How MCX is dealing with its tech transition woes

MCX, India's largest commodity exchange with a monopoly in crude, bullion, and base metal derivatives trading, has landed itself in a precarious situation due to repeated failures to switch to a new technology platform. More than two years have passed since MCX appointed Tata Consultancy Services (TCS) to develop a new tech platform as it wanted to discontinue the services of its two-decade-old service provider, 63Moons (erstwhile Financial Technologies).

TCS is one of the world's leading IT companies, but still, the platform it was developing for MCX has not gone live.

Where does the problem lie?

Sources and experts close to the developments in MCX say the exchange kept changing requirements frequently in the name of new functionalities, which led to the delay.

MCX has witnessed a slew of resignations by chief technology officers (CTOs) in the last few years. After Rahi Racharla (designated as chief information officer) quit in August 2018, his replacement, Paresh Paul, who was appointed in February 2019, also quit in March 2021.

This was followed by the exit of Manav Jain and Shashank Sathe, two other technology chiefs who came in after Paul.

It is unprecedented for a large exchange in the midst of a technology transition.

The uncertainty over a full-time CTO is believed to be a factor behind MCX's failure to firm up its Business Requirement Specification (BRS) document for TCS.

However, sources said that scope of work was finalised only a couple of months ago, and no further changes are anticipated from the side of MCX.

But the delays have been due to past happenings.

The buck did not stop here, and the situation went from bad to worse. MCX also does not have a full-time chief regulatory official (CRO), a crucial person who can give input on the implementation of the new platform as per SEBI norms.

Like a full-time CTO, the role of a full-time CRO is also important for MCX as SEBI has recently prescribed rigorous guidelines on technology transition.

In June, the last of 63Moons six-month extended tenure as a technology provider for MCX, the exchange was still issuing advertisements to seek candidates for CTO and CRO.

According to sources, mock trading sessions conducted by MCX in the last six months did not give enough confidence to go live with the TCS platform.

On June 30, MCX ran back to 63Moons for another temporary extension of tenure.

In the process, it has paid more than Rs 400 crore to 63Moons to keep itself afloat.

"For the count, this is the third time that MCX approached 63Moons to extend the software support service arrangement after the long-term arrangement with MCX ended on September 30, 2022, and MCX selected a new technology service provider way back in February 2021.

"We sincerely wish that this ‘last time’ really happens someday, so that we can deploy our excellent team of exchange technology engineers in a mega-promising opportunity in the new digital world," 63Moons teasingly said in its exchange filing on June 29.
 
Equity research firm Morgan Stanley has given a price target of Rs 1,125 for MCX even as the share price was trading at over Rs 1600.

"The extension of its contract with 63Moons will wipe out most of its financial year 2024 profits. FY25 profit forecasts are unlikely to be affected if the implementation happens by December 2023," Morgan Stanley said in a note.

An email query was sent to MCX for its response. But no response has been received. 

SEBI's concerns

SEBI has been expressing its concerns to MCX since August last year. 

"Being a market infrastructure institution, it is necessary that MCX and MCXCCL ensure, on a continuous basis, that they have adequate infrastructure and systems in place for orderly execution of trades and timely clearing and settlement of trades, as well as having online surveillance capability," SEBI has told MCX.

After its warning to MCX, SEBI also tightened the scrutiny around technology set-up and put the onus of ensuring its accuracy on the Standing Committee on Technology (SCOT) of the respective exchanges.

The rules, however, were formulated especially for tech transitions like MCX.

SEBI has made SCOT of exchanges responsible for approving the methodology of system testing, functional testing, system performance under stress conditions, and application security testing.

SEBI has mandated that exchanges do extensive testing, validation, and documentation whenever new systems/applications or changes to existing systems/applications are introduced before deployment in a production/live environment.

Such documentation has to be comprehensive. Further, exchanges should have policies and procedures for the use of third-party systems/applications/software codes and ensure that these are subject to review and testing before integrating them. 

According to experts, fulfilling such rigorous requirements and its documentation without a full-time CTO and CRO could be difficult. 

But before it cuts the umbilical cord with 63Moons, MCX has to create the framework and allow SEBI a few weeks for inspection and testing. After the appointment of a CTO, the setting up of the framework, parallel testing of the platform, and all the risk management parameters themselves can take around six months for MCX, say experts.

But the process can start only after there is some clarity on MCX's filling of the key vacancies, given that not many would be keen to take up such a critical role at such a delicate juncture.

Hence, according to the experts, a switch to the TCS platform even after December 31, 2023, the last month of the third extended deadline of 63Moons, could be a race against time for MCX but not impossible.

Market speculation

Speculation is rife that, to salvage the situation, MCX may seek to merge with either the NSE or the BSE.

It is due to such anticipation that the share price of MCX has held firm in the face of grave adversities and even rose by around 10 per cent on Thursday despite a lower price target by the likes of Morgan Stanley, analysts say.

What is fueling speculation about a merger? Officials from Kotak group, which owns a 15 per cent stake in MCX, had a meeting with senior BSE officials a few months ago but it is not clear if the finer details of the merger were discussed.

In the past, too, news reports have suggested that the BSE was interested in a share swap deal with the NSE.

Adding fuel to the fire, the BSE recently made its derivatives trading available on the ODIN technology platform, which is the same that the majority of the brokers use to trade on MCX.

There are other similarities: the BSE uses the T7 platform to trade, which MCX has been trying to develop with the help of TCS.

News reports have suggested in the past that MCX could pursue a merger with NSE. But that would have to pass the muster of the Competition Commission of India (CCI), since both hold monopoly positions in their respective areas.

SEBI suggested SaaS 

SEBI had told MCX to explore utilising software-as-a-service (SaaS) models with any of the existing exchanges or clearing corporations until MCX and MCX-CCL are ready to handle the transition.

Reportedly, last year, officials at MCX held meetings with NSE Clearing, wherein SaaS was discussed. But MCX fears that it would lose volumes and crucial market data to rivals, hence the idea being put on the back burner.

While options for MCX are limited, its share price is firm, indicating interesting developments are in the works.