CRISIL has assigned a ‘CCR AA’ rating to the National Commodity & Derivatives Exchange Limited (NCDEX). This is the first credit rating assigned to an Indian exchange. The ‘CCR AA’ indicates high degree of strength with regard to honouring debt obligations. However, it is not a rating of a debt instrument of NCDEX.

Disclosure of Interest: CRISIL has a 12 per cent equity stake in NCDEX, and the Boards of Directors of CRISIL and NCDEX have a common Chairman and one Director in common. The common Chairman, and the Director on CRISIL’s and NCDEX’s boards, did not participate in the Rating Committee Meeting and the rating process for NCDEX.

CRISIL’s rating on NCDEX reflects the exchange’s strong market position among commodity exchanges, sound risk management systems, large settlement guarantee fund (SGF) base, and proactive and technically competent management. These rating strengths are, however, partly offset by the uncertainties arising from the exchange’s short track record, the inherent risks of possible cyclicality, coupled with a cost structure that is largely fixed.

NCDEX is one of India’s three online multi-commodity exchanges, and has a strong position in the Indian agricultural (agri) commodities segment, with a share of more than 80 per cent in the trading of most agri-commodities. Agri-commodities contribute about 90 per cent of NCDEX’s turnover. To bring in greater diversity, the exchange is focusing on precious metals trading, and also plans to introduce trading in other metals and energy products.

NCDEX’s strong risk management measures include stringent criteria for admitting new members, real-time monitoring of trading positions and volatility, and a robust margining system based on the Standard Portfolio Analysis of Risk® (SPAN) model developed by the Chicago Mercantile Exchange. As on March 31, 2006, NCDEX had an SGF base of more than Rs.10 billion, in relation to an open interest of Rs.36 billion; CRISIL believes that this provides adequate protection from member defaults. Although NCDEX’s technology and risk management systems have not been tested over a long timeframe or in extreme volatility conditions, CRISIL believes that they are adequate for the exchange’s current scale of operations; the exchange's systems have been able to handle increases of over 100 per cent in average daily volumes. NCDEX also benefits from the parentage of national-level institutional shareholders, and technically competent management. The exchange’s systems and policies are based on those of the National Stock Exchange of India (NSE), one of its major shareholders.

Turnover on exchanges could be affected by cyclicality arising from the performance of the economy and underlying products, and by adverse movements in other exchanges that have common members. Further, all high-volume exchanges derive their volumes from investor confidence; a long track record implies stability and is therefore reassuring for market participants. NCDEX, in common with India’s other electronic commodities exchanges, is yet to build up such a track record.

About the exchange:
NCDEX is a national level online multi-commodity exchange. It began operations in December 2003. Its existing shareholders are ICICI Bank, Life Insurance Corporation of India, National Bank for Agriculture and Rural Development (NABARD), NSE, CRISIL, Indian Farmers Fertiliser Cooperative Limited (IFFCO), Punjab National Bank, Canara Bank and Goldman Sachs Investments (Mauritius) Ltd. It is a professionally managed, board-governed exchange. NCDEX offers futures contracts on 51 commodities. The daily average turnover during 2005-06 was Rs. 34.51 billion.