Dubai Gold and Commodities Exchange has notched up impressive growth in 2008 despite the doom and gloom associated with the global financial crisis. A broad product offering and diverse customer base have enabled the three-year-old exchange to register trade volumes surpassing one million contracts valued at $57.5 billion (Dh211bn) in the past year, said Malcom Wall Morris, Chief Executive Officer of DGCX. This is a rise of more than 26 per cent on the previous year and has helped in turning DGCX into a leading commodity derivatives exchange in the region. In this interview with Emirates Business, Morris enumerates the challenges lying ahead for the exchange, the global commodity markets and the effects of current liquidity crunch on the markets.
The global commodity markets underwent a volatile phase in 2008. As the head of the youngest commodity exchange, how do you see the role and performance of commodity exchanges like DGCX in the future? What are the major challenges and opportunities awaiting DGCX in the current global context?
In the three years since DGCX began operations, we have listed a wide portfolio of contracts, covering precious metals, energy, currencies and alloys and have succeeded in attracting almost 230 members. This broad product offering and diverse customer base have enabled us to become the leading commodity derivatives exchange in the region, resulting in trade volumes surpassing one million contracts in 2008, a rise of over 26 per cent on the previous year.
In order to provide the right products at the right time, we continuously liaise with our customers to develop the existing as well as new products. In May last year, we launched both the West Texas Intermediate (WTI) and Brent crude oil futures contracts, which were the most successful product launches in the exchange's history and helped us reach a new daily volume record of more than 14,000 contracts in July. In October, based on customer feedback, we enhanced the Indian rupee-dollar futures contact to ensure that it better served the needs of the market users and have been rewarded with three-digit volume growth when we compare it to the same period last year.
The key challenge for DGCX remains that derivatives are still in their infancy in this region, which, combined with the backdrop of the new economic environment, makes for potentially challenging times.
However, challenging times often require market users to consider alternative ways of doing business and the benefits of doing business on a well-regulated exchange such as DGCX are clear. Not only do DGCX provide a robust marketplace to transact business in alternative asset classes to property and equities, but we also operate the region's sole derivative clearing house, the Dubai Commodities Clearing Corporation (DCCC), meaning that counterparty risk is all but removed and that clients' funds remain here in the region, ensuring efficient and cost-effective trading opportunities for all regional market users.
DGCX is reportedly in merger talks with other exchanges like Dubai Mercantile Exchange. Compared to the giants like CME (Chicago Mercantile Exchange), DGCX is only a small player in the market. Do you see an era of mergers among commodity exchanges? Are you planning a merger/partnership with DME or any other exchange?
There has been no discussion and there is no proposal for a merger with DME or any other exchange.
Derivatives markets and speculators are blamed for the current global financial mess. What lessons are to be learnt from the the collapse of many big banks and financial institutions?
DGCX is a well run and regulated marketplace that operates under the strong guidance of the federal regulator of the UAE, the Emirates Securities and Commodities Authority (Esca). This strong regulatory framework has ensured that DGCX has become the region's leading derivatives exchange, enjoying healthy participation from both commercial and non-commercial market participants. The economic crisis has brought into sharp focus the benefits of transacting and clearing business via a well-regulated exchange such as DGCX, ensuring the reduction in counterparty credit risk.
Within three years of existence, DGCX has launched a number of products in the region. What are the future focus areas for DGCX?
DGCX has evolved as the leading derivatives exchange in the region. Since inception in November 2005, more than 2.6 million contracts have been traded with a value in the excess of $107bn. January saw an encouraging start to the year with 38,500 contracts traded, an increase of 33 per cent against December last year. We are continuously researching and developing new products, but we cannot disclose details of future product development at this stage. We will communicate details at the appropriate time.
Recently DME has moved its oil trading to the CME platform. Are you satisfied with the performance of the oil futures contracts and fuel oil contracts on DGCX? Market participants say the volume has been negligible, especially for steel.
DGCX has launched 10 products in less than three years, resulting in a diverse product range covering precious metals, energy, currencies and alloys. Simultaneously, we have been developing the regional market for derivatives, highlighting the benefits of asset diversification away from the more traditional asset classes of property and equities. In May last year, we expanded our energy portfolio to include both the West Texas Intermediate (WTI) and Brent crude oil futures contracts, with over 108,000 contracts trading for a value of over $13bn to date.
Dubai has been a gold trading hub and gold contracts constitute a major business for the exchange. Are you satisfied with the results achieved by the exchange in terms of the number of contracts and revenue? What are the the latest figures of gold/precious metals trading on DGCX? How do you see the performance of silver contracts?
The precious metals contracts form a key part of our product portfolio. Since DGCX began operations, over $48bn worth of gold has been traded on the exchange. In addition, during 2008, gold accounted for approximately 65 per cent of the exchange's total volume, trading over 766,000 contracts, which was an increase of 12 per cent over the previous year.
