ESTABLISHMENT OF COMMODITY EXCHANGE IN TANZANIA

1.0 Commodity exchangeA commodity exchange is a trade platform where various commodities and derivatives products are traded in orderly and organized fashion, with clearly specified and transparent rules.

Commodity exchange cont.................• Prices are determined solely by supply and demand

conditions or fundamentals, and not by the exchange itself.• Prices at which transactions are made are recorded and

released publicly by the exchange as soon as possible, thus generating market transparency; Bids to buy go on simultaneously with offers to sell;

• The exchange has a clearing mechanism which ensures or guarantees that transactions undertaken by traders on the floor are honored, should any insolvency occur.

Commodity exchange cont.................

• The Exchange makes use of brokers to bring and integrate large numbers of buyers and sellers into a market where membership is limited. They have a duty to advise their clients regarding buy or sell decisions and as to the best market opportunities.

• Exchange regulations and directives make it mandatory for members to make use of standard contracts prepared by the exchange, as well as to adhere to the terms and conditions of the contracts, to keep records of their transactions and submitted to be bound by the disciplinary rules of the exchange.

Price Discovery Mechanism – Buyers and sellers together set the price

• Many buyers

• One Buyer

• One Seller Many Sellers

Auction Exchange

Negotiation Reverse Auction

2.0 Fucntions of Commodity Exchange

Commodity exchange provides three basic functions which make the need for one not just necessary but imperative: •Price/ market transparency (everyone has access to a neutral reference price); •Price discovery (demand and supply developments are easily reflected in price levels) and •Reduced transactions costs (it is easier to find buyers or sellers through a centralized market place).

3.0 Types of Commodity Exchange

• A ‘cash’ exchange with spot delivery (i.e. typically up to 30 days)

• A ‘cash’ exchange with spot and forward delivery (i.e. beyond 30 days) and

• A futures exchange, where the principal objective is hedging (i.e. insuring against price fluctuations), where the majority of contracts are ‘offset’ and do not lead to physical delivery.

4.0 How it Operates

•The operation of a commodity exchange is similar to that of the stock markets.• At the centre of the exchange lies the exchange trading floor, where all non-electronic commodity trading takes place.• These exchange floors are divided into several sections, each devoted to the trading of a single commodity. •These sections are known as either a pit or a ring.•

HOW DOES A COMMODITY EXCHANGE WORK?

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Farmer, cooperative, or trader brings product to Exchange-accredited warehouse

The warehouse draws samples and issues a Product Certificate and Warehouse Receipt and send copy to CDS

Buyer posts bid

Seller posts offer

Exchange Trading Floor

Order Matching

• Market information transmission

•Clearing and settlement

•Market surveillance

•Risk management

• Member database

•Disaster recovery

•Data center

Exchange Back Office

Buyer deposits funds into the Intermediary Member account

warehouse Receipt are immobilized into

the CDS

How it operates cont……………• In these pits traders stand facing each other, and

subsequently make bids and offers to one another.• When a successful transaction is made between

traders, the information is immediately transferred on to the massive trading floor quotation board while simultaneously being distributed to the relevant trading centers worldwide.

How it operates cont…………………….

• With the development of ICT the traditional methods of open outcry system is being replaced by global electronic trading platforms.

5.0 Benefits of commodity exchange

• Improvement of Farm gate prices as farmers become more informed about market and pricing information;

• Farm productivity rises due to credit access; • Increase quality of production by rewarding better quality

and consistency of crop; • Commodity exchange can cover a wide range of

commodities from Agricultural produces and products to non agricultural commodities such as minerals;

• Commodity exchange enable farmers and buyers adopt both spot trading and forward contract.

6.0 Requirements for Establishing Commodity exchange

• A market information system;

• A system of product grading and certification;

• Infrastructure – warehouses, weighing scales, ICT, roads etc;

• Legal and regulatory framework;

• An arbitration mechanism for dispute resolution;

Requirements for Establishing Commodity exchange --- cont• A system for licensing trading members (intermediary and

trading members);• Producer and trade associations;• Well-functioning warehouse receipts system;• A well-functioning clearing and settlement system;• Trading Platform;• Supportive sectors such as banking, insurance, transport, IT

services, and inspection services.

7.0 Progress Made -

A. Work done to date

• Established a Team of Expert to oversee the process of establishing and developing commodity exchange in the country. The team comprise officials from Prime Minister’s Office, Ministry of Industry and Trade; Ministry of Agriculture and Food Security; Ministry of Finance; Attorney General; Tanzania Warehouse Licensing Board Capital Markets and Securities Authority and Agricultural Council of Tanzania (ACT).

