Broadening Dubai Derivatives

The Dubai Gold and Commodities Exchange (DGCX) plans to launch next year a spot gold contract, and energy, plastics and agricultural futures as part of plans to diversify its product offerings and asset classes, its Ceo said.

The derivatives exchange, which currently has currency, energy, metals and equities futures contracts, is looking at providing a spot gold contract in the second quarter of 2014, Gary anderson told Gulf Business.

“We are looking to launch a spot gold contract that will complement the gold ecosystem that we have within Dubai itself,” said Anderson.

“Dubai sees about 30 per cent of all the world’s gold pass through it and it is Dubai’s biggest export currently.”

Dubai benefits from a large gold industry that includes refiners, jewelry markers and other businesses, which will benefit from the spot gold contract, he added.

In 2011, Dubai saw 1,196 tonnes of gold worth $41 billion traded, which amounts to around 29 per cent of the global trade in gold.

DGCX’s gold futures reached over 344,000 contracts in the first nine months of this year.

Year-on-year volumes of the exchange have grown by 137 per cent in 2012 to 9.6 million contracts from a year earlier and the exchange is forecasting to trade 15 million contracts by the end of 2013.

Since its launch, over 22 million contracts have been traded at a value in excess of $940 billion.

DGCX first futures contracts were gold and silver futures, followed by currency futures and fuel oil futures, which no longer trades.

But DGCX has plans to revive the Fujairah Fuel oil contract, and introduce other energy products.

“What we are looking to do again as part of our strategy over the next six to 12 months, is to look at all the market, potentially launching a natural gas contract, and relaunching the Fujairah fuel oil contract we delisted,” said Anderson.

“Most of the oil companies here in the GCC do use futures and end users of those energy products, be they airlines, also use derivatives to try and mitigate their risk with regards to oil price movement. If we can provide that infrastructure in Dubai on the exchange, we should be able to get that liquidity here back within the region itself.”

Liquidity of contracts is an issue and has led exchanges around the world to delist contracts that have poor performance. That’s why the exchange is trying to talk to stakeholders to ensure the contracts it will launch will have enough demand and attract enough liquidity to allow them to flourish.

The exchange is working with China’s Dalian Commodity Exchange, a derivatives exchange that has signed a memorandum of understanding with DGCX, to launch a polypropylene futures contract on DGCX in the first quarter of next year. Polypropylene is a plastic used in various industries, including textiles.

“The next step for us is to make sure there is continued demand to launch this contract,” said Anderson. “What we want to do is to is to try and launch our contract simultaneously with the Dalian Commodity Exchange, so it will basically increase the liquidity pool and will give people the ability to trade into both plastics pools.”

Alongside the polypropylene, the exchange could introduce a Chinese Renminbi contract as trade between the UAE and China looks to increase.

“In conjunction with plastics, it would be an opportunity for us to launch a Renminbi contract versus the dirham or dollar itself and we are still looking at ways to introduce that contract,” said Anderson. “We need to ensure when we launch these products there is demand for them.”

The exchange will also further expand its offering in equities futures. After launching the Indian equities futures contract based on the S&P BSE Sensex Index in July, the exchange will launch in November this year a futures contract based on MSCI India Index, which represents 72 locally listed firms in India.

“The community we are looking at for this contract to succeed will certainly be of an institutional level. Initial interest for that contract will come out of Singapore and Hong Kong, where a lot of asset managers are based who trade in emerging market economies,” said Anderson.

“Equities is a way for the exchange to diversify its product base and we believe it supplements our Indian strategy in particular. We have a very liquid Indian rupee- dollar currency contact, so having a equity component for that strategy is really complementary.”

Offering the Indian equities futures will augment the exchanges’ focus on reaching the six million Indian expatriate population in the Gulf region, which has made the exchange’s Indian rupee currency futures a successful product since its launch in 2007.

DGCX Indian Rupee Futures grew 62 per cent in the first nine months of this year, trading 9,785,833 contracts.

The two Indian equities futures contracts will not compete with each other, but will cater to two different types of investors, institutional for the MSCI product and retail for the Sensex product, he said.

The MSCI India equities futures will particularly benefit from the upgrading of the UAE to emerging market status from frontier market next year by Index compiler MSCI Inc.

Eighty per cent of DGCX’s current membership base is from the Middle East and the Indian Subcontinent and the rest is from the USA and Europe.

The exchange is also looking to list equity products next year for the Gulf region, which are likely to benefit from the upgrade of the UAE from frontier market to emerging market by MSCI.

“We would look to list more products that are very much more GCC-oriented,” said Anderson. “Now that the UAE has been granted emerging market status, that means people will want more exposure to the region itself. And they are going to need a derivative product to either gain exposure to the region or to mitigate some of the risk they may have.”

DGCX, which was set up in 2005, is a joint venture between the Dubai Multi Commodities Centre, Financial Technologies India and the Multi Commodity Exchange of India