growing the exchange agri market-1

8/6/2019 Growing the Exchange Agri Market-1

1/98

Growing the Agricultural DerivativesExchange Market

Rod Gravelet-Blondin


2/98

O

verview

Rod Gravelet-Blondin The Agricultural Derivatives Marketin South Africa

Lecture / Discussion Topics - The

Raison-dtre of the Exchange - TheElements of the Exchange - TheBusiness of the Exchange - The Face ofthe Exchange

Conclusion /The Way Forward


3/98

RodGr

avelet-B

londin

Born and bred in South Africa. Studied Economics and

Agricultural Economics.

Worked for National Departmentof Agriculture for 20 years 10years spent as Agric Attach.

Challenged by the interactionbetween the public and private

sector in agricultural policy


4/98

RodGr

avelet-B

londin

In 1995 established theAgricultural Markets Division ofthe South African FuturesExchange (SAFEX).

In 2001 moved with SAFEX to the

JSE to head up the AgriculturalProducts Division of the JSELimited.

Presently heads up theAgricultural Products Division ofthe JSE effectively theagricultural derivatives market inSouth Africa


5/98

IMP

ORTANT

ANNOU

NCEME

NTS

Please note that I do not have all theanswers I speak from experienceand from what I have learnt, BUT I amstill learning.

Please note that my objective is to beobjective. No one person has all the answers

and I do not think there is oneblueprint for the establishment and

growth of an agricultural derivativesmarket


6/98

IMP

ORTANT

ANNOU

NCEME

NTS

Together we will do our best to find theanswers, to your questions and to myquestions.

I would really appreciate yourparticipation because we will have funfinding the answers.

There is no such thing as a stupidquestion.


7/98

TheAgriculturalDerivatives

Market

inSouthAfrica

Direct government intervention in

agricultural marketing policy since 1930 Indications in early 1990s that move away

from government intervention might beimminent.

Research undertaken by South AfricanFutures Exchange (SAFEX) on viability ofan agricultural derivatives market(1993/1994)

Business plan / prospectus compiled and

trading seats issued.


8/98


Market

inSouthAfrica

84 trading seats taken up by

interested parties @ R50 000.00 eachto form start up capital of R4.2m(about US$ 1m).

Seat holders included banks, existingfinancial trading houses, newcommodity trading houses andagricultural interest entities - allprivate money.

Agricultural Markets Divisionestablished in 1995 as division ofSAFEX licensed to trade derivatives in

terms of the Financial Markets ControlAct and regulated by the FinancialServices Board (FSB).


9/98


Market

inSouthAfrica

1995 government steps away frommost forms of intervention in thepricing of agricultural products

The AMD lists physically deliveredchilled beef futures in August 1995

and cash settled potato futures inOctober 1995. Grain products stillsubject to a form of price intervention.

Neither beef contracts nor potatocontracts are a success.


10/98

T

heAgriculturalDerivatives

Market

inSouthA

frica

Feb 1996 AMD lists white and yellowmaize futures.

Nov 1997 AMD lists wheat futures.

Feb 1998 AMD lists maize options.

Aug 1998 AMD list wheat options. Feb 1999 AMD lists sunseed futures

Aug 1999 AMD lists sunseed options

April 2002 AMD lists soya futures Oct 2002 AMD lists soya options


11/98

T

heAgriculturalDerivatives

Market

inSouthA

frica

August 2001 SAFEX becomes partof the JSE Securities Exchange andagricultural derivatives trade withina division of the JSE.

June 2006 the JSE demutualizes

and becomes a company. July 2007 the JSE lists on itself

The JSE limited is a multi-instrument exchange, regulated by

the Financial Services Board (FSB)in terms of the Securities ServicesAct (SSA).