A large portion of the physical gold demand in the UAE is still settled outside the DGCX domain. It seems the physical gold buying by retail/wholesale traders are outside the DGCX online trading platform. Do you have any plans to attract this segment to DGCX?
By launching the gold futures contract in November 2005, DGCX set about creating a new regional price benchmark to allow market users the option of hedging and investing in gold locally. Since its launch, over 1.9 million contracts have been traded, which is a significant achievement and one which we are extremely proud of. The DGCX gold futures contract continues to attract greater participation from the physical gold trade as was witnessed last September when we successfully completed our largest ever physical delivery of almost 1 MT of gold valued at $25m. This transaction was a testimony to the efficient and robust settlement framework provided by our clearing house, DCCC, and reinforces the exchange's position as a secure and trusted marketplace.
Oil prices have come down drastically in a short period of time. Is it due to excessive speculation? Physical oil trade was only less than 10 per cent of the actual number of paper contracts on various exchanges. How do you see this trend? Is there a need for more regulation?
As an exchange, we cannot comment on prices. The factors driving price volatility increases or falls depending on a specific commodity. Fluctuations in commodity prices are due to a wide variety of reasons, including, but not exclusively, supply and demand, and are not necessarily linked to speculators. Derivatives were evolved as a hedging tool to protect against price volatility. Derivatives also facilitate best price discovery and bring transparency to commodity markets worldwide.
What are the volumes and value of foreign exchange trading? How is the currency business doing and are there any plans to introduce more such products?
Currency volumes are assuming growing importance in the exchange's product portfolio, with record growth on DGCX last year. The euro futures contracts have led this growth with 110,000 contracts traded in 2008. On February 10, volume in euro-dollar futures recorded a new high, reaching 4,956 contracts, valued at $320m.
The Indian rupee futures contract was strengthened in November 2008 and is now cash settled in US dollars, facilitating the settlement process for both local and international market participants. The DGCX contract remains the only Indian rupee futures contract accessible to international market participants, and thus holds a great deal of potential for growth.
How safe is it to conduct business online? What are the risk factors involved and what are the security measures that are in place?
DGCX has almost 230 members, including many leading international and regional financial institutions such as Deutsche Bank, JP Morgan, HSBC, ENDB, Newedge Group and Standard Chartered Bank, among others, demonstrating the trusted and safe systems that we have in operation. The trading platform incorporates a highly sophisticated and automated risk management system, augmented by a strong online surveillance team, which provides comfort to market participants regarding financial integrity and transparency of the market place. In addition, DGCX is the first exchange in the region to achieve the prestigious ISO 27001:2005 Certification for its information security management system. The ISO certification illustrates the exchange's ability to provide a safe and secure environment to members, customers and associates.
Liquidity has been a problem for almost all businesses in the UAE and the Gulf. Is commodity trading on DGCX affected by the liquidity crisis? Are your members affected by demands for increasing margin calls? Are there any measures to improve liquidity?
The global credit crunch is undoubtedly affecting all sectors, including the commodity sector and exchanges across the world. We recognise that we are now operating in a new climate with restricted liquidity and credit. However, 2009 has got off to an encouraging start with our January volumes increasing by 33 per cent compared to December 2008. We are continually looking for new ways to improve volume and liquidity and remain committed to driving the business forward this year. As an exchange, it is not our policy to comment on our members' trading activity.
Are the commodity markets facing a drop in business due to declining demand for commodities from manufacturers? Most industries are reportedly in recession and what will be the impact on the commodity trading exchanges?
The global credit crunch is undoubtedly affecting all sectors, including commodities and exchanges as well as all geographical locations across the world. In this region, the effects were most notably felt during the last quarter of 2008, but despite this DGCX posted record volumes in 2008.
The Middle East remains an important hub for global commodity trade and the GCC is a large consumer, producer and exporter of commodities. As such, despite the current global uncertainty, the region has excellent growth potential in the long term and we, at DGCX, remain committed to helping deliver on the potential.
You have been planning a plastic futures contract and postponed the launch this week? What prompted the decision? Is it due to the bad market conditions?
Throughout the development of the plastics futures contracts, we have worked in conjunction with participants of the plastics industry. The decision to postpone the launch of plastics futures contracts is therefore based on feedback that we have received from these key market participants. After careful consideration, we decided that it was not appropriate to go ahead with the launch at this time.
PROFILE: Malcom Wall Morris CEO, DGCX
Morris, a commodity derivatives market expert with over 14 years' experience in the sector, took over as Chief Executive Officer of DGCX in November 2007.
Prior to this, Morris was Head of Business Development, Commodity Products at Liffe, the derivatives business of NYSE Euronext. For the past six years, he spearheaded the marketing and development of both existing and new futures and options contracts that formed Liffe's commodity product portfolio.