Country to get maiden commodity exchange within a year

The Chittagong Stock Exchange (CSE) is going to establish the country's first commodity exchange through the trading of precious metals including gold and silver as there is a ready market for these products and they are easily tradable.

Other goods, both locally produced and imported, such as food grains, chemicals, crude oil, steel, and natural gas would be added to the commodity exchange later, according to the CSE.

CSE Chairman Asif Ibrahim told The Business Standard that necessary preparations are being taken to launch the commodity exchange within one year.

The CSE chairman has already prepared a concept note and sent it to Finance Minister AHM Mustafa Kamal after getting approval from the Bangladesh Securities and Exchange Commission (BSEC) to establish a commodity exchange in the country.

He has sought financial assistance from the government to create infrastructures for online trading, clearing and settlement, and to conduct research for this purpose.

A commodity exchange allows businessmen to trade futures contracts to buy or sell a specific commodity at a specific price.

According to the CSE concept note, the purpose of the proposed commodity exchange is to provide a centralised marketplace where producers and traders can sell their products to those who want to use them for manufacturing and consumption.

"Through a commodity exchange a producer or seller can lock a price for their products months before they are even harvested or manufactured. A commodity exchange can ensure improvements of commodity prices as farmers and producers become more informed about the market and prices. It ensures credit access up to the root level of the supply chain of commodities to create an efficient market and minimise fluctuation in prices," says the concept note.

All commercial parties of a particular commodity – including manufacturers, producers, traders, buyers or users, financiers, and stockists – will be able to utilise commodity exchanges to make the economy more efficient, active and vibrant.

An automated commodity exchange platform can connect all the commercial parties at home and abroad, creating normal and efficient price discovery for an effective supply and distribution system. In this way, the economy can get a proper mechanism to boost production and trading, says the CSE in its concept note.

 What are the challenges?

The CSE has identified five problems in introducing a commodity exchange in Bangladesh.

Absence of a regulatory infrastructure is one of the shortcomings, while physical infrastructures are also insufficient for warehousing, delivery and standardisation, both for spot and futures trading.

"But the activities can be started with some specific and standard products with a futures cash settlement policy which would gradually create avenues of requisite infrastructure," the concept note reads.

The banking system has a very limited scope for financing through trade infrastructure except export-import documents, and inter-bank debt instruments are almost absent, it noted, hoping that a commodity exchange policy may accelerate and force banking and insurance systems to accommodate smart financing procedures for commodity trading.

It also cited a lack of awareness about policy provocations to establish a transparent transaction system that can facilitate commodity trading through an exchange platform.

"Not only Asian economic giants such as China and India, but Nepal and Pakistan as well have established commodity exchanges. But in Bangladesh, policymakers, regulators, banks and other stakeholders of the economy lack awareness about the necessity of commodity exchanges," it added.

Potential of commodity exchange in Bangladesh

Bangladesh is one of the fastest growing economies of the world and all the economic indicators are showing positive trends, the CSE mentions, adding the size of the economy needs systematic commodity trading infrastructure to ensure sustainability.

"Current transition of the economy towards developing status is highly suitable for establishing a commodity exchange as a facility to improve Global Value Chain with the national market," says the CSE.

Pointing out that annual international trade of the country is now about $95 billion which was around $61 billion five years ago, the port city bourse also noted that efficient forecasting, price discovery, financing and supply and distribution are important to facilitate international trade.

Growing international trade is encouraging the establishment of a commodity exchange, it observes.

As per the CSE concept note, the current supply chain of imported and domestically produced commodities requires a structural platform that can facilitate a commodity exchange.

History of commodity exchange

The Amsterdam Stock Exchange is often cited as the first stock exchange that originated as a market for the exchange of commodities. Trading took place on the Amsterdam Bourse, an open-air venue that was created as a commodity exchange in 1530 and rebuilt in 1608.

In 1864, wheat, corn, and cattle were widely traded using standard infrastructures on the Chicago Board of Trade in the United States.

Other food commodities were added to the Commodity Exchange Act and traded through CBOT in the 1930s and 1940s expanding the list from grains to include rice, mill feeds, butters, eggs, Irish potatoes and soybeans.

In the Indian subcontinent, the Cotton Trade Association started futures trading in 1875, about a decade after those started in Chicago. Over the time, derivatives markets developed in several commodities in India.

Multi Commodity Exchange of India Limited (MCX) is India's premier commodity exchange that started operating in 2003.

Commodities traded in the exchange include gold, silver, crude oil, natural gas, copper, aluminium, lead, zinc, nickel, brass, cotton, crude palm oil etc. In India, three national-level and 21 regional exchanges are involved in commodity trading.

Established in 2007, the Pakistan Mercantile Exchange (PME) started operations with three-month gold futures contracts and later it included other commodities like rice, sugar, wheat, crude oils, cotton yarn etc.

The Mercantile Exchange Nepal Ltd (MEX) started operations in 2009. Products traded on the exchange are crops, food grains, vegetables, spices, walnut seed, metals and bullion.