12/98

Clearing Member Clearing Member

Broking Trade BrokingMember Member

Client A Client XClient B Client Y

Client C Client Z

Clearing HouseCCP

Structure of the Agricultural Derivatives Market


13/98

JSE Limited BESA

Financial

Derivatives

Agricultural

Derivatives

Trading

Clearing

Management

CCP Clearing

& Risk

Settlement

Equities

JSE JSE JSE

Interest rate

products

SAFCOMSAFCOM

STRATE

STRATE

STRATESAFCOM SAFCOM-cashJSE - products

Exchange Environment (Capital Markets)

Financial Services Environment

JSE NO CCP

(regulated by Financial Services Board)

Insurance

Industry

Retirement

Funds

Collective

Investment

Schemes


14/98

NEARBY W HITE M AIZE PRICE SINCE J

0

5 00

1000

1500

2000

2500

199

8/05/01

199

8/02/06

27/10/98

24/3/99

23/8/99

20/1/2000

20/6/2000

200

0/11/13

200

1/04/11

200

1/09/10

200

2/02/06

200

2/07/05

200

2/11/28

200

3/05/02

200

3/09/25

200

4/02/20

200

4/07/21

200

4/12/14

200

5/05/16

200

5/10/07

200

6/03/06

200

6/08/03

200

6/12/29

200

7/05/30

200

7/10/23


15/98

T O T A L A G R I C U L T U R A L D E R I V A T I V E C O N(F U T U R E S A N D O P T I O N S )

0

5 0 0 0 0 0

1 0 0 0 0 0 0

1 5 0 0 0 0 0

2 0 0 0 0 0 0

2 5 0 0 0 0 0

3 0 0 0 0 0 0

1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7

F u tu re s O p t i o n


16/98

2007 Breakdown of Contracts Traded

White Maize Futures

Yellow Maize Futures

Wheat Futures

Sunseed Futures

Soya Futures

White Maize Options

Yellow Maize Options

Wheat Options

SS & Soya options


17/98

Fu tures C on tracts an d F utures D eals 19

199 199 200 2001 200 200 200 200 200 200

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

2000000

C

ontractsTraded

0

50000

10000

15000

20000

25000

Average deal size8 contracts


18/98

Op tion C on tracts and O ption D eals 199

0

100000

200000

300000

400000

500000

600000

700000

800000

ContractsTraded

0

10000

20000

30000

40000

50000

60000

70000

Average deal size12 contracts


19/98

Fu tures C ontracts T raded and Fu tures C on tracts Op

(on m on thly b asis from 1997 to d ate)

0

50000

100000

150000

200000

250000

0

1000

2000

3000

4000

5000

6000

7000

8000

9000Futures Contracts Tr

Futures Contracts O

Interest


20/98

T

heAgricu

lturalDerivatives

Market

inSouthA

frica

The Exchange added value to the marketplace exchange objectives

Contracts and Specifications Timing

Role of Government

Role of Brokers (especially banks)

Education and Marketing

Systems (functionality esp spreads)

Reasons why the Market Workedin South Africa


21/98

T

heAgricu

lturalDerivatives

Market

inSouthA

frica

Integrity of the delivery process

Convergence of futures price to the economic value of theunderlying product

Consistency of application of the rules Market orientation (constant months, contract size)

Exchange personnel

Reasons why the Market Workedin South Africa cont.


22/98

T

heAgricu

lturalDerivatives

Market

inSouthA

frica

Concentrated trading times (09h00 12h00)

Physical delivery (incl foreign product)

Daily price limits

Speculative position limits

Option expiries

Margin requirements (increase as risk increases)

Some Specifics in our Agric Market.


23/98

T

heAgricu

lturalDerivatives

Market

inSouthA

frica

Warehouse receipt case.Fraudulent certificates purchased in spotmarket by long position holder and tenderedfor delivery. Remedial action changed

delivery rules and ensured Clearing Memberswere aware of responsibilities.

Pension Fund loss. Large lossesincurred by pension fund. Remedial action regulator to ensure pension fund activity in

derivative market is strictly adhered to.

