Commodity exchange need of the hour

"The beauty of the exchange is that someone like a corn farmer can lock in a price for his crops months before harvest."

A commodity exchange is needed for Bangladesh as it will ensure fair prices for both producers and consumers, said Asif Ibrahim, chairman of the Chittagong Stock Exchange (CSE), as it is set to appoint a consultant to establish the market.

Commodity exchange refers to an organised market where enforceable contracts to deliver goods, such as wheat and paddy, are bought and sold.

The CSE recently got the nod from the Bangladesh Securities and Exchange Commission to this end and plans to launch the market by 2022.

"The beauty of a commodity exchange is that someone like a corn farmer can lock in a price for his crops months before they are even harvested," Ibrahim said in an interview with The Daily Star.

This increases the farmers' chance of economic survival as the market always makes sure there is a buyer for every seller, provided the prices are acceptable for both parties.

"So, an organised commodity exchange is the need of the hour for Bangladesh," said Ibrahim, who is also vice-chairman of Newage Group of Industries.

Besides, the market would play a key role in price discovery, and help develop an efficient commodity ecosystem in the country.

"It will establish an automated market linkage between big groups of stakeholders, including producers and end-users, to affirm a structural governance practice," he added.

Commodity exchanges also play an important role in developing the ecosystem for physical market trading in emerging countries like Bangladesh.

The benefits of establishing a vibrant commodity derivative and spot markets in Bangladesh are manifold.

It will help the government effectively monitor the movement of essential commodity prices and lubricate the supply chain, bringing competitiveness and efficiency to the market mechanism by setting up modern commodity ecosystem infrastructures.

Commodity exchanges are important market infrastructure institutions that improve the competitiveness of commodity ecosystem participants by fulfilling two important functions of price risk management and price discovery.

In addition, it facilitates an enabling policy environment, such as warehouses, collateral management services, cold storages and quality testing centres, which further contribute to establishing rural infrastructure and increasing post-harvest credit flow in agriculture.

"This promotes the discovery of referenceable national prices, and price transparency," Ibrahim said.

Through the innovative application of emerging information and communication technologies, commodity exchanges can catalyse the integration of small producers with supply chains.

For an emerging economy like Bangladesh, the commodity market will result in the reduction of post-harvest losses through price stability, improvement in commodity price risk in both locally produced and imported supplies and credit risk management, provision of a transparent and competitive price discovery mechanism, reduction in transaction and marketing costs.

About the challenges of the exchange, Ibrahim said engaging many authorities such as regulatory bodies while also involving different third parties might cause delays in the approval processes.

The absence of a structured spot exchange in Bangladesh might make setting reference prices an intricate process.

"For futures trading, we need market structures like warehouses but such facilities are yet to be established. This includes the lack of enough third-party service providers, such as vault services, to affirm a harmonious delivery mechanism."

Since automated and structured commodity trading is a fresh idea for Bangladesh, raising market awareness and enlightening stakeholders through training and other measures might be a huge task.

"However, the issue can't be avoided as providing producers and end-users with the tools to participate in the commodity exchange is vital for successful contract executions," said Ibrahim, also a former president of the Dhaka Chamber of Commerce and Industry.

Still though, implementing a new asset class and integrating its system will require massive hardware upgrades and system customisation.

In its quest for a suitable knowledge sharing partner, the CSE explored numerous international commodity markets and sovereign consultants, such as NSE India, Multi Commodity Exchange (MCX) India, Bursa Malaysia, Indonesian Stock Exchange, PwC, the UAE's Pride Group, and Russian Investment Group.

Considering the financial aspect, previous relationship, practical implications in the execution phase and solid cultural integration, the CSE approached MCX India for institution-to-institution cooperation and/or consultancy.

Regarding the investment required to establish a commodity exchange, the CSE chairman said proportionately typical expenses are incurred in two segments.

The first is primary expenses for system development, such as software, while the secondary expenses are for physical or structural development.

"But most of the expenses apart from system development are hypothetical as they can only be gauged through phase-by-phase development of the project," said Ibrahim, a former chairperson of the Business Initiative Leading Development.