The Gulf region's fledgling commodities exchanges could get a boost as investors seek the security offered by clearing houses amid heightened fears over counterparty risks following the global credit crisis.
Global exchanges have benefited from a move away from over-the-counter commodities trading, where deals are typically bilateral agreements between two parties with no backing from a central clearing house.
"The reason why exchanges are created in the first place is to reduce the amount of risk between the party buying and the party selling," said Gerhard Hametner, Director of Dubai-based corporate finance house MAC Capital, yesterday.
"You will see that, not just in this region but in the world, the amount of over-the-counter (OTC) transactions will reduce and that more of this business will move onto exchanges."
This change has been particularly pronounced in the oil market, Jackie Bullimore, Chief of Customer Relations at the Dubai Mercantile Exchange (DME) told a derivatives conference in Dubai last week.
"Certainly in oil and most definitely in the east-of-Suez oil market, OTC transactions were a huge piece of the risk management profile," Bullimore said. "There has been a very demonstrable shift onto exchange space as a result of the credit crisis."
The DME, a joint venture between Oman, Dubai and the New York Mercantile Exchange, launched trading with its Oman contract in June 2007.
The contract has survived longer than other attempts to establish a crude futures benchmark for around 12 million barrels per day of Middle East oil that move to Asia. But volumes remain thin and the exchange has yet to attract any of the region's big producers to use it to price their oil.
A boost from investors looking to avoid over-the-counter risk could help the DME's attempts to improve liquidity. Daily volumes hit a record on January 13 at more than 6,000 lots.
The Dubai oil exchange recently switched the Oman contract to the US-based CME Group's Globex trading platform, the world's largest derivatives exchange. The change gives the CME's wider customer base access to the Oman contract.
The Dubai Gold and Commodities Exchange (DGCX), launched in November 2005, saw volumes rise to 1.14 million lots in 2008, up 26 per cent from the previous year.
The DGCX operates its own clearing house and hosts derivatives including gold, oil, steel and currency futures. The gold and currency contracts make up most of the volumes traded.
Not all of the DGCX contracts have succeeded. Its international steel rebar contract last traded in September 2008. The global economic downturn forced the DGCX yesterday to postpone the launch of plastics futures, due to take place today.
Despite the downturn, there are moves in the region to open more exchanges and launch new contracts.
India's Financial Technologies plans to launch a new bourse in Bahrain in 2010. The firm is a big shareholder in the DGCX. It plans to offer both Islamic and conventional products in equities, derivatives, commodities and currencies on the new exchange. Aside from the deteriorating economic climate, new contracts and exchanges face the challenge of a region little accustomed to trade in derivatives.
"At present, globally the trading volume is down on account of anticipated uncertainty in the real economy," Rajiv Kumar, Deputy Chief Executive of MF Global Middle East, a DGCX member, said. "[But] the first and foremost reason for low volumes on derivatives products in the region is the lack of familiarity which needs to be tackled through greater education. The region surely has potential."