Major Problems Experienced


24/98

T

heAgricu

lturalDerivatives

Market

inSouthA

frica

Too slow in launching new contracts

System replacement slow

Maintain integrity

Applicability to small producer

Government understanding

Increasing liquidity but maintainingauthenticity

Continue adding value

Challenges and Shortfalls


25/98

?Question

What are the objectivesof an Agricultural

Derivatives Exchange?


26/98

TheRais

on-dtreofthe

E

xchange

The Objectives of an AgriculturalDerivatives Exchange

Primary Objectives

Price Risk Management Transparent Price Formation

Secondary Objectives

Price Integrity

Liquidity Secure Settlement


27/98

TheRais

on-dtreofthe

E

xchange

These are NOT the Objectives of anAgricultural Derivatives Exchange

to satisfy political aspirations

to justify academic and theoreticalreasoning

to provide employment to some veryclever and hard working people

to make use of empty office space


28/98


29/98

TheRais

on-dtreofthe

E

xchange

An exchange MUST add value

Areas where an exchange canadd value:

price risk managementprice transparency priceintegrity securesettlement (deliveryand payment)


30/98

TheRais

on-dtreofthe

E

xchange

Can value be added to the agricultural

market without an Exchange?

Yes/No How

Price RiskManagement

PriceTransparency

Price Integrity

Securesettlement


31/98

TheRais

on-dtreofthe

E

xchange

Can value be added to the agricultural

market without an Exchange?

Yes/No How

Price RiskManagement

yes Forward contracts,vertical processing

PriceTransparency

? Conditional on reporting

Price Integrity ? Conditional on sources ofreporting

Securesettlement

? Conditional on thirdparties


32/98


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TheRais

on-dtreofthe

E

xchange

Better Faster Cheaper

Price Risk Management

Price Transparency andIntegrity

Settlement


34/98

TheRais

on-dtreofthe

E

xchange

Value Add is CORE to the sustainability of

the Exchange

No Value Add = No Growth

Value Add = Growth

The USE of the exchange is directlyproportional to the VALUE ADD of theexchange


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TheElementso

fthe

E

xchange

Regulation (legislation & rules)

Direct legislationClear Objectives

Market Orientated


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TheElementso

fthe

E

xchange


Direct legislation

Enabling / Supporting legislation

Legal Processes (contract law)Financial Processes (flow of funds)

Agricultural Policies (consistency, storage)


40/98

TheElementso

fthe

E

xchange


Direct legislation

Enabling / Supporting legislation

Exchange rules

ClearApplicableConsistentDeveloped with marketLimits (price & position)


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TheElementso

fthe

Exchange

Exchange Structure

Trading and Clearing Horizontal ORVertical

Depends largely on country set-upJury out on comparative benefits

Should be based on cost and efficiency(the outcome is important)


43/98

TheElementso

fthe

Exchange

Exchange Structure


Self Regulation / RegulatedWhat works best for country

Consistent with country legislation

No compromise on Integrity


44/98

TheElementso

fthe

Exchange

Exchange Structure


Self Regulation / Regulated Ownership

mutual membership structure

unlisted company

listed company


45/98

TheElementso

fthe

Exchange

Exchange Structure


Self Regulation / Regulated

Ownership Divisions

No set blueprint

Cost and efficiency

Focus of operation

Functional / Product based


46/98

TheElementso

fthe

Exchange

Exchange Structure


Self Regulation / Regulated Ownership

Divisions

Physical PresenceYes / NoPrestige / Cost


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TheElementso

fthe

Exchange

Systems Trading / matching system

In house / TurnkeyCost and efficiencyOrder driven / Quote Driven

Functionality - market use- the more it hasthe more will be used)- dynamic spreads- delta options

Flexible (provide the market what it wants- EFP, EFR)


