National Commodity Exchange – The Future of Trading

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Interview with Managing Director of National Commodity Exchange Limited, Mr. Sameer Ahmed

Please tell us about your educational and professional background?
I have a Bachelor’s degree in economics from the University of Chicago and a Master’s degree from the London Business School. I have been associated with financial sector for the past 26 years. I started my career in banking and worked in Pakistan and the Asia Pacific region for the first 10 years and from the last 16 years I have been dealing with capital markets, investment banking and the regulatory side.

Initially, I was in the brokerage business and then I was hired as an advisor to the Dubai Financial Market. I was also the CEO of Lahore Stock Exchange for 3 years. Before joining National Commodity Exchange Limited (NCEL), I was the CEO of IGI investment bank for 5 years.

Tell us about the commodity exchange, its operations and what are the achievements of NCEL after 2 years since its establishment?

The operations of the commodity exchange started in May 2007. Since then, we have made                                            phenomenal progress over this period of time, especially during the last financial year of 2009-10. The volumes have increased by 6 times. Currently, our daily trading volume is 600-700 million rupees. In April 2010, we took over Lahore Stock Exchange in terms of trading volumes, which made us the 2nd largest exchange in Pakistan after Karachi Stock Exchange.

The trading volumes in commodity exchange are growing every month and we are expected to retain this growth momentum as worldwide commodity and futures markets are larger than the cash or equity markets. It is expected that we will become a larger exchange than Karachi Stock Exchange in the time period of 3 to 5 years.

We deal with not only commodities but also with the futures including interest rate futures. Later on, we will also include currency futures and various other products to this list as the range of business or products is unlimited.

In terms of products, NCEL started with gold but now has crude oil, silver, rice, palm oil and interest rate (futures). We are also working to include sugar, maze, wheat and currency futures. NCEL will keep on adding different commodities over a period of time. Apart from agricultural products, we might also include industrial products like steel, copper, zinc etc. Some of the commodity exchanges worldwide also trade chemicals. We want to include all these products step by step.

 

How do you prioritize products in the exchange i.e. which product or commodity should be added first?

We observe the market which tells us which products have more business and then we add those products in the exchange. Sugar for example is being traded in high volumes across the country, thus the next product to be added in the exchange will be sugar. Similarly, wheat is the largest crop ofPakistanwhich we also intend to add soon.

Secondly, we have to identify what we are gear to do and can do efficiently. Some crops or commodities are very large inPakistanin terms of trading and hence are difficult to manage.

India’s commodity exchange is only 2 or 3 years ahead of us and they are trading in around 60 to 70 commodities. In Western countries, there are hundreds of commodities which are being traded.

Please tell us about the trading in interest rates futures and the upcoming product of currency futures?

In interest rates, there is a contract on the 3 month KIBOR rate. If a borrower or a lender wants to secure their business position from the fluctuations of Interest rates, they can hedge their position in the interest rate futures market. Incidentally, interest rates worldwide are the most actively traded derivative products. Currently, NCEL has KIBOR futures and is also doing a research on T-Bills futures.

As far as the currency futures are concerned, NCEL has originally designed Rupee-Dollar hedging contracts but the State Bank is responsible for giving permission for this commodity (currency). NCEL is not likely to launch currency futures in the near future. In the mean time we have also designed the 3rd currency future products like Euro-Dollar, Dollar-Yen etc. It is perceived that this does not affect the value of the Rupee and is not related with the monetary or economic policy of Pakistan. On the other hand, in the last 6 months, there has been a huge amount of volatility in Euro. If we have a Dollar-Euro product, it will help importers and exporters to hedge their Euro against dollar for trading and can use Euro as their currency for trading.

There is a huge unregulated market inPakistanknown as Forex Houses, which are conducting business exactly the same way as NCEL is planning to do in currencies. As they are unregulated and do not come under the jurisdiction of State Bank or Securities and Exchange Commission of Pakistan, there are risk factors involved for any investor.

NCEL will offer those products which are regulated by the SECP and State Bank. The investor can be protected by using transparency in our operations. Currently, there is no facility or service inPakistanfor importers/exporters if they want to hedge their currencies while trading with other countries.

 

What kind of people are trading in commodity exchange?

It is a mix of different people which includes retailers, wholesalers, and institutional investors having various mutual funds. There is also a bank which is being permitted to launch a gold link deposit product. All of these institutional investors needed a regulated platform for trading. Before NCEL there was no other way of trading in commodities in a regulated way.

