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ESTABLISHMENT OF COMMODITY EXCHANGE IN TANZANIA

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At the centre of the exchange lies the exchange trading ... Agricultural produces and products to non agricultural commodities such ... India leading Commodity ... – PowerPoint PPT presentation

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Title: ESTABLISHMENT OF COMMODITY EXCHANGE IN TANZANIA


1
ESTABLISHMENT OF COMMODITY EXCHANGE IN TANZANIA
  • 1.0 Commodity exchange
  • A commodity exchange is a trade platform where
    various commodities and derivatives products are
    traded in orderly and organized fashion, with
    clearly specified and transparent rules.

2
Commodity exchange cont.................
  • Prices are determined solely by supply and
    demand conditions or fundamentals, and not by the
    exchange itself.
  • Prices at which transactions are made are
    recorded and released publicly by the exchange as
    soon as possible, thus generating market
    transparency Bids to buy go on simultaneously
    with offers to sell
  • The exchange has a clearing mechanism which
    ensures or guarantees that transactions
    undertaken by traders on the floor are honored,
    should any insolvency occur.

3
Commodity exchange cont.................
  • The Exchange makes use of brokers to bring and
    integrate large numbers of buyers and sellers
    into a market where membership is limited. They
    have a duty to advise their clients regarding buy
    or sell decisions and as to the best market
    opportunities.
  • Exchange regulations and directives make it
    mandatory for members to make use of standard
    contracts prepared by the exchange, as well as to
    adhere to the terms and conditions of the
    contracts, to keep records of their transactions
    and submitted to be bound by the disciplinary
    rules of the exchange.

4
Price Discovery Mechanism Buyers and sellers
together set the price
  • Many buyers
  • One Buyer
  • One Seller Many Sellers

Exchange
Auction
Reverse Auction
Negotiation
5
2.0 Fucntions of Commodity Exchange
  • Commodity exchange provides three basic functions
    which make the need for one not just necessary
    but imperative
  • Price/ market transparency (everyone has access
    to a neutral reference price)
  • Price discovery (demand and supply developments
    are easily reflected in price levels) and
  • Reduced transactions costs (it is easier to find
    buyers or sellers through a centralized market
    place).

6
3.0 Types of Commodity Exchange
  • A cash exchange with spot delivery (i.e.
    typically up to 30 days)
  • A cash exchange with spot and forward delivery
    (i.e. beyond 30 days) and
  • A futures exchange, where the principal objective
    is hedging (i.e. insuring against price
    fluctuations), where the majority of contracts
    are offset and do not lead to physical
    delivery.

7
4.0 How it Operates
  • The operation of a commodity exchange is similar
    to that of the stock markets.
  • At the centre of the exchange lies the exchange
    trading floor, where all non-electronic commodity
    trading takes place.
  • These exchange floors are divided into several
    sections, each devoted to the trading of a single
    commodity.
  • These sections are known as either a pit or a
    ring.

8
HOW DOES A COMMODITY EXCHANGE WORK?
9
How it operates cont
  • In these pits traders stand facing each other,
    and subsequently make bids and offers to one
    another.
  • When a successful transaction is made between
    traders, the information is immediately
    transferred on to the massive trading floor
    quotation board while simultaneously being
    distributed to the relevant trading centers
    worldwide.

10
How it operates cont.
  • With the development of ICT the traditional
    methods of open outcry system is being replaced
    by global electronic trading platforms.

11
5.0 Benefits of commodity exchange
  • Improvement of Farm gate prices as farmers
    become more informed about market and pricing
    information
  • Farm productivity rises due to credit access
  • Increase quality of production by rewarding
    better quality and consistency of crop
  • Commodity exchange can cover a wide range of
    commodities from Agricultural produces and
    products to non agricultural commodities such as
    minerals
  • Commodity exchange enable farmers and buyers
    adopt both spot trading and forward contract.

12
6.0 Requirements for Establishing Commodity
exchange
  • A market information system
  • A system of product grading and certification
  • Infrastructure warehouses, weighing scales,
    ICT, roads etc
  • Legal and regulatory framework
  • An arbitration mechanism for dispute resolution

13
Requirements for Establishing Commodity exchange
--- cont
  • A system for licensing trading members
    (intermediary and trading members)
  • Producer and trade associations
  • Well-functioning warehouse receipts system
  • A well-functioning clearing and settlement
    system
  • Trading Platform
  • Supportive sectors such as banking, insurance,
    transport, IT services, and inspection services.

14
7.0 Progress Made -
  • A. Work done to date
  • Established a Team of Expert to oversee the
    process of establishing and developing commodity
    exchange in the country. The team comprise
    officials from Prime Ministers Office, Ministry
    of Industry and Trade Ministry of Agriculture
    and Food Security Ministry of Finance Attorney
    General Tanzania Warehouse Licensing Board
    Capital Markets and Securities Authority and
    Agricultural Council of Tanzania (ACT).

