Transcript No Slide Title

Emerging commodity exchanges
UNCTAD, Commodities Branch
Olivier Combe, Lamon Rutten, Leonela Santana-Boado
When is it useful to start the creation of a
commodity exchange?
What does an exchange provide?
Transparency in prices
Everybody can
know at what price
is each product
sold
Reduces cost transaction
Everybody is in the
same place, no need
to look for buyer or
seller
Provides price discovery
Sorry, I only deal
with love affairs,
look at the
commodity
exchange
Avoid
manipulation,
provide a
benchmark price
for transaction
What will be the
price of Robusta
coffee next
month?
Why Have a Commodity Exchange?
Through the
exchange
Reduce counterparty risk.
It’s the most competitive trading mechanism available
It gives a competitive price quote
Increases sources of finance
Allows price risk management
The development of a commodity exchange;
preconditions
I will reach it
A real willingness from politicians
Sound infrastructures
A sound legal
framework
A real interest from exporters,
traders and producers
The development of a commodity exchange;
settings
And now our daily
report on wood
prices quoted at the
exchange
Telecommunications
between traders and the
trade floor
Clearing house floor
controls
Availability of information
through medias
Trade floor
Brokers ’ floor
Building settings
Allow the existence of the exchange and its practices,
provide incentives to deal in the exchange
Law modification
What would be the components of a detailed action plan
1
2
3
Necessary infrastructure:
 trading room
 many telephones
 weighting and quality
control equipment
 a system to record prices
Trading rules:
choose
the
right
language for the orders
 best bid/offer should be
automatically accepted
register
the
deal
immediately on standard
form
Exchange organization /
rules to determine:
 formal criteria for
access
 financial guarantee
 which staff
 the trading period
4
Contract formulation including:
 the minimum quality acceptable
 discount or premium if quality is
lower or higher
 traded quantity
 delivery conditions
 procedures to follow in case of dispute
5
Need to be trained:
 those active on the exchange
 exchange officials
 exchange users outside the
exchange
 create some awareness among
local bureaucrats and politicians
Open-outcry
versus
Electronic trade
It’s a centralized trading
floor, with buyers’ and
sellers’ representatives
What
Buyers and sellers
interconnected through a
computer network
More adapted to
physical trade
Why
More adapted to
risk-management
Buyers and sellers need
to be in one place
Physical infrastructures;
relocation
Role for locals; low
risk of breakdown
Whe Buyers and sellers are
re
dispersed
Costs
Operating systems;
telecommunication costs
Easy to add new products;
Advantages long trading hours; perfect
recording of operations
Steps of development
1
Learning stage of trading mechanisms, most
trades are spot, some are over-the-counter
Producers
Foreign traders
Traders
Producers
may come
with
warehouse
receipts or
with samples
Easier to deal first only on
physical goods
Steps of development
2
Creation of contracts
Purpose
- facilitate planning and marketing
- lock in forward prices
- secure a processing margin
Advantages
- tailor made
- ensures physical market for
the commodities produced
- can make production or pre-export
finance possible
Disadvantages
C O NTRACT
- difficult to revert initial decision
- major counterparty risk
- possibility of profiting favourable
spot market developments is lost
Steps of development
3
Creation of a new futures exchange
The underlying product should really
be different from already traded ones
in other futures markets (problem of
basic risk)
The volume of traded contracts should be
sufficient (problem of liquidity)
The futures contracts will be more
successful when located in a region which
is an important producer
Example of a futures market and its
components
Public
Clearing house
Control trades
and prices
Public is:
Brokers
Market floor
Trade according to their
client’s mandate
-speculators
-bodies which hedge
-arbitrager
Roles of equal
significance
Counterparty risk is absent from futures market
Steps of development
3
Creation of contracts
Purpose
- hedge price risk
- lock in the value of inventories or finance
part of storage costs
- secure a processing margin
Advantages
- no need to negotiate contract specifications
- minimal counterparty risk
- initial position can easily be reversed
- delivery is not necessarily implied
C O NTRACT
Disadvantages
- working capital is frozen up in margins
- possibility of profiting from favourable
spot market development is lost
- prices of the hedged product and the
futures contract may diverge
Steps of development
4
Creation of contracts
Purpose
- obtain protection against unfavourable
price movements while retaining the
possibility of benefiting from favourable ones
- valorize inventories
Advantages
- available in standardized form on exchanges,
and tailor-made over-the-counter
- no “funding risk”: the costs of protection are
known up-front
- possibility of benefiting from favourable
price movement
C O NTRACT
Disadvantages
- up-frpnt premiums can be expensive,
especially in times of volatile prices
- selling options can be highly risky
- options sellers need to pay margin calls
Roles of Government and International
Organisations
Motivate producers to deal through the exchange
Arrange that quotas for low-tariff entry of
selected products into other countries are traded
through the exchange
Tax speculation and hedging differently
Do not change price policy too often
In building infrastructure
In providing training and
spreading information
In the design of contracts
For reliable trading system, prices, contracts,
brokers and traders
For reliable quality specifications
and warehouse receipts
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