Pre-requisites to a Successful Commodity Exchange

The concept of commodity exchange is not new to this world. Commodity is not a new word- people have been dealing with the word commodity since the global economy started with a barter mechanism. Earlier, it was commodity against commodity later it turned out to be money against commodity but the concept always remained the same. After the foundation to the trading scenario was laid, and then injected economics into it. People started knowing that an economy of scale is a vital factor for trade. A producer produces less and prices it more, s/he earns a handsome profit but even if a produces prices his/her produce less but produces more, the profit is higher than in the earlier case. Thus, commodity exchange came up as a combo of the above mentioned trade facilitation and the economy of scale which is supposed to facilitate the traders and make them sure about the fair price of the product.

Investopedia defines commodity exchange as “An entity, usually an incorporated non-profit association that determines and enforces rules and procedures for the trading of commodities and related investments, such as commodity futures. Commodities exchange also refers to the physical center where trading takes place.” To be very simple, a commodity exchange makes an arrangement of a venue for the buyers and sellers to conduct the trading-through a group of registered brokers. Literally, the motive of the well-run commodity exchange should be reducing the cost of the trade transaction of all the counterparties involved in the value chain process- may it be a producer, trader, processor or consumer, the decreased cost definitely creates a welfare scenario of each counterparty in trade. A very popular exchange, ZAMACE suggests- “Agricultural commodity exchanges bring more formality to trading methods, enhancing market transparency and increase quantity and quality of commodities traded, for the benefit of the agricultural sector and the economy as a whole.”

Trying to look into peculiarly, there are few things to be remembered which will help creating a very successful commodity exchange. They are:

•          Focused Objectives
•         GGP (Good Governance Practice)
•         Stakeholders
•         Efficient Infrastructure
•         Facilitator Government with limited Intervention mechanism
•         Efficient Self-regulatory Mechanism
•         Structured Trading/Clearing mechanism
•         Well-equipped Contracts
•         Relevant awareness and training programs
•         Economy of Scale

Inclusion of these points does not mean that these are sufficient to make the commodity exchange successful, instead these are the necessary conditions and when we talk about the sufficiency condition, commodity exchanges attain that state only when client satiety is achieved.

Ø    Focused Objectives

A commodity exchange strictly needs to have focused objectives and that the relevance of the exchange should be justifiable. There should be a detailed plan to carry out activities with the activity plan and cost of each intermediary step. The budget and the strategic plan should comply with the objectives and activity plan.

Ø    Good Governance Practices

Commodity exchange should have a well-defined and scientific governance mechanism for the control and response mechanism. The business standards and the performance targets of the exchange should be tried to achieve creating the efficient executive boards and the advisory boards. The board can be effective and efficient only when it has representatives from the government, banking, warehousing, agricultural sector, insurance, etc. the employees of the exchange should also target the benefits of exchange and personal benefits should be sidelined during the working hours.

Ø    Stakeholders

The leadership and management in the exchange should be well aware about the farmers, traders, processors, banks, the central bank, Ministry of Agriculture, Ministry of Finance, Securities Board and the probable donors who can help support the promotion and flourish the exchange. And each stakeholder should also be aware about one another or else well-functioning of the exchange and the trading system cannot take place. There can be possibilities that all may not accept whatever being done, so workshops which increase the awareness about the value and benefits to the stakeholders through the exchange need to be carried out to gain the industry-wide support.

Ø    Efficient Infrastructure

Infrastructures do not always mean the physical infrastructures which is the general meaning of the infrastructure. By infrastructure, we also mean the legal infrastructure, human resources infrastructure, etc. which work combinable to get the objective fulfilled.

Ø    Facilitator Government with limited Intervention mechanism

Questions have been raised since a long time about the role of government in the country. May it be before the Great Depression, after that, during and post-World War scenarios- every time the role of government has remained questionable. This justifies that the role of government should be just a facilitator not the executor or the implementer. The history shows that those governments who tried the execution and the implementation by themselves ended up promoting the monopoly in the country and it created big risk to the country. But, it should be remembered that there is a group of goods which government should always take care of and not leave upon the public or the private sector.

Ø    Efficient Self-Regulatory Mechanism

Self-regulation is always an important asset of an organization. If the sectors in the country get monitored, supervised and regulated by the central regulatory body since the inception only, they cannot be well-developed. Therefore, self-regulatory mechanism should be strong and efficient enough for the smooth operation.

Ø    Structured Trading/Clearing Mechanism

Trading and Clearing mechanism in a commodity exchange is the bone marrow which is vital for even the backbone of the company. It is the trading/clearing which gives sufficient scope for the profit/loss and the sustainability of the exchange mechanism. Without a structured trading and clearing mechanism, nobody is going to trust the commodity exchange on its operation procedure.

Ø    Well-equipped Contracts

The contracts which are traded in the commodity exchange should be standard and scientific. They should be equipped with all the major details like margin, swap costs, trading hours, etc. if the contracts are not clear, the exchanges cannot promote their supremacy in the market.

Ø    Relevant awareness and training programs

Because the concept of the market is different to what the usual trends in the market are, awareness and training programs are very vital. It is only awareness and trainings which will assure that market is in a positive direction and that the trading of the exchange-traded commodities will ripen beneficial fruits for the exchange and the country on the whole.

Economy of scale is not only important factor the trading in the exchange but also for the overall mechanism. Economy of scale will promote the Going Concern Concept of the exchange and the sustainability of the organization.

The above mentioned factors are only the necessary conditions and there are much more needed in an exchange. Because the exchanges are the pivotal to the overall development of the economic development of the country, negligence may lead to a BIG LOSS.