Emerging Markets: The Next Generation

By Zwick, Steve | Modern Trader, June 2005 | Go to article overview

Emerging Markets: The Next Generation


Zwick, Steve, Modern Trader


Remember China's hot futures markets? Old news. India's and Brazil's? Ditto. There's a new wave taking shape - and it could just be the shape of our own tomorrow.

Truth is sometimes hard to wallow. "The world's largest ommodity futures exchange s in Dalian, China," Fred Grede, CEO of Chicago-based Vega Financial Engineering Ltd., likes to remind people. "The world's largest financial futures exchange is in South Korea. Brazil is consistently in the top 10."

A former planning boss at the Chicago Board of Trade and CEO of the Hong Kong Futures Exchange, Grede now advises so-called "emerging" Asian exchanges on how to get up to speed -and often wonders if there isn't a better word to describe them.

And if you bring up the old argument that the notional value of one South Korean Kospi Index option - long the world's most actively traded contract, despite an 11% drop in volume in 2004 - won't cover dinner for two at most Chicago restaurants, he'll point out that the Chicago Mercantile Exchange's (CME) eminis aren't much bigger.

He says true emerging markets lie beyond the Kospi and the Chinese giants - in places like Kenya and Columbia - where innovative derivative-based financing and risk management schemes could soon help subsistence farmers clamber out of poverty, and even teach us a thing or two.

AFRICA:

PROMISES AND PITFALLS

Let's start in Kenya, where the Nairobi Stock Exchange received approval in 2000 from the country's regulator, the Capital Markets Authority (CMA), to launch financial futures and options and is now carrying out feasibility studies for agriculture products as well.

In the face of subsidized staple crops from abroad, however, the only successful African commodity futures product is the Johannesburg Stock Exchange's (JSE) white corn contract - a niche product based on an underlying product rarely seen outside South Africa.

Two online platforms - the Kenya Agricultural Commodities Exchange (www.kacekenya.com) and African Lion (www.africanlion.com) were launched in the 1990s to provide more competitive pricing for coffee and other African commodities, but Kenya's most influential centralized commodities exchange remains Mombassa's Tea Trade Center (TTC), which holds physical auctions every Monday and Tuesday and sets prices for Kenya, Congo, Rwanda, Tanzania and Uganda.

Other business models are emerging, however, that could provide solutions - if not for coffee, then perhaps for Kenya's internal domestic markets for cassava and African sweet potatoes.

The JSE's white corn contract can certainly serve as one such model - after all, it's a niche product that meets a real hedging need for local farmers. But the real buzz is coming from the most recent addition to JSE's financial offerings: Yield-X, an online interest rate platform that lets users trade all yield-related products - both cash and derivatives - simultaneously. One function allows users to create and trade "J-Notes," which are little swaps standardized at 1 million Rand ($166,000) and lasting 2-, 5- and 10-years.

And the kicker: the target customers are home-owners looking to hedge their mortgages beyond the two-year locked interest rate. The emerging market retail customer, it turns out, has made up for the under-developed financial sector by becoming a bit more sophisticated than his developed world counterpart.

TECHNOLOGY AND COORDINATION

Lamon Rutten, who coordinates commodity trade, risk management and finance projects for the United Nations Conference on Trade and Development (UNCTAD), sees Africa's domestic markets becoming more liquid and functional in the coming decade, in part because he expects technology and cooperation to generate economies of scale and continental distribution.

One hush-hush project taking shape in Botswana, for example, involves a centralized trade-matching engine designed to offer back-office functionality to various African exchanges by year-end. …

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