Diamond Equity and Futures Trading
Diamond equity and futures trading look to be a reality in the near future with a potential market of over 200 billion dollars a year being traded.
Unveiled to a nervous Diamond industry was plans being thrashed out to develop diamond-derivative contracts, by a number of representatives from around the globe, including the Rapaport group, the Dutch financial-services company ABN Amro Holding NV; ICICI Bank Ltd., India’s largest lender; and the Chicago Board of Trade, spent the day in Antwerp’s diamond district thrashing out an initiative to develop,
Rapaport group ideas was one of those which intends to kick off its plans as early as September. The group, who’s prices already set the benchmark for the diamond industry, intend to launch spot cash tenders from September 17 in what its chairman hopes will be precursor to the first ever diamonds futures trade. â??Weâ??re going to produce something like a commodities contract for diamonds. We will be pushing pricing transparency to a level itâ??s never been to before,â? Martin Rapaport said on Thursday. His company will run weekly Internet auctions along the lines of those on eBay for individual polished diamonds of 1.01 -1.19 carats and of higher end colour, clarity and cut. A chart of prices for the various grades could be used to produce a single futures price with cash settlement each month.
â??Itâ??s very much the same way as you have the Dow Jones Industrial Average from individual stocks,â? Rapaport explained.
Rapaport wants regulatory approval before he launches his futures market and plans talks with the US Commodity Futures Trading Commission soon. â??Whatâ??s different about our effort and other efforts is that we are going to be asking for a government regulated contract rather than a simple derivatives contract…. Itâ??s going to take a while, a year and a half to two years,â? he said.
Just down the road from Rapaportâ??s Belgian office, several banks, the Chicago Board of Trade (CBOT) and rival pricing service PolishedPrices, were also presenting their ideas for a derivatives market that could evolve into a futures exchange.
A task force sponsored by Antwerpâ??s High Diamond Council (HRD) and with representatives from ABN AMRO, CBOT, ICICI Bank and diamond companies aims to chart the way forward. â??The advantages are clear. A contract would give dealers with large stocks the chance to limit their risk,â? Freddy Hanard, director general of the HRD told a news conference.
Derivatives trades, advocates argue, would help finance an industry whose debt level has doubled in five years to $12 billion, against market expansion of 20%. Charles Wyndham, founder of PolishedPrices, said the task forceâ??s job would be to establish the terms of a contract, from its size, to certification, to the issue of physical delivery or not and the date it would start. â??I would be prepared to take a big bet that it would be within a year,â? he said.
“The first conclusion is that derivatives are absolutely inevitable,” said Charles Wyndham, founder of diamond information provider PolishedPrices.com, who took part in the discussion. “ICICI Bank came out with what they thought might be the size of the market, which could be between,” $150 billion and $200 billion.
“There is a clear reluctance to start selling funds for private investors when there is no benchmark price that is acceptable in this market,” said Loet Kniphorst, head of ABN Amro’s diamond and jewelry division in Antwerp. “I would like to see a number of my clients able to hedge some of their risks.”
It may take up to a year to start offering contracts, PolishedPrices.com said. It plans to set up a smaller task force to continue today’s discussion. There were 35 participants at today’s working panel. The contracts would start for polished gems and would probably be a ‘non physical’ product, one that didn’t include the actual delivery of the gems.
It looks very much that the idea of diamond equity and futures trading is so far off in the distant future after all.