A. Work done to date cont..…………..

• Prepared a Concept Paper on the establishment of a Commodity Exchange in Tanzania;

• Road Map for the establishment and development of commodity exchange prepared.

• Undertaken a study visit to the Ethiopian Commodity Exchange and Ethiopia Commodity Exchange Authority; the India leading Commodity Exchange (NCDEX) and Dalian Commodity Exchange of China

Work done to date cont......

• Undertaken three Studies on: (i) Developing Legal and Regulatory Framework, (ii) Linkage between Warehouse Receipt System and the Established Commodity Exchange; and (iii) Commodity Exchange Design. The draft reports have been discussed during stakeholders workshop held late June, 2013. Final reports submitted.

• A draft Cabinet Paper for establishing commodity exchange has been prepared

A. Work done to date cont..…………..

• Established Warehouse Receipt System for coffee, cashew nut, sesame sunflower, paddy and maize;

• Already Tanzania has in place a mini exchange for coffee whereby warehouses receipts are traded by linking buyers and sellers in automated trading platform;

•

B. Outstanding Activities ..........................

• To put in place Legal and Regulatory Framework for an efficient Commodity Exchange;

• To prepare business plan and budget which indicates roles of each stakeholder in agricultural commodity value chains.

• To establish a capacity building program for the purpose of creating local expertise to manage the system

• To sensitize stakeholders, policy makers and the general public.

B. Outstanding activities cont..........................

•Investment in the Technology: - The exchange will be setup on the strong backbone of IT infrastructure, which requires significant investment in developing and acquiring the required software and the hardware.

B. Outstanding activities cont..........................

• Investment in Operating capital: - The Exchange will take time to be profitable. In the interim, investment will be required in keeping operations running.

• Investment in Human capital: - The Exchange to be successful will require International experts to work for the exchange as consultants/ Senior Management In close collaboration with local counterparts this will require funding to hire the key staff/ consultants.

7.0 Estimated Total Investment Required

Investment in Setting up operations (Initial Three years)

Area of InvestmentApproximate Investment

in USDPre-launch Business Design 1,200,000.00 Initial Set up of Infrastructure 8,230,000.00 Technology- Software & Hardware 5,000,000.00

Total Investment required cont......................

Capacity Building 4,000,000.00 Human Capital 2,000,000.00 Initial Operations for three years 3,000,000.00 Guarantee Fund 4,000,000.00 Overheads (10%) 2,570,000,00 Total Investment 30,000,000.00

8.0 Challenges

• Funding:- initial investment for infrastructure and manpower development;

• Inadequate awareness of the functioning of commodity exchange among stakeholders which slow down buy in process;

• Infrastructure – inadequate investment in Rural Roads, Warehouses and Weighing scales;

• Inadequate development of Information and Communication Technology in rural areas;

• Underdeveloped warehouse receipt system for effective functioning of the envisaged commodity exchange.

Wayforward

• Issuance of a Cabinet decision on the establishment and development of Commodity Exchange in the country;

• Engage all key stakeholders, particularly those who were involved with agriculture marketing system, warehouse receipt system, clearing and settlement systems and policy makers, development partners on the need for the establishment of an exchange.

• To establish framework of how to collaborate with private sector in our efforts to set up the exchange.

• To put in place Legal and Regulatory Framework for the establishment and development of a commodity exchange.

Wayforward

cont...................................• To develop awareness and capacity building programme

for all stakeholders.• To establish ownership and Board Structure of the

envisaged National Commodity Exchange of Tanzania taking into consideration the public private partnership structure.

• Establish an institution to take up the establishment of Commodity Exchange, “National Commodity Exchange of Tanzania (NCXT)” is proposed.

• To develop a business plan for the established institution for sharing with the Government, Development Partners and other key stakeholders.

Wayforward cont...................................

• Enhance capacity of Tanzania Warehouse Licensing Board (TWLB) so as to ensure integrity and reliability of the warehouse receipt systems through upgrading of exchange accredited warehouse and logistics infrastructure, enforcement of exchange defined product specifications.

• Enhance capacity of Capital Markets and Securities Authority to regulate the Commodity Exchange.

• Redefining the role of agriculture marketing boards in order for them to dwell more on production promotion through crop and seeds researches.