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ESTABLISHMENT OF COMMODITY EXCHANGE IN TANZANIA
1.0 Commodity exchange
A commodity exchange is a trade platform where various
commodities and derivatives products are traded in
orderly and organized fashion, with clearly specified and
transparent rules.
Commodity exchange cont.................
• Prices are determined solely by supply and demand
conditions or fundamentals, and not by the exchange itself.
• Prices at which transactions are made are recorded and
released publicly by the exchange as soon as possible,
thus generating market transparency; Bids to buy go on
simultaneously with offers to sell;
• The exchange has a clearing mechanism which ensures or
guarantees that transactions undertaken by traders on the
floor are honored, should any insolvency occur.
Commodity exchange cont.................
• The Exchange makes use of brokers to bring and
integrate large numbers of buyers and sellers into a
market where membership is limited. They have a duty
to advise their clients regarding buy or sell decisions
and as to the best market opportunities.
• Exchange regulations and directives make it mandatory
for members to make use of standard contracts
prepared by the exchange, as well as to adhere to the
terms and conditions of the contracts, to keep records of
their transactions and submitted to be bound by the
disciplinary rules of the exchange.
Price Discovery Mechanism – Buyers and
sellers together set the price
• Many buyers
Auction
Exchange
Negotiation
Reverse Auction
• One Buyer
•
One Seller
Many Sellers
2.0 Fucntions of Commodity Exchange
Commodity exchange provides three basic functions
which make the need for one not just necessary but
imperative:
• Price/ market transparency (everyone has access to a
neutral reference price);
• Price discovery (demand and supply developments are
easily reflected in price levels) and
• Reduced transactions costs (it is easier to find buyers or
sellers through a centralized market place).
3.0 Types of Commodity Exchange
• A ‘cash’ exchange with spot delivery (i.e. typically up to
30 days)
• A ‘cash’ exchange with spot and forward delivery (i.e.
beyond 30 days) and
• A futures exchange, where the principal objective is
hedging (i.e. insuring against price fluctuations), where
the majority of contracts are ‘offset’ and do not lead to
physical delivery.
4.0 How it Operates
• The operation of a commodity exchange is similar to
that of the stock markets.
• At the centre of the exchange lies the exchange trading
floor, where all non-electronic commodity trading takes
place.
• These exchange floors are divided into several
sections, each devoted to the trading of a single
commodity.
• These sections are known as either a pit or a ring.
•
HOW DOES A COMMODITY EXCHANGE WORK?
Farmer, cooperative, or
trader brings product to
Exchange-accredited
warehouse
Exchange Back Office
Exchange Trading Floor
The warehouse draws
samples and issues a
Product Certificate and
Warehouse Receipt and
send copy to CDS
warehouse Receipt
are immobilized into
the CDS
Buyer deposits funds into
the Intermediary
Member
12/6/2011
account
Seller posts offer
Order
Matching
Buyer posts bid
• Market information
transmission
•Clearing and settlement
•Market surveillance
•Risk management
• Member database
•Disaster recovery
•Data center
4
4
How it operates cont……………
• In these pits traders stand facing each other, and
subsequently make bids and offers to one another.
• When a successful transaction is made between
traders, the information is immediately transferred on to
the massive trading floor quotation board while
simultaneously being distributed to the relevant trading
centers worldwide.
How it operates cont…………………….
• With the development of ICT the traditional methods of
open outcry system is being replaced by global
electronic trading platforms.
5.0 Benefits of commodity exchange
• Improvement of Farm gate prices as farmers become more
informed about market and pricing information;
• Farm productivity rises due to credit access;
• Increase quality of production by rewarding better quality
and consistency of crop;
• Commodity exchange can cover a wide range of
commodities from Agricultural produces and products to
non agricultural commodities such as minerals;
• Commodity exchange enable farmers and buyers adopt
both spot trading and forward contract.
6.0 Requirements for Establishing Commodity
exchange
• A market information system;
• A system of product grading and certification;
• Infrastructure – warehouses, weighing scales, ICT, roads etc;
• Legal and regulatory framework;
• An arbitration mechanism for dispute resolution;
Requirements for Establishing
Commodity exchange --- cont
• A system for licensing trading members (intermediary and
trading members);
• Producer and trade associations;
• Well-functioning warehouse receipts system;
• A well-functioning clearing and settlement system;
• Trading Platform;
• Supportive sectors such as banking, insurance, transport, IT
services, and inspection services.