A commodity as an investment is not a well established business and proper awareness is needed so that a common investor can invest in NCEL.

Retailers and wholesalers are trading in NCEL on the agricultural commodities. The exchange guarantees each trade settlement therefore there are no defaults. We have structured steps which a buyer and a seller have to undergo and our pricing is also transparent. We are actually giving our customers online pricing screens from around the world. Currently, we are open 20 hours a day but soon we are going to start operating 23 hours a day. The idea behind it is that in internationally traded commodities our investors can also take advantage from other markets.

The advantage for an investor is real time international prices and complete transparency. In retail markets, the prices of products vary from place to place and retailers sometimes have wide margins but in NCEL, the prices of different markets can be checked and margins are also narrow. We actually import gold from the Swiss refinery and we guarantee that our physical gold is 99% pure.

What are the major problems being faced by the commodity exchange?

In gold trading, 1% tax is charged on the import of gold and as NCEL is a transparent exchange, this tax is always paid. Most of the retailers do not pay that tax which makes their prices lower than ours. We have informed FBR about this issue. Even the government is hardly collecting that 1% duty from the market. Currently, the export of Gold is not allowed inPakistan. Jewelry can be exported but the export of gold bars is not permitted. We have been requesting the government to allow the export of original gold as well.

In the agriculture field, we lack in warehouse facilities and logistics infrastructure inPakistan. NCEL has been working jointly with central bank and some other parties to improve it. The central bank is also interested in financing the commodities which is also dependent on warehouses and logistics infrastructure. We are working to have warehouses at a national level so that there is a warehouse in every locality of the agricultural land. It will take some time as the warehouse management business is a scientific business.

Moreover, as this is a novel concept in Pakistan, one of the major problems we face is the lack of awareness of this kind of exchange.

 

From the aspect of technology, how do you compare Pakistan’s commodity exchange with other exchanges around the world?

When we established the exchange, we employed software from a company based inUnited   Kingdom. Since the exchange was a new business and consisted of regulatory changes subsequently we had no choice but to change the system.

By that time our own in-house team started developing the appropriate software and now we are using our own software for the last 18 months. We are also offering this software to our brokers free of charge. Larger exchanges around the world have more sophisticated software but the software we developed is tailored precisely to the needs and requirements of the local market.

 

How much workforce does NCEL have?

Currently, there are around 39 employees. This will remain a small setup as it is an electronic exchange. Whatever trading volume we are conducting today, we can do 10 times of this value by employing the same number of people. In the near future, more traders will be entering the exchange for business development and marketing but in terms of our operations we do not require a large number of employees.

How do you measure the size of the commodity exchange?

We measure the exchange according to the number of lots traded (1 share of equity exchange is equal to 1 lot of commodity exchange) and the rupee value traded.

What are the probable risks associated with the exchange and who are the major share holders?

The risk in trading depends on the portfolio in which an investor wants to trade and the volatility of the product being traded. Because of risk management, all the exchanges around the world did not face huge losses as compared to the non-exchange trading. This factor alone can give a clear idea about NCEL’s risk management capabilities.

Another factor is that the model which is being followed here is tried and tested. Unlike other exchanges, NCEL is a demutualized exchange. Various stock markets are paying attention to this concept but they are not operating as a demutualized exchange.

In Demutualized exchange, the share holders, the brokers and members of the exchange are all separate therefore there is no conflict of interest. Our shareholding from first day has been 100% institutional share holders (companies). The largest share holder is National Bank of Pakistan followed by Pak Kuwait Investment Company, Zara-e-Taraqiati Bank and 3 stock exchanges as an institution (not their shareholders).

 

Where do you see NCEL in the future and how will it affect Pakistan’s economy?

In terms of volume, NCEL’s aim is to be several times larger than today. The growth is exponential. In terms of benefits to the economy, we are providing properly regulated and transparent exchange to the farmer, industry and investors. This market provides the prices in a transparent manner to the buyers and sellers after which they can conduct trading in the NCEL exchange. It will provide a smooth and improved way of trading which will help the government in regulating the businesses and generating revenues.

From a company’s perspective, businesses can hedge their prices. For example, a sweets manufacturer can hedge the price of sugar for three months and then the company can easily plan ahead making the profit margins, production and sales predictable.

The government has shown interest in this exchange especially in the agricultural products as every year there is a shortage of some product which results in a price war. With the help of national commodity market, people will now know the exact prices of products at different parts of the countries after which they can set a specific price for trading. In addition, they can also hedge the prices for a certain time period.

 

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