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Commodities Exchange: A new beginning – Q&A with Ian Wright of DGCX on plastics futures trading

Polypropylene (PP) is a principal raw material in the production of plastic goods and the polypropylene market is subject to frequent price fluctuations. Recognizing the demand of the rapidly growing plastics market to manage risk and to provide enhanced liquidity in the global trade of plastics, Dubai Gold & Commodities Exchange (DGCX) launched polypropylene plastic futures contract early this year. In an interview with Lekhraj Ghai of POLYMERUPDATE, Ian Wright—Chief Business Officer, DGCX—discusses opportunities and challenges that exist in modern-day plastics futures trading.

DGCX is a leading derivatives exchange in the Middle East and North Africa, trading in metals, hydrocarbons and currencies. DGCX is majority owned by Dubai Multi Commodities Centre (DMCC), a strategic initiative of the Government of Dubai.

Ian Wright – CBO, DGCX

Ian Wright – CBO, DGCX

Q: Trading in polymers on an exchange has been attempted before in some parts of the world including in London, India and China. However other than China, the other exchanges have failed. How has DGCX overcome this difficulty? Is it possible to successfully hedge PP futures?

A: In 2012 DGCX formed a Plastic Working Group to specifically look at the viability of a PP futures contract. The advice from the group and industry research indicated that there is a place within the market for a PP futures contract and DGCX subsequently launched the contract in February 2014.

DGCX's new contract brings a number of benefits to the physical plastics industry:

  • The DGCX contract facilitates accurate price discovery, which the physical industry can use as a basis for price negotiations;
  • it provides a transparent forum for the trading of futures contracts in polypropylene;
  • it allows all participants in the plastics supply chain, including producers, traders, convertors and end-users to hedge polymer price risk; and
  • it allows participants in the physical market to use DGCX's delivery option for the contract to sell excess stock in times of over-supply and as a source of material in times of shortage.

Q: How does DGCX carry out its price assessments? What methodology does DGCX follow for determining the prices of PP? On what basis is a single price determined? Is market analysis involved in price determination?

A: Since it is a physical delivered contract, DGCX uses the contract to determine the final settlement price.

Q: What are the factors that affect PP prices on your exchange?

A: DGCX cannot comment on price movements. However, prices are closely linked to the physical market and have a strong correlation with plastics prices in other markets.

Q: How do you encourage participation and transparency among members?

A: DGCX's product strategy has two pillars; listing of products that directly compliment the UAE's trading, industrial and financial market places and listing products that reinforce and expand upon DGCX's reputation as the market place of choice for off-shore Indian futures products. The PP Futures contract falls firmly in the first category. The launch of any new product is based on both market conditions and demand from market participants. DGCX regularly reviews its product range to evaluate their performance and explore the introduction of new products. The Exchange's aim is to provide the contracts that its clients wish to trade.

Constantly maintaining a feedback loop with Members and the market allows DGCX to explore the launch of new products. With the plastic futures contract, DGCX and a number of the Exchange's broker members invested significant resources in refining the contract and continue to drive awareness among the physical participants, as well as providing incentives for new entrants to participate in the new contract. Continuing Plastic Working Group meetings—held at regular intervals since being set up in 2012—are also a key factor in this participation.

Q: Which are the PP expansion projects that might affect PP prices in the short to medium term?

A: It is not DGCX's role to comment on price movements or structural changes within an industry segment. We do however believe that the DGCX PP contract will provide a useful hedging tool to industry participants.

Q: Since DGCX ensures physical delivery, inventory management is critical. Is there a system in place for inventory management?

A: Our Clearing House, the Dubai Commodities Clearing Corporation (DCCC), utilizes an online warranting system, TradeFlow, which was developed by DGCX's parent company, Dubai Multi Commodities Centre (DMCC). It is a warrant registration system in which Approved Warehouses and participants record and manage exchange traded inventory.

Q: Are there any prevailing trade barriers in the Emirates?

A: The delivery points are all in the free-zone areas and therefore there are no specific trade barriers associated with the delivery process.

Q: Does DGCX intend to expand its product portfolio with other polymers such as LDPE, LLDPE, HDPE and PVC?

A: Yes. DGCX has had a number of enquiries to launch more products and these will be presented at our next Plastic Working Group meeting, which is scheduled to take place in the near future. Following this, announcements on potential new products will be made.

Q: Is trading being planned for other PP grades?

A: We do not currently see any requirement to add more grades on PP; however, this has been scheduled for discussion at the next Plastic Working Group meeting.

Q: Tell us more about your risk management and surveillance systems. What systems are in place for avoiding the manipulation of prices?

A: Trading on the exchange provides absolute transparency to participants—every order that is placed is clearly visible in the order book, meaning that participants can take positions on the prices they see on the Exchange.

DGCX adheres to the highest international standards of risk management, corporate governance, regulation and market surveillance. The DGCX management follows international best practices in terms of its code of conduct and management of the Exchange. DGCX is regulated by the Securities and Commodities Authority (SCA). A member of the International Organisation of Securities Commissions (IOSCO), SCA is also the regulatory authority for the Dubai Financial Market and the Abu Dhabi Securities Market.

Q: Could you name the PP producers that support or are member firms of DGCX? Do these firms have a say in deciding the futures prices?

A: The exchange platform is open to all participants, all of which are able to post prices on the trading screen. Therefore, the prices are determined purely by the market and not by any single entity.

Q: What are your thoughts on Dubai becoming an international trading hub in the future? How important is India's contribution to the success of DGCX as a commodity trading platform? Tell us more about the Indian Rupee/Dollar futures on DGCX.

A: Dubai's strategic location in a time zone midway between the Far East and Europe has enabled DGCX to support the growth of derivatives trading in the region.

Dubai is already a leading international trading hub. Its geographical location, allied with its world-class infrastructure and talent pool, already allows the Exchange to offer extended trading hours to global traders and integrate regional and international trading. DGCX acts as a bridge between the time zones of the Far East and Europe, contributing to the smooth flow of the global trading cycle especially during the gap between the closing of the Far East markets and the opening of European markets.

As part of the continued development of Dubai as an international hub, DGCX and its parent company DMCC, continue to develop a strong offshore platform for the trading of a range of Emerging Market (EM) contracts in response to Member and market needs. DGCX Emerging Market currency contracts, like Indian Rupee futures, allow international investors to hedge their exposures offshore in a safe and regulated environment. These contracts are attracting increasing attention from both retail and international institutional participants, ranging from multinational banks, non-deliverable forward (NDF) markets, traders and other business entities, and have contributed significantly to the growth of the Exchange's Member base.
The success of the INR futures contract in particular has been driven by international interest in India's economy and currency. India's rapidly growing trade flows, increased cross border investments and the fluctuation in exchange rates, have created a corresponding requirement to hedge risk. Increasing trade between India and the Middle East is also a key factor behind this growth.

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