholding and strong operational linkages with its parent MCX Limited.

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Press Release

Applicable criteria Criteria on assigning ‘outlook’ and ‘credit watch’ to Credit Ratings CARE Policy on Default Recognition Rating Methodology: Factoring Linkages in Ratings Criteria for Issuer Rating Financial ratios - Financial Sector

Liquidity Profile: Adequate MCX CCL’s liquidity profile was comfortable as it had no external borrowings. As on September 30, 2020, MCX CCL had cash and equivalent of Rs.155.69 crore. It also has unutilised OD facility of Rs.53 crore. For Month of September 2020, MCX CCL had SGF of Rs.448.16 crore as against minimum required corpus of 366.42 crore.

About the Company Multi Commodity Exchange Clearing Corporation Limited (MCX CCL) is 100% subsidiary of Multi Commodity Exchange of India Limited (MCX). MCX CCL is the first clearing corporation in the commodity derivatives market in India. It provides secured counterparty risk management and post-trade services to the market participants that would help mitigate risks and step-up operational standards for clearing and settlement functions in the industry. In terms of novation (i.e. the act of a clearing corporation interposing itself between both parties of every trade, being the legal counterparty to both), it guarantees funds pay-out to its Clearing Members till marking of delivery and financial compensation (to make good losses of non-defaulting party) in case of default (in goods or funds pay-in) after marking of delivery. SEBI has renewed the recognition of MCX CCL as clearing corporation for three years commencing July 31, 2019. Post start of operations of MCX CCL, MCX has infused equity capital of around Rs.240 crore until FY19. Brief Financials (Rs. crore) FY19 (A) FY20 (A) Total income 38.75 71.57 PAT 9.43 27.92 Total Assets (net of intangibles) 701.30 1,219.26 PAT Margin (%) 24.35 39.01 ROTA (%) 2.32 2.91 A: Audited ROTA is calculated on average of tangible assets

Status of non-cooperation with previous CRA: NA Any other information: NA Rating History for last three years: Please refer Annexure-2 Annexure-1: Details of Instruments/Facilities Name of the Date of Coupon Maturity Size of the Issue Rating assigned along Instrument Issuance Rate Date (Rs. crore) with Rating Outlook Issuer Rating-Issuer Ratings - - - 0.00 CARE AA+ (Is); Stable

Annexure-2: Rating History of last three years

Current Ratings Rating history Name of the Date(s) & Date(s) & Date(s) & Date(s) & Sr. Amount Instrument/Bank Rating(s) Rating(s) Rating(s) Rating(s) No. Type Outstanding Rating Facilities assigned in assigned in assigned in assigned in (Rs. crore) 2019-2020 2018-2019 2017-2018 2016-2017 1) CARE AA+ (Is); Stable Issuer Rating- Issuer CARE AA+ (08-May-19) 1. 0.00 - - - Issuer Ratings rating (Is); Stable 2) CARE AA+ (Is); Stable (26-Feb-20)

Annexure 3: Complexity Level of various Instruments rated of this company Sr. No. Name of the Instrument Complexity level 1 Issuer Rating Simple

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Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to [email protected] for any clarifications.

Contact us Media Contact: Name: Mradul Mishra Tel: +91-22-6837 4424 Email: [email protected]

Analyst Contact 1 Mr. Aditya Acharekar Contact no.: + 91-9819013971 Email ID: [email protected]

Analyst Contact 2 Mr. Sanjay Kumar Agarwal Contact no.: (022) 6754 3500 / 582 Email ID: [email protected]

Relationship Contact: Ankur Sachdeva Tel: - +91-22-6754 3429 Email ID: [email protected]

About CARE Ratings: CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices. Disclaimer CARE’s ratings are opinions on the likelihood of timely payment of the obligations under the rated instrument and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE’s ratings do not convey suitability or price for the investor. CARE’s ratings do not constitute an audit on the rated entity. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. CARE or its subsidiaries/associates may also have other commercial transactions with the entity. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is, inter-alia, based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. CARE is not responsible for any errors and states that it has no financial liability whatsoever to the users of CARE’s rating. Our ratings do not factor in any rating related trigger clauses as per the terms of the facility/instrument, which may involve acceleration of payments in case of rating downgrades. However, if any such clauses are introduced and if triggered, the ratings may see volatility and sharp downgrades.

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