Malcolm Wall Morris, chief executive officer (CEO) of the Dubai Gold & Commodities Exchange (DGCX), talks to MEED about the reasons for setting up the exchange, its performance and future challenges amid the turbulent global conditions.
The DGCX was launched in November 2005. When it started it was a Dubai government initiative, through the Dubai Multi-Commodities Centre (DMCC), which is part of the government-owned Dubai World group.
The DMCC’s remit is to stimulate and support all forms of physical commodity business in the region with Dubai as a trading centre.
Why was the DGCX set up?
What they wanted in creating the exchange was to provide price risk management tools and a risk management function within the region, to support those in the commodities business who have exposure to underlying price movements.
It was the first commodity exchange in the region and is the leading commodities-derivatives exchange by some margin. We trade on average five or six times of the volume of our nearest competitor in the region.
Has there been any pressure on the West Texas Intermediate (WTI) and Brent futures contracts in the wake of the financial crisis?
Crude oil futures contracts are DGCX’s most successful product launch to date.
First-day volumes of DGCX WTI and Brent contributed more than 45 percent of the exchange’s daily volume and on July 11, DGCX crude volumes reached a record daily high of 14,066 contracts.
What is the driver behind this?
The financial crisis has evidently impacted market participant’s confidence across all asset classes and all geographical locations.
However, there have been record volumes on DGCX year to date - surpassing 1 million contracts in September and volumes are up 52 percent year on year, reflecting an interest in commodities and derivatives.
Note that derivative products allow for financial gains when markets move in either direction.
What is the outlook for these contracts?
Given the current volatility in all markets, derivatives will continue to be an attractive and alternative asset for market participants.
The global economic uncertainty should also encourage market participants to transact and clear business in the well-regulated and low-risk environment of an exchange and clearing house.
Trading on DGCX and clearing via the Dubai Commodities Clearing Corporation (DCCC) - a wholly owned subsidiary of DGCX, helps reduce participant’s exposure to operational and counterparty credit risk.
Can the dynamic sustain even in the current global market turmoil?
The best answer to that is to look at our growth and how the business is growing.
We launched in November 2005. In the first full year of operation, which was 2006, we traded just over half a million contracts.
Last year we traded just under one million contracts, and this year we broke the million contract mark in September.
With four months still to run we exceeded last year’s volumes.
I think that’s a fairly good example of how this exchange is seen by the people using it.
It has a very strong double-digit growth unlike many of our international peers in the market today, we’ve still enjoyed that level of growth.
Are you appealing to both regional and international traders?
Since the start of trading in November 2005, DGCX has demonstrated the existence of large liquidity pools in the Middle East and the growing need for the region to access alternative risk management and investment tools.
If you look at the breakdown of where our business comes from, 80 percent of our business originates from the region - whether that be a member based in the UAE or a member broker able to provide access to the market.
About 20 percent comes from outside the region, whether that is in Europe, North America or the Far East.
What we are seeing is that 20 per cent tends to be people who are conversant with futures, and who are trading actively on US, UK or Asian markets and who want to interact with net new liquidity in this region.
This region represents a liquidity pool that is untouched and we considered the gateway to this pool.
Is the region’s liquidity pool the main draw?
We think this pool is extremely large but it’s in a nascent form.
You are bringing derivatives to a region that’s never had them.
What we are seeing is the way our volume growth continues apace and more and more people are understanding the advantages of price risk management, particularly in the last year when you’ve seen huge volatility in terms of currency movements, in terms of precious metal prices and also energy.
DGCX is regarded as providing the three key economic indicators for this region namely: precious metals, currencies and energy.
This allows market participants to hedge themselves if they have exposure in those three areas.
This seems to be the key appeal, offering a low-risk environment in the current global market conditions.
Certainly. The expression I have heard more and more in recent times is the counter-party time bomb.
The advantage of doing business on an exchange with a trusted clearing function.
With our clearing house, you have a central counterparty which has a settlement guarantee fund and therefore guarantees that the trades are good and it removes that counterparty risk.
In these uncertain times, this is absolutely vital.
What can you offer that people can’t access in other markets?
We would like to think we offer something to two clear market segments - we offered cost and time efficiencies to users in this region who were already using markets in London and the US, by enabling them to access those markets locally. For those retaining funds here in the region, the cost of having to transfer funds overseas is spared and time previously spent having to deal with overseas regulators and brokers is also reduced.
How do you view the competition, for example from the Dubai Mercantile Exchange (DME)?
We both have Dubai in our names which is all very good but DGCX and DME operate according to different models.
We regard ourselves as the only true regional commodity derivatives exchange as we provide trading and clearing infrastructures in the UAE. That is a key differentiator.
But frankly, competition is good - if we ensure we are offering the right products at the right time at the right price, then our volumes will continue to grow. And the fact that volumes are up 50 percent to date show we are doing a reasonable job for our clients.
We are seeing volume growth in all sectors - currencies are particularly strong this year as well as energy.
What’s interesting is the growing recognition that there is room in today’s global market for an exchange in this region - that is a clear message and why we attract regional and international business.
The exchange offers the following products:
Gold futures and options
Fuel oil futures
WTI light sweet and Brent crude oil futures
Indian rupee, British pound, Japanese yen and euro currency futures
Trading on DGCX provides
Guaranteed settlement and reduced counterparty risk provided by Dubai Commodities
Clearing Corporation (DCCC), a subsidiary 100% owned by DGCX
The advantage of transacting and clearing business within the UAE and therefore the local taxation and regulatory regimes
A simple fee structure: one fee for all participants. All participants also pay the same margin.
Whether commercial or non-commercial entities
An opening to regional and international liquidity pools
Robust risk management and surveillance systems
Uninterrupted trading hours from 8.30am-11.30pm (GMT+4)
Regulated by the Emirates Securities & Commodities Authority (Esca)