CSE submits commodity exchange draft rules eyeing first trade by April
COMMODITIES TO BE TRADED:
- Gold and cotton might be the maiden commodities
- Copper and other common industrial metals are in the list
- Perishable items might be the last to be traded, as those involve a stronger market
The Chittagong Stock Exchange (CSE) submitted its draft rules for the country's maiden commodities exchange to the Bangladesh Securities and Exchange Commission (BSEC) on Tuesday.
The draft rules, which are subject to the approval of the market regulator, have been framed in collaboration with the project consultant Multi Commodity Exchange of India (MCX). The rules include an outline of how the new marketplace will be built, operated and governed.
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Following the approval, the port-city bourse would prepare the regulations concerned for further details of the way the commodity exchange would run.
According to the schedule, the regulations are set to be finalised by November so that the maiden commodity contract can be traded by April 2023, said CSE Deputy Manager (Business Development) Md Faisal Huda who is the member secretary of the bourse's commodity exchange team.
The CSE appointed the MCX as its project consultant on 12 April this year.
Commodity Exchange
A commodity exchange is a marketplace where producers, traders and users of pre-selected commodities meet for buying and selling. In modern days, they meet on electronic trading screens even without seeing or knowing each other just like the stock market.
Instead of instant deliveries of the traded commodity, the commodity exchanges prefer to float standard contracts with a future expiry date when the seller is compelled to deliver the sold commodity of standard quality and quantity, and the latest buyer is compelled to take the deliveries.
Commodity brokers act on behalf of their clients to facilitate the transactions and deliveries while warehousing, clearings and settlement of the trades are also taken care of by relevant entities.
The CSE is working to build a complete commodity exchange ecosystem in the country eying the establishment of all its pillar entities.
However, it takes time even up to a decade mainly due to the gradual development of business feasibility.
CSE Acting Managing Director Md Ghulam Faruque told The Business Standard that his exchange is planning to open commodity trading with non-delivery futures contracts that would be settled in cash after expiry.
For example, a contract to buy or sell one gram of gold is scheduled to expire on 30 June. The contract is made tradable at the beginning of the same year.
Buyers may buy and hold one or multiple contracts from the market or even sell it off to another buyer in the commodity exchange platform. Whoever holds the buy contract on 30 June would be entitled to get the delivery of the gold.
Since the delivery involves lots of processes and needs a matured ecosystem, the CSE would start with non-delivery, cash settlement futures contracts, said Ghulam Faruque.
In that case, commodity exchanges would settle the contract through cash payments between the buyers and sellers, based on the last-moment market price of the contract.
Faisal Huda said trading of non-delivery contracts might sound meaningless initially, which is not true.
The contracts help price discovery of the underlying commodity, let buyers-sellers hedge against price volatility, and cater to the need for investable liquid asset classes where money can be deployed for a return and withdrawn any time, Huda said.
In the MCX, over 80% of futures contracts are settled in cash while only the actual users of commodities tend to take the deliveries upon contract expiry.
Gold and cotton might be the maiden commodities as the two have both an efficient international market and enough users in the country, said CSE officials.
Copper and other common industrial metals are on the list of low-hanging fruits with enough feasibility for the proposed port-city commodity exchange.
Perishable items might be the last commodities to be traded there as those involve a stronger market and settlement infrastructure.
Trading commission in the commodity exchange would be similar to the stock market trading commission, according to Huda.
CSE is also planning for intraday trading which means a contract can be bought and sold repeatedly on the same day.
