‘SMX proposed black pepper futures contract may become global benchmark’

Last Updated : 01 July 2011 at 10:50 IST
SINGAPORE (Commodity Online): In a bid to cash-in on the boom in agri-sector, the Singapore Mercantile Exchange is planning to come up with contracts in black Pepper futures in the third quarter this year.

The contract idea was originally proposed in September 2010 and was possibly undergoing “exhaustive research and close consultation with key industry players” as its then CEO, Thomas J. McMahon had commented.SMX is backed by Financial Technologies (India) Limited which has successfully established 10 exchanges across India (MCX), Dubai, Singapore, Africa, Mauritius and Bahrain.

In a response to Commodity Online, SMX informed of the reasons behind the launching of the contract, how it is planning to bring liquidity and why the contract is expected to become a global benchmark.

1. What reasons have prompted SMX to come up with a contract in black pepper?

Black Pepper is a high value commodity. All the entities involved in its global supply and value chain are exposed to high price volatility due to seasonal, climatic and supply - demand factors. Today there is no global Black Pepper futures contract available which can be used by these international entities to mitigate their price risk (except domestic black pepper futures available to Indian players only). Nor there is any global price discovery platform of black pepper which can give directional inputs to the global physical market players.

The proximity of SMX in Singapore to the major producing regions of black pepper i.e. Vietnam, Indonesia, India and Malaysia encouraged the Exchange to look at this commodity for developing a Asia centric price discovery and price risk management futures platform. Also several major global black pepper physical traders have a strong presence in Singapore, which makes Singapore the ideal location for a black pepper futures contract.

2. How does SMX plans to bring liquidity into the contract?

SMX has planned out extensive awareness and educational programs in the major black Pepper producing and trading centers to attract the key industry players to hedge on its platform. The high price volatility of the commodity is expected to attract the interest of the directional traders, commercial trading firms and arbitrageurs.

The novation of each futures contract executed on the Exchange by the SMX-CC in Singapore, would give the market participants added confidence of effective mitigation of settlement and counter party risk. The state of the art trading system of the Exchange and the robust clearing, settlement and delivery mechanism under the apt regulatory oversight of the Monitory Authority of Singapore (MAS) is expected to attract participation from across the global, especially from the major importing centers viz. US, EU and Middle East.

3. Does SMX think that the contract will become a global benchmark? Why?

SMX Black Pepper contract is well poised to become a global benchmark as the Asia Pacific region is the largest underlying market of black pepper in the world, both in terms of production and exports. The contract is expected to attract a wide spectrum of black pepper trading firms across the globe as it would offer them a unique avenue for off-loading their price risk. In the absence of any global benchmark for black pepper prices, the SMX contract would be gradually used as a price barometer by the global physical players for their commercial transaction, which in turn would make it a global benchmark.

India market players positive

Analysts and industry participants in India seem to welcome the SMX move, according to certain media reports. India is a major producer of pepper and NCDEX (National Commodity& Derivatives Exchange) and NMCE (National Multi Commodity Exchange) currently provides for a platform for trade in pepper futures in India.

As published in: http://www.commodityonline.com/news/%E2%80%98SMX-proposed-black-pepper-futures-contract-may-become-global-benchmark-40434-3-1.html