Understanding the Commodity Exchange
Commodity exchange is regulated by the Commodity Exchange Act 2015 in Tanzania. Commodity exchange (Hereinafter “the exchange”) is a system that provides for a centralized market place where commodity producers can sell their commodities to those (buyers) that need them for manufacturing or consumption. Commodity is defined by the Act to mean agricultural, livestock, fishery, forestry, mining or energy goods, or any product that is manufactured or processed from such goods also financial index or an index, right or interest in any such commodity (see section 2 (1) ).
Apart from the exchange bringing together sellers and buyers, it acts as a platform for trade commodity-linked contracts whose foundation is based on adherence to laws that are enacted to govern as well as in keeping of records of the transaction and being bound by the disciplinary rules of exchange.
So ultimately, commodity exchange is a platform that allows buyers and sellers to meet conveniently. From the price assessment and control angle, the commodity exchange can be seen as an efficient price discovery system that provides price transparency and reduced transaction costs.
Underlying elements of a Commodity Exchange.
For there to be commodity exchange there must be the following elements;
i. market information system,
ii. product evaluating, infrastructure,
iii. rules governing the exchange, and
iv. a mechanism for dispute resolution.
Facets of commodity exchange
Commodity exchange can be done by payment and delivery of the commodity (spot delivery), supply of the goods by one party and buying by another (forward delivery) or it can be an exchange in the future. In this, the price of the commodity is set in the present to avoid rising or falling of the commodity price.
How it operates.
Since commodity exchange futures exchange of different commodities (agricultural, fishery, forestry, mining, and energy goods) the operation is similar to that of stock markets. The exchange is done in one trading floor but this floor is divided into several sections. Each section is then devoted to the trading of a single commodity. These sections are known as pits and traders subsequently make bids and offers to one another. When a transaction between traders is completed the information is displayed for all to see on the trading floor quotation board and simultaneously conveyed to relevant trading centers worldwide.
But with the development in Information and Communications Technology the traditional methods of exchange are being replaced by global electronic trading platforms.
Global Electronic Trading Platforms, sometimes called etrading is a method of trading securities (stocks and bonds), foreign exchange or financial derivatives electronically.
PROS AND CONS OF THE ACT.
The Commodity Exchange Act vests all powers in dealing with commodity exchange to the Capital Market and Securities Authority (CMSA). The Act has thoroughly addressed all aspects of commodity exchange from the responsibilities of the CMSA, including;
i. Licensing of a commodity exchange,
ii. Price transparency,
iii. Offence and penalties enforcement,
iv. Revocation of license issued,
v. Powers to review disciplinary measures taken by the commodity exchanges and,
vi. Power to offer immunity to officers and staff acting in good faith.
Even though the Act has meticulously provided for all the rules and procedures needed to govern commodity exchange, it has bestowed all the powers to deal with commodity exchange to the CMSA. Procedures ranging from the licensing and approval of an application to the ones about operation of a commodity exchange and dispute settlement are conferred to the CMSA. Commodity exchanges have to seek the approval of the CMSA in executing some of its functions like altering of its rules and the CMSA has the discretion to approve and decline the amendment (See Section 11 of the Act). This shows that the Act grants wide powers to the CMSA that may be prone to abuse. In the light of this, there ought to be a better check and balance of the CMSA.
Also commodity exchange is not a well known practice and this affects mostly farmers in interior areas. Where if they were aware of this it could have helped them in selling their products. This is not the farmers problem only, other market players face the same problem.
To provide an understanding of this and to bridge the gap between lack of market professionals given the current and anticipated growth of the commodity exchange industry in the country the CMSA conducted a three week certification course for the Commodity Exchange Traders and Market Intermediaries (CTCCs).
HOW IS THE COMMODITY EXCHANGE HELPFUL?
The Act has given rise to and recognition of commodity exchanges, and also provided for a legal and regulatory framework for the commodity exchanges to operate on. This will lead to the improvement in prices (transparency & fairness) (See section 13 of the Act) especially to farmers who before the introduction of commodity exchanges had to sell their products in prices that were non-profitable to them and non-regulated. For some of them there was no market at all hence, if prices improve so will production and the subsequent quality of production.
- Product visibility
This has come as an advantage of commodity exchange. Before farmers and other producers had to scuffle up markets for themselves. But now with the wide spread net of the CMSA and the outreach that it has producers are most likely to achieve far more markets than they previously did.
Commodity exchange is also helpful for selling and buying of a variety of products (agricultural & mining) as it encourages adaptation of different types of trading from spot trading to future trading contracts.
BODIES ESTABLISHED BY THE ACT.
The Commodity Exchange Act has established several bodies and provide for their functions. These bodies are;
- Commodity broker- is a company licensed by the CMSA as an agent of investors to obtain and accept orders for the purchase or sale of any commodity contracts by way of trading.
- Commodity trading adviser – this is a company that has been licensed by the CMSA to engage in the business of advising others (directly / indirectly) as to the value of commodities, advisability of investing in purchasing or selling of commodities contracts, and these companies charge the clients a sum of money for their services.
- Market intermediary – a body corporate duly licensed under the Act to provide for services in the commodities exchanges. (Refer to the training reference above)
In all considerations we at Breakthrough Attorneys are of the view that commodity exchange is a crucial and essential practice towards improving market practices. We sternly believe that the funding and infrastructures need to be improved if the exchange is to succeed in, and surpass, its objectives. Awareness and capacity building programmes should be initiated for all stakeholders and not just fractions of the stakeholders. We also are of the view that integrated joint awareness programs between the stakeholders are very crucial for offering an expansive approach to the exchange which would be focused on issues that face the players involved rather than each group of stakeholders fixating on their issues alone.
Also engagement of all key stakeholders, particularly those who are involved in agriculture marketing system, policy makers and development partners is a vital requirement in putting into place a legal and regulatory framework for the establishment and further developing of the exchange.
Breakthrough Attorneys is also contemplative of the possibilities of the commodity exchanges extending to the regions and zones, to offer the stakeholders extended opportunities of them getting involved in the market. The rigid stance of the market infrastructure and system in the business capital (Dar es Salaam) may render the exchange readily unreachable for some of the potential stakeholders. Perhaps with the use of electronic means as Dar es Salaam Stock Exchange recently introduced the Mobile Trading medium, the same can be partially cured, but does not erode the need for having peripheral markets (or is “exchanges”?).
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.