7.0 Progress Made A. Work done to date
• Established a Team of Expert to oversee the process of
establishing and developing commodity exchange in the
country. The team comprise officials from Prime
Minister’s Office, Ministry of Industry and Trade; Ministry
of Agriculture and Food Security; Ministry of Finance;
Attorney General; Tanzania Warehouse Licensing Board
Capital Markets and Securities Authority and Agricultural
Council of Tanzania (ACT).
A. Work done to date cont..…………..
• Prepared a Concept Paper on the establishment of a
Commodity Exchange in Tanzania;
• Road Map for the establishment and development of
commodity exchange prepared.
• Undertaken a study visit to the Ethiopian Commodity
Exchange and Ethiopia Commodity Exchange Authority;
the India leading Commodity Exchange (NCDEX) and
Dalian Commodity Exchange of China
Work done to date cont......
• Undertaken three Studies on: (i) Developing Legal and
Regulatory Framework, (ii) Linkage between Warehouse
Receipt System and the Established Commodity Exchange;
and (iii) Commodity Exchange Design. The draft reports have
been discussed during stakeholders workshop held late June,
2013. Final reports submitted.
• A draft Cabinet Paper for establishing commodity exchange
has been prepared
A. Work done to date cont..…………..
• Established Warehouse Receipt System for coffee,
cashew nut, sesame sunflower, paddy and maize;
• Already Tanzania has in place a mini exchange for
coffee whereby warehouses receipts are traded by
linking buyers and sellers in automated trading
platform;
•
B. Outstanding Activities ..........................
• To put in place Legal and Regulatory Framework for an
efficient Commodity Exchange;
• To prepare business plan and budget which indicates
roles of each stakeholder in agricultural commodity
value chains.
• To establish a capacity building program for the purpose
of creating local expertise to manage the system
• To sensitize stakeholders, policy makers and the
general public.
B. Outstanding activities cont..........................
•Investment in the Technology: - The
exchange will be setup on the strong
backbone of IT infrastructure, which
requires significant investment in
developing and acquiring the required
software and the hardware.
B. Outstanding activities cont..........................
• Investment in Operating capital: - The Exchange will
take time to be profitable. In the interim, investment will
be required in keeping operations running.
• Investment in Human capital: - The Exchange to be
successful will require International experts to work for
the exchange as consultants/ Senior Management In
close collaboration with local counterparts this will
require funding to hire the key staff/ consultants.
7.0 Estimated Total Investment Required
Investment in Setting up operations (Initial Three
years)
Approximate Investment
Area of Investment
in USD
Pre-launch Business Design
1,200,000.00
Initial Set up of
Infrastructure
8,230,000.00
Technology- Software &
Hardware
5,000,000.00
Total Investment required cont......................
Capacity Building
Human Capital
Initial Operations for three
years
Guarantee Fund
Overheads (10%)
Total Investment
4,000,000.00
2,000,000.00
3,000,000.00
4,000,000.00
2,570,000,00
30,000,000.00
8.0 Challenges
• Funding:- initial investment for infrastructure and
manpower development;
• Inadequate awareness of the functioning of commodity
exchange among stakeholders which slow down buy in
process;
• Infrastructure – inadequate investment in Rural Roads,
Warehouses and Weighing scales;
• Inadequate development of Information and
Communication Technology in rural areas;
• Underdeveloped warehouse receipt system for effective
functioning of the envisaged commodity exchange.
Wayforward
• Issuance of a Cabinet decision on the establishment and
development of Commodity Exchange in the country;
• Engage all key stakeholders, particularly those who were
involved with agriculture marketing system, warehouse
receipt system, clearing and settlement systems and policy
makers, development partners on the need for the
establishment of an exchange.
• To establish framework of how to collaborate with private
sector in our efforts to set up the exchange.
• To put in place Legal and Regulatory Framework for the
establishment and development of a commodity exchange.
Wayforward cont...................................
• To develop awareness and capacity building
programme for all stakeholders.
• To establish ownership and Board Structure of the
envisaged National Commodity Exchange of Tanzania
taking into consideration the public private partnership
structure.
• Establish an institution to take up the establishment of
Commodity Exchange, “National Commodity Exchange
of Tanzania (NCXT)” is proposed.
• To develop a business plan for the established
institution for sharing with the Government,
Development Partners and other key stakeholders.
Wayforward cont...................................
• Enhance capacity of Tanzania Warehouse Licensing Board
(TWLB) so as to ensure integrity and reliability of the
warehouse receipt systems through upgrading of exchange
accredited warehouse and logistics infrastructure,
enforcement of exchange defined product specifications.
• Enhance capacity of Capital Markets and Securities
Authority to regulate the Commodity Exchange.
• Redefining the role of agriculture marketing boards in order
for them to dwell more on production promotion through
crop and seeds researches.