|Buyers and sellers make deals (Credit: John Humphrey)|
Earlier this year I visited the Ethiopian Commodity Exchange (ECX). The ECX was set up by the Ethiopian Government in April 2008 as a private-public partnership – about 45% of the members of its Board of Directors are traders working within the exchange, and the other 55% are Government representatives.
The Exchange provides spot trading for five commodities, with coffee being the most important. Trading itself is relatively straightforward. It is spot market only, no future or forward contracts. This may change, but the Exchange decided at the beginning to start simple and instil the necessary discipline and understanding of standard trading terms before embarking on more complex derivatives contract trading.
Trading is open outcry in a pit. There are sequential 10 minute sessions devoted to different commodities. But the really interesting action is invisible. Behind the bustle of the Exchange floor lies a series of innovations that make it all possible:
- Classification. A new domestic grading system, backed up by certification and labs, means that coffee can be classified into different internationally accepted grades.
- The development of a warehouse receipt system. There are currently 16 warehouses with a storage capacity of 16 million bags. Coffee is taken to these warehouses and electronic receipts issued. This gives buyers' confidence about the existence of the coffee they are being offered and independent verification of its quality grade.
- The trading floor itself. Traders buy seats on the Exchange. Some are professional coffee traders, others from cooperatives. The green and brown jackets represent the two categories: buyers and sellers. Sellers can only sell coffee for which they have a warehouse receipt. Buyers can only buy up to the limits of cash balances which they have deposited with the Exchange.
- Settlement. Like many other developing countries, Ethiopia has no national clearing system. The Exchange wanted settlement within 24 hours. The government passed a law allowing the Exchange the exceptional right to use electronic signatures and so trades are reconciled overnight.
- Information technology. The price information shown on the screens around the trading floor is transmitted within 2 seconds to 31 electronic display boards in rural locations. It’s also displayed on the Exchange’s website. An automated telephone system provides prices for different products and grades, and 156,000 subscribers receive real time data via SMS text messaging.
- Regulatory powers. The Exchange is the only self-regulating agency in Ethiopia. It can discipline members and has applied civil penalties for offences such as attempted price-fixing and collusion.
|More deals are made (Credit: John Humphrey)|
These policy innovations make the spot market possible. Products have to be homogenised to enable trade (hence grades and standards). Buyers need assurances about sellers, and the warehouse system is one way of doing this. Sellers need assurances about buyers, and the cash balances held by the Exchange provide this.
In doing all this, the Exchange seems to have produced gains for farmers. A long succession of transactions between traders at various locations between the farmer and exporter has been replaced by a simple grower-warehouse-exchange model. Farmers and cooperatives have an easier and more transparent route to market, and the wide availability of price information allows the Exchange prices to act as reference prices throughout the country. The Exchange shows how much work goes into building markets.