CSE hopes to set up commodity exchange within six months

The Chittagong Stock Exchange (CSE) hopes to launch Bangladesh's first commodity exchange within six months after the relevant rules were gazetted and published yesterday.

The Bangladesh Securities and Exchange Commission (Commodity Exchange) Rules, 2023 will be applicable for commodity exchange and related participants, aiming to provide physical facilities or systems, whether electronic or otherwise, for trading, clearing and settlement of commodity derivatives contracts.

The CSE is hopeful of launching the commodity exchange by mid-2024, said Asif Ibrahim, chairman of the port city bourse.

"As the rules have been gazetted, the ball is in our court," he said.

A commodities exchange is a legal entity that determines and enforces rules and procedures for trading standardised commodity contracts and related investment products.

According to experts, a commodity exchange would allow farmers to lock in prices using forward contracting. This reduces the risk of a drastic price drop and squeezes out uneven ups and downs of commodity prices.

Primarily, the CSE is planning to launch the commodity exchange for one or two products, Ibrhaim said. Generally, commodity exchanges deal in items such as gold, rice and fuel.

Under the rules, a commodity exchange should have a minimum paid-up capital of Tk 400 crore and at all times maintain a net worth of 75 percent of its paid-up capital.

However, the capital requirement as mentioned above shall not be applicable for stock exchanges already registered under the Securities and Exchange Ordinance, 1969.

As the CSE is already registered, it will not need to keep that capital to establish a commodity exchange.

"We have invested a lot of funds on consultancy to form the rules and further investment will be needed for purchasing software and hardware, building capability in the backend and establishing warehouses," said Ibrahim, also a former president of the Dhaka Chamber of Commerce and Industries.

"To do so, we will have to invest around Tk 200 crore," he added.

According to the rules, a commodity exchange's board of directors will be constituted of 13 members, including at least seven independent directors. The chairman of the board of directors will be selected from among the independent directors.

A commodity exchange shall also prepare financial reports and send it to the Bangladesh Securities and Exchange Commission (BSEC).

All Trading Right Entitlement Certificate holders can be commodity derivative brokers, but will have to keep paid-up capital of Tk 10 crore and appoint a compliance officer separately.

Every commodity derivatives broker shall open and maintain a bank account in its name with any scheduled bank with intimation to the commodity exchange or clearing house, as the case may be, for its own transactions.

The exchange will provide a transparent and efficient platform for price discovery by bringing together buyers and sellers. It will also facilitate the determination of fair market prices based on supply and demand dynamics.

This will help market participants make informed decisions in regards to buying, selling or holding commodities.

The exchange will offer risk management tools such as futures contracts and options and these financial instruments will allow market participants to hedge against price volatility.

Hedging will help producers, consumers and traders mitigate the risk of adverse price movements, ensuring stability and certainty in their operations.

Ibrahim hoped it would also help standardisation and contract terms for commodities traded.

Standardisation will ensure that commodities meet certain quality criteria, allowing buyers to make informed decisions based on consistent product quality.

Producers can sell commodities in advance at a predetermined price, reducing their exposure to price fluctuations. Conversely, consumers can secure future supplies at fixed prices, protecting themselves from potential price increases, he added.

Earlier in April 2022, the Chittagong Stock Exchange (CSE) signed a memorandum of understanding (MoU) with the Multi Commodity Exchange of India (MCX), appointing it as a consultant.

The CSE formulated the draft rules with the help of the MCX and submitted it to the BSEC in November of 2022.