From the April 01, 2007 issue of Futures Magazine • Subscribe!

Joint venture exchanges deliver the goods

A noticeable chill swept through India’s commodities world in late January when the government banned futures on two products core to the Indian diet and to all three national commodity exchanges: the tur (a type of pea) and the urad (a type of lentil).

The move came weeks before Parliament launched debate on legislation to open commodity futures to more participants, and on the heels of China’s decision to postpone launching the much-anticipated Shanghai and Shenzhen 300 Index (SS 300) futures on the fledgling China Financial Futures Exchange (CFFE). Then, in early March, the government delisted futures on wheat and rice.

Fortunately, there are plenty of other new products that offer American traders a chance to get in on moves around the world. The Joint Asian Derivatives Exchange (JADE), for example, has finally launched its flagship product, dollar-denominated crude palm oil (CPO). That major oil correlates with soybean oil and corn oil, and trades on the Chicago Board of Trade’s (CBOT) electronic platform.

Indeed, JADE is a joint venture between the CBOT and the Singapore Exchange (SGX), one of nearly a dozen new joint-venture exchanges launched during the past year. For futures traders, such joint ventures could yield more new products than the massive consolidation sweeping the industry, symbolized most dramatically by the planned mergers between the CBOT and the Chicago Mercantile Exchange (CME) and between the New York Stock Exchange and Euronext.

Even the political storms about Asia’s exchange landscape seem more annoying than threatening. For example, Shang Fulin, who runs the China Securities Regulatory Commission (CSRC), has gone out of his way to re-iterate his belief that the SS 300 will make the country’s privatization process run more smoothly by offering an efficient hedging vehicle, and subtle shifts indicate the Chinese still intend to open their markets, but in their own time. Five more mainland futures brokerages, for example, have set up shop in Hong Kong making it possible for them to forge joint ventures with non Chinese brokers to solicit non Chinese business.

That business is being delivered via a global web of exchanges and communications networks operating under the auspices of ever-more cooperative regulators in places that less than a decade ago were on no trader’s map.

No city demonstrates that more than Dubai, where the Dubai Gold & Commodities Exchange (DGCX) has been running for more than a year. A joint venture between India’s Financial Technologies (India) Ltd. (FTIL) and the Dubai Multi Commodities Centre, which is owned by the government of Dubai, DGCX is set to launch an array of metal contracts this year, beginning with steel on May 1.

That’s the same day the Dubai Mercantile Exchange (DME) is set to start trading “sour” crude oil. The contract is based on the oil grade produced by much of the Middle East, while the two current global benchmarks, Brent crude and West Texas Intermediate (WTI), are “sweet” varieties being pumped out in lower and lower amounts. The DME is a joint venture between the New York Mercantile Exchange (Nymex) and Dubai Holdings.

In April, Eurex is set to launch futures and options on the RDX extended index, which is comprised of 15 dollar-denominated Russian shares trading in London. The exchange also will also list single stock futures on those 15 and options on four. It has applied to offer the index futures and options in the United States.

The London Stock Exchange (LSE), meanwhile, says it will soon announce a new platform for Eastern European products, probably in cooperation with the Warsaw Exchange or Moscow’s RTS. That represents a morphing of products and innovation akin to the London Metals Exchange (LME), which made a splash when it unveiled a slew of non ferrous products geared to small hedgers and retail traders last year.

In the energy sector, carbon trading has finally become a bona fide part of the energy complex in Europe with the price of carbon allowances on the European Climate Exchange (ECX) now being a major component of the spread between clean energy sources like natural gas and dirty energy sources like coal. Such correlations will become more pronounced once the market gets a handle on whatever cap-and-trade regime the United States will implement in the future.

In India, as in China, commodity markets are booming domestically, but face stiff political opposition. Every issue is on the table from who can access Indian markets from abroad to who can invest in futures exchanges to whether the ban on tur and urad futures will be extended to other foodstuffs (see our International special on India, “Do Chickpeas have a future?”April 2007).

Under the current regulatory regime, non U.S. firms still have to build a physical presence in India to trade commodities there, which is an option only viable for a handful of giants like Cargill, Louis-Dreyfus and Merill-Lynch, who have massive operations in the cash markets.

But now Parliament is debating a series of amendments to the Forward Contracts Regulation Act (FCRA), which could not only give the commodities regulator, the Forward Markets Commission (FMC), more autonomy, but also clear a path for exchanges to launch intangible products like weather derivatives, commodity indexes, and options on commodity futures, and allow direct access from abroad to approved foreign institutions.

But the delistings give credence to calls by left-wing politicians for a ban on all food-based futures — a likelihood that Ncdex boss P. H. Ravikumar says is overblown. “Several ministers have already said that these delistings are isolated instances,” he says, adding that all capital restrictions will be gone within three to four years.

The immediate goal is to get permission to court the same users as the securities exchanges do: so-called Foreign Institutional Investors (FIIs), which are foreign entities, including proprietary trading shops that can trade simply by being approved by regulators even if they have no presence in India. Such FIIs can already trade Indian financial futures, which are listed on stock exchanges, because stock exchanges are regulated by the Securities and Exchange Board of India (SEBI).

Commodity futures exchanges, on the other hand, are regulated by the FMC, which has a mandate analogous to that of the U.S. Commodity Futures Trading Commission, meaning it oversees not only the three national multi-commodity exchanges, but also the 21 regional commodity futures exchanges dedicated to just one or a few commodities.

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