Building blocks for a successful commodity exchange

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Strategies for a successful commodity exchange
how to avoid the threat of automatic obsolescence
Lamon Rutten Chief, Finance, Risk Management and
Information UNCTAD
ASSOCHAM Conference on Commodity Futures Market
in India Delhi, 14 July 2005
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It is not the strongest of the species that
survive, not the most intelligent, but the one
most responsive to change. Charles Darwin
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Commodity exchanges have a high degree of
in-built obsolescence. It is not just that
their environment changes due to external
developments. Also, through their own actions,
they improve the environment in which they
function and make themselves less useful. So,
standing still is not good enough. Rather,
exchanges have to keep innovating. And this
requires a strong strategic vision of exchange
management. Optimal strategies change as the
environment changes
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Attack
Occupy the terrain
Consolidate
Attack
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Occupy the terrain

• By rolling out new contracts
• but manage the risks of overly hasty forays
• By improving conditions for use of contracts
• training
• warehouse receipt / collateral management systems

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The synergy of exchanges, warehouses and a modern
information/communication system will make it
possible to cross over into a new era for
agriculture.
From a 1999 presentation
exchanges
communications
warehouses
Bridging the efficiency gap
Being slow and uncompetitive
Being flexible and profitable
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Indian exchanges can still go a long way with
this strategy, judging from Chinas
experience While NYMEX is still the worlds
largest commodity exchange, in 2004, the three
exchanges in China traded a total of 305.67
million contracts (with a notional value of 1.77
trillion US), more than the 280.04 million
commodity contracts for NYMEX, CBOT and NYBOT
combined.
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• Consolidate your hold on the market place
• continue improving your existing markets (better
  services, better liquidity, lower costs)
• deepen penetration reach groups that you could
  not reach before (e.g., farmers)
• pre-empt political problems by continuous
  awareness-raising and publicity.
• And try to do this without turning into a static
  organization.

Consolidate
Arriving at one goal is the starting point to
another. John Dewey
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India can lead the way in integrating farmers
into national and international market places
using modern information and communications
technologies
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An alternative to satellite-linked kiosks the
InfoThela
How to make the Internet reach deep into the
countryside
It is basically a pedal driven vehicle just like
a common cycle rickshaw and there will be a
personal computer on board which will be
connected to internet using wireless technology.
It is designed keeping in mind the village
conditions in the country where electric power is
not available all the time. So a pedal generator
is designed in such a way that while pedalling,
the battery will keep on charging for running the
on board computers and equipments.
Source IIT Kanpur
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The InfoThela can provide an Internet Wi-Fi
Network in a radius of some 20 km around the
nearest Internet access point, without access
charges.

5 - 8 Km
Village
Internet
Metro
Source IIT Kanpur
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On this platform, an electronic trading and
financing system can be built. Salient
features

• Biometric identification-based
• dematerializing of warehouse
• receipts easier to use, cheaper, and more
  secure
• Human-ATM workers from Micro Finance
  Corporations go on InfoThela to villages and do
  the identification, disburse loan etc. saves on
  the costs of ATM
• The integration of futures trading automatically
  solves key issues of price smoothening and giving
  some predictability to farmers sales prices.

Source IIT Kanpur
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"Only those who attempt the absurd will achieve
the impossible. Escher
Attack
The bricks and mortar of the established
exchanges...
..can be a barrier to seeing opportunities.
"Man who say it cannot be done should not
interrupt man doing it. Ancient Chinese Proverb
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From one of my 2002 presentations Exchange
managers should lead the process of change,
otherwise they risk that their market is bypassed
by others. The willingness to cooperate is a
major part of a successful change strategy. The
process of change and adaptation should come
natural to exchanges, and in western countries,
many have gone through remarkable transformations.
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There is a need for emerging exchanges to
continue looking further forward. International
markets are becoming more and more integrated.
Services are flowing across borders. A commodity
exchange is just a part of the big picture.
You got to be careful if you dont know where
you are going, because you might not get there
(Yogi Berra)
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• Medium to long-term repositioning of the Indian
  commodity exchanges not as national exchanges,
  but as core players in the international arena.
• Key strategic issue what is an exchange? What
  comparative advantages can Indian exchanges bring
  to the table?
• Several possible answers
• Skills/domain knowledge
• Technology
• Low cost
• Project implementation capacity

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Commodity exchanges consist of  blocks  of
activities, and there is no reason why each block
should be done in the same place. Many functions
can be outsourced.
Financial Firms Hasten Their Move to
OutsourcingNew York Times, August 18, 2004
"Offshoring is not just a fad, but the reality of
doing business today," said Chris Larsen,
chairman of E-Loan, "and this is really just the
beginning." From 2003 to 2004, Deloitte
Research found in a survey of 43 financial
institutions in North America and Europe (that
they) increased jobs offshore to an average of
1,500 each from an average of 300. The Deloitte
study said that about 80 percent of this went to
India. Deloitte said the unexpectedly rapid
growth rate for offshore outsourcing showed no
signs of abating "Offshoring has created a truly
global operating model for financial services,
unleashing a new and potent competitive dynamic
that is changing the rules of the game for the
entire industry," the report said. By SARITHA RAI
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An example of a franchise-based exchange
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Even more ambitiously When EUREX, a German
exchange, started offering German Bund (10-year
German government bonds) futures at a cost much
less than LIFFE (and LIFFE had been dominating
this market for many years) how long did London
banks and brokers stay faithful to Londons
LIFFE? It took EUREX only six months to go from
a market share of 50 to 100. If an Indian
exchange offers the same products even more
cheaply, how long will such banks and brokers
remain faithful to European exchanges? In
practice, however, product innovation and not
just lower cost may well continue driving
exchange growth.
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• Conclusion
• Nominal volumes on Indias commodity exchanges
  will soon exceed those on its stock exchanges.
• The commodity exchanges will have an impact on
  the national economy that is much larger than
  that of the stock exchanges, bringing the
  benefits of financial markets to much of the
  countryside and unlocking the growth potential of
  agriculture.
• The speed at which this happens will to a large
  extent on government policy how fast will policy
  makers remove the remaining roadblocks to
  exchange development? (options, index futures,
  participation of banks, mutual funds).
• Technology can bring futures to the farmgate, and
  India can lead in developing the mechanisms.
• Soon, Indian commodity exchanges will be able to
  take on the world. Financial markets are global
  markets, and the lack of legacy problems, strong
  technology skills and strong leadership of Indian
  exchanges give them a perfect competitive base.

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"Every morning in Africa, a gazelle wakes up.  It
knows it must outrun the fastest lion or it will
be killed. Every morning in Africa, a lion wakes
up.  It knows it must run faster than the slowest
gazelle, or it will starve.  It doesn't matter
whether you're a lion or gazelle - when the sun
comes up, you'd better be running."         
Inspirational sign on a runner's office wall
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In times of change, learners inherit the Earth,
while the learned find themselves beautifully
equipped to deal with a world that no longer
exists. Eric Hoffer