15
A. Work done to date cont....
  • Prepared a Concept Paper on the establishment of
    a Commodity Exchange in Tanzania
  • Road Map for the establishment and development of
    commodity exchange prepared.
  • Undertaken a study visit to the Ethiopian
    Commodity Exchange and Ethiopia Commodity
    Exchange Authority the India leading Commodity
    Exchange (NCDEX) and Dalian Commodity Exchange of
    China

16
Work done to date cont......
  • Undertaken three Studies on (i) Developing Legal
    and Regulatory Framework, (ii) Linkage between
    Warehouse Receipt System and the Established
    Commodity Exchange and (iii) Commodity Exchange
    Design. The draft reports have been discussed
    during stakeholders workshop held late June,
    2013. Final reports submitted.
  • A draft Cabinet Paper for establishing commodity
    exchange has been prepared

17
A. Work done to date cont....
  • Established Warehouse Receipt System for coffee,
    cashew nut, sesame sunflower, paddy and maize
  • Already Tanzania has in place a mini exchange for
    coffee whereby warehouses receipts are traded by
    linking buyers and sellers in automated trading
    platform

18
B. Outstanding Activities .......................
...
  • To put in place Legal and Regulatory Framework
    for an efficient Commodity Exchange
  • To prepare business plan and budget which
    indicates roles of each stakeholder in
    agricultural commodity value chains.
  • To establish a capacity building program for the
    purpose of creating local expertise to manage the
    system
  • To sensitize stakeholders, policy makers and the
    general public.

19
B. Outstanding activities cont....................
......
  • Investment in the Technology - The exchange will
    be setup on the strong backbone of IT
    infrastructure, which requires significant
    investment in developing and acquiring the
    required software and the hardware.

20
B. Outstanding activities cont....................
......
  • Investment in Operating capital - The Exchange
    will take time to be profitable. In the interim,
    investment will be required in keeping operations
    running.
  • Investment in Human capital - The Exchange to be
    successful will require International experts to
    work for the exchange as consultants/ Senior
    Management In close collaboration with local
    counterparts this will require funding to hire
    the key staff/ consultants.

21
7.0 Estimated Total Investment Required
Investment in Setting up operations (Initial Three years) Investment in Setting up operations (Initial Three years)
Area of Investment Approximate Investment in USD
Pre-launch Business Design 1,200,000.00
Initial Set up of Infrastructure 8,230,000.00
Technology- Software Hardware 5,000,000.00

22
Total Investment required cont...................
...
Capacity Building 4,000,000.00
Human Capital 2,000,000.00
Initial Operations for three years 3,000,000.00
Guarantee Fund 4,000,000.00
Overheads (10) 2,570,000,00
Total Investment 30,000,000.00
23
8.0 Challenges
  • Funding- initial investment for infrastructure
    and manpower development
  • Inadequate awareness of the functioning of
    commodity exchange among stakeholders which slow
    down buy in process
  • Infrastructure inadequate investment in Rural
    Roads, Warehouses and Weighing scales
  • Inadequate development of Information and
    Communication Technology in rural areas
  • Underdeveloped warehouse receipt system for
    effective functioning of the envisaged commodity
    exchange.

24
Wayforward
  • Issuance of a Cabinet decision on the
    establishment and development of Commodity
    Exchange in the country
  • Engage all key stakeholders, particularly those
    who were involved with agriculture marketing
    system, warehouse receipt system, clearing and
    settlement systems and policy makers, development
    partners on the need for the establishment of an
    exchange.
  • To establish framework of how to collaborate with
    private sector in our efforts to set up the
    exchange.
  • To put in place Legal and Regulatory Framework
    for the establishment and development of a
    commodity exchange.

25
Wayforward cont...................................
  • To develop awareness and capacity building
    programme for all stakeholders.
  • To establish ownership and Board Structure of the
    envisaged National Commodity Exchange of Tanzania
    taking into consideration the public private
    partnership structure.
  • Establish an institution to take up the
    establishment of Commodity Exchange, National
    Commodity Exchange of Tanzania (NCXT) is
    proposed.
  • To develop a business plan for the established
    institution for sharing with the Government,
    Development Partners and other key stakeholders.

26
Wayforward cont...................................
  • Enhance capacity of Tanzania Warehouse Licensing
    Board (TWLB) so as to ensure integrity and
    reliability of the warehouse receipt systems
    through upgrading of exchange accredited
    warehouse and logistics infrastructure,
    enforcement of exchange defined product
    specifications.
  • Enhance capacity of Capital Markets and
    Securities Authority to regulate the Commodity
    Exchange.
  • Redefining the role of agriculture marketing
    boards in order for them to dwell more on
    production promotion through crop and seeds
    researches.
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