50/98

TheElementso

fthe

Exchange

Systems

Trading / matching system

Clearing system

fully integrated

cost and efficiency


51/98


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54/98

TheElementsofthe

Exchange

Products to Trade

Contract Specifications

- expiry settlement (cash /physical delivery)cash easier, but must be

non manipulatable

physical delivery


55/98

TheElementsofthe

Exchange

Products to Trade

Contract Specifications- physical deliverylocation - single point

- multiple points- multiple points with

differentialsallocation - random

- fifo- short position decides- long position decides- matching requests


56/98

TheElementsofthe

Exchange

Products to Trade

Contract Specifications- physical deliveryprocess - clear rules

- notice day (who)- delivery day- risk mitigation

warehouses and receipts- administration- central register- security (paper / electronic)- logistics- relationship between exchange and

warehouse


57/98

TheElementsofthe

Exchange

Physical Delivery Case Study

Through the agreed delivery process of the Exchange,Client A as short position holder gives notice ofdelivery and in accordance with Exchange deliveryprocedure tenders the exchange approved warehousereceipts to the Exchange. The warehouse receiptswere obtained by Client A from the Exchange as aresult of an earlier long position.

The Exchange assigns the delivery to a long positionholder in accordance with delivery procedure andnotifies the new owner accordingly. The buyer of theproduct pays the full value sum for the productthrough the exchange and collects the warehousereceipts.The new owner of the product notifies the warehouseowner of his intention to take physical delivery of theproduct represented by the warehouse receipts on acertain date.


58/98

TheElementsofthe

Exchange

Physical Delivery Case Study cont.

The owner of the warehouse notifies the new ownerthat the product represented on the face of thewarehouse receipt is subject to a dispute regardingstorage costs between the storage owner and theoriginal owner of the product (not Client A) and that noproduct can be outloaded as requested. The warehousereceipt tendered to the exchange in completion of thefutures contract carries no indication of any lien nor

any reference to any dispute.The new owner of the product, holder of thewarehouse receipt, refers the matter to the Exchangeas a matter of urgency because the new owner needsthe product to process.

WHAT COURSE OF ACTION SHOULD THE

EXCHANGE TAKE ?


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62/98

TheElementsofthe

Exchange

Participants

Government

Financial Communityrisk in agricultural sector

understanding

support

hedge funds


63/98


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66/98

TheBusinessofthe

Exchange

Utility

Pros Service

Orientated Easily compatiblewith Agriculturalpolicy

Cons Lack of focus

Lack of drive Lack of

development

Stagnation


67/98


68/98


69/98

TheBusinessofthe

Exchange

Income Generation

Trading feesFair

Incentive basedMust leave room for brokers fees (look attotal trading cost)


70/98

TheBusinessofthe

Exchange

Income Generation

Trading fees

Clearing fees

FairRemember total cost of trading


71/98


72/98

TheBu

sinessofthe

Exchange

Income Generation

Trading fees

Clearing fees

Margin management fee (haircut) Data sales

public vs private data

be aware of total picture (can be verygood marketing)


73/98

TheBu

sinessofthe

Exchange

Income Generation

Trading fees

Clearing fees

Margin management fee (haircut)

Data sales

Training (courses, material)

income generation / marketing


74/98


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79/98

T

heFaceoftheEx

change

Exchange Interface

Government

Regulator

Agricultural Policy


80/98


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T

heFaceoftheExchange

Exchange Interface

Government

Direct exchange participants

Indirect exchange participantsIntegrity

Consistency in application of rules andprocedures

Communication (especially media)Consistency of message (spokesman ?)


86/98

T

heFaceoftheExchange

Exchange Interface

Government

Direct exchange participants

Indirect exchange participants Education sector

Curriculum (universities & schools)

Lecturing

Educational material


87/98


88/98


89/98

?Question

Is there anything we haveheard that can be applied tothe agricultural derivative

market in Thailand


90/98


91/98

Conclusionan

d

Way

Forward

Application to Thailand

The Elements of the Exchange

Are all the elements of the exchange

in place and operating efficiently ?


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96/98

Conclusionan

d

Way

Forward

# 1 exchange growth promoter

Access to the exchange

Market participants (especially hedgers)

must have easy and cheap access to theexchange so as to benefit from the valueadd benefits that an exchange brings to themarket place.


97/98


98/98

growing the exchange agri market-1

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