When the original plan for setting up a hi-tech exchange within a tight schedule of one year was announced, many in the media took the news with a pinch of salt. Last week, DGCX's senior management took Khaleej Times for an exclusive preview of the new exchange. What we saw was awe-inspiring __ a testimony to Dubai's inimitable style. Just a few days from joining the big league of world's leading commodities exchanges such as the Chicago Board of Trade, The Tokyo Commodity Exchange, NYMEX and LME, the DGCX premises were bereft of the usual pre-launch hustle and bustle. Sensing my surprise at the utter calm with which the executives were going about their business, Framroze Pochara, Chief Executive Officer of DGCX volunteered a curt explanation: "The team and the systems in the exchange have been through all the trading procedures over a thousand times. In addition we have a very experienced team who are just waiting for the exchange to go live." Bridging the derivatives gap Dubai has a long history of being the commodities trading hub of the Middle East, Africa and the subcontinent. In gold, Dubai has the unique status of a hub that bridges Africa, the biggest gold producer and India, biggest gold consumer in the world. Gold imports to Dubai reached close to $10 billion last year. This strong position in the physical trading market will now be complemented by the creation of a derivatives market to serve both the hedging requirements of the local gold sector as well as global traders. "For the commodities market to be efficient and complete, physical (spot) market essentially needs to be complemented with the presence of derivatives markets. In most developed markets the futures trading is estimated to be more than 10 times the spot market. The establishment of the derivative market in Dubai will support the vibrant trading sector with effective hedging mechanisms," said Arshad Khan, Director, DGCX. Giving a befitting tribute to Dubai's status as the 'City of Gold, the first contract to be listed for trading on DGCX will be six month gold futures. The DGCX will commence trading on November 22 with a 1-kilogram gold futures contract. "We estimate that we will have around 100 members trading on the DGCX markets on day one," said Pochara. From day one, members will be able to trade in six forward months for gold futures, and trading of silver futures and gold and silver options will be available during first quarter of 2006. Following which a diversified range of commodities such as steel, marine fuel oil, freight rates and cotton will be introduced for trading. With its extensive portfolio of listed commodities including Gold, Silver, Freight, Cotton, Steel and Marine Fuel Oil, DGCX is set to offer an efficient platform for the trading, clearing and settlement of a diverse range of commercially important derivative products. "The exchange is geared for multi commodities trade and our systems are ready for introduction of any number of new commodities. As the market matures, we are sure to offer more derivatives on newer commodities," said Khan. Not shy of physicals DGCX will offer fully dematerialised trading system. Although the trading will be margin based and settlements are done using Dubai Gold Receipts (the equivalent of cash in DGCX), the exchange also offers the option for traders to take delivery in physicals. "World over, physical delivery constitutes less than 2 per cent of the total trade. However it is important to give the physical delivery option, as physicals are necessary to keep the stability in the spot market. In the absence of physical deliveries, speculators could drive the prices on the market," said Pochara. While the exchange has appointed HSBC and National Bank of Dubai as clearing banks, to keep up with the physical delivery requirements, it has empanelled Brinks, MAF Securicor and Transguard as approved vaults for gold and silver deliveries. The approved brands in gold bars include Rand Refineries, South Africa, Valcambi, Metalor Technologies, Switzerland, GR Mathey, Australia, PAMP Switzerland, Johnason Mathey, Hong Kong and Argor Heraeus, Switzerland. The exchange has plans to provide physical deliveries in other commodities contracts too. "While the spot market stability is an important motive in offering physical deliveries, we are also abiding by Islamic principles of commodities trading where an underlying real asset is a must for a valid contract," Khan added. DGCX opened its membership last June and received an overwhelming response of close to 300. Of these, some 200 have now been approved in principle by the DGCX Board. The approved list include some of the leading local, regional and international players such as Mashreq Securities; National Bank of Dubai; Standard Bank; Goldas (Turkey); Supama International; Swiss Gold; Shaheen Brokerage and Al Ghurair Giga as Broker Members. Arbitrage to become a key element From day one, DGCX will offer uninterrupted trading for thirteen hours offering arbitrage opportunities against Far East, European and American markets. The exchange is confident that it will see wide participation from approved members from diverse backgrounds such as commodity traders, banks, brokerages and other financial institutions, who will trade and clear their obligations. "We are located in a unique time zone as far as commodities exchanges are concerned. Once Tokyo closes, there is a time gap of more than 7 hours before the LME opens. We fill this gap and this gives traders the opportunity to engage in uninterrupted trade. With our long trading hours, our traders will get arbitrage opportunities with all leading markets around the world." DGCX officials said the dollar denominated trade would enhance arbitrage opportunities, as traders will need only to hedge their arbitrages against single currency risk. Regulation begins at home The backbone of DGCX's regulatory framework is its own stringent self-regulatory set up. "DGCX aspires to be a commodities exchange of global significance. To achieve this goal we are committed to adhering to the highest international standards of corporate governance, self regulatory discipline and market surveillance," said Khan. The exchange's board will follow international best practices in terms of conduct of its meetings. While directors will not be permitted to have an interest in any member of the exchange or in the commodities traded, any conflict of interest involving a director will be required to be declared to the board. Apart from the self- regulation, the market is regulated by Emirates Securities and Commodities Authority (ESCA). "Esca's regulatory framework is compatible with the international regulatory standards and our own self-regulation. When we have a competent regulator at home, what is the need for looking out side," asks Pochara. The third layer of regulation comes from brokers who are required to know their clients, in addition to calling adequate margins prior to the order keyed into the exchange's trading system. Geared to protect investors Investor protection is the common thread that links the systems, procedures, regulations and technology solutions used in DGCX. Commodity markets are volatile and futures contracts are leveraged instruments. To protect the interests of investors and the reputation of the market, DGCX has implemented systems and procedures in line with the best available internationally. "Our exchange is fully automated. The chances of human errors of omissions and commissions are minimum as at any point if the exchange participants deviate from the market's requirement's it will be detected and rectified," said Khan. It is very important to ensure that futures prices are not distorted by market manipulation by the financial failure of participants. Such failures can cause financial losses to participants and reputation loss to the exchange. To eliminate such instances, DGCX has its own active programme of real time market surveillance. "The monitoring mechanism tracks each individual participants and ensures that market participants and their clients are adequately protected by Exchange's margin requirements." DGCX has incorporated its clearing corporation in addition to setting up a Settlement Guarantee Fund. DCCC will act as counterpart for trades between the buyer and the seller. Thus it will guarantee the performance of the contract between transacting parties. The non-performance by one of the parties will not affect the other party, as the DCCC will take over the obligations of the defaulting party to ensure that settlement takes place as scheduled without any glitches. The guarantee of performance by the Clearing Corporation will provide comfort and confidence to the market participants and ensure the integrity of the market. Systems integrity and technology platform DGCX is a fully automated, screen-based and on-line. The exchange runs on the latest and proven trading platform supplied by Financial Technologies (India) Limited (FTIL). To provide anywhere trading facility, the exchange has a highly secure Internet trading environment. DGCX has deployed state of the art security solution based on global standards. While all data is encrypted using Secured Socket Layer (SSL), multiple authentication mechanisms and monitoring systems make the environment additionally secure. While the entire technology infrastructure such as servers and data storage have two additional back ups with totally independent power sources, the data is highly secured through encryption and bio-metric access given only to authorised personnel PIN/KHALEEJ TIMES