A promise to buy a diamond must be one of the oldest assurances, given by a man to a man, or more interestingly, to a woman. Such a promise would have high intangible value, much like the reputation of the men involved in it. However, very soon, it will be possible to assign a value to this promise to buy diamonds, and even trade them: Indian Commodity Exchange (ICEX) has launched the world’s first diamond futures contracts.
The launch of the diamond futures exchange is significant for more than one reason. Apart from sentiments around the diamond, the fact remains that there has not been any other successful launch of diamond futures trade anywhere in the world.
Reliance-group anchored ICEX is the first-ever diamond futures exchange. Significantly enough, it is also the first exchange in India to start operations under the unified licence regime announced by the market regulator in April this year.
On February 1, 2017, Finance Minister Arun Jaitley while presenting the Union Budget had announced the government’s plans to “further integrate” the commodities and securities derivative markets by integrating the participants, brokers, and operational frameworks.
This purported “integration” had started two years back in 2015 when commodity market regulator Forwards Market Commission (FMC) was merged with equity market regulator Securities and Exchange Board of India (SEBI).
Obviously, the budget announcement made it clear that the government was now looking at creating further synergies between the two markets. Thus, in April last year came SEBI’s pioneering move to implement a unified licence scheme for brokers and clearing members that would allow them to buy, sell or deal in both commodity derivatives as well as securities markets without setting up a separate entity for both.
Before the integration of FMC with SEBI, India’s commodity and securities market operated as two separate markets with different set of participants and regulations. Even exchanges had created their separate monopolies in each of the segments. While the National Stock Exchange (NSE) worked its way up to become the world’s largest in equity derivatives, Asia’s oldest stock exchange Bombay Stock Exchange (BSE) obtained a stronghold in the cash market.
Commodities market also had its own set of leaders and specialists. Multi-commodity Exchange (MCX) became a formidable name in the world for crude and metals derivatives and NSE-owned NCDEX had the leadership in agri-commodities.
In July last year, NMCE decided to merge with ICEX to create the country’s third-largest commodity exchange, and thus became the first exchange to come after the implementation of the unified licence system. The diamond futures contracts is the first product from the stable of NMCE-ICEX combine, which was rolled out end of August last year.
India’s diamond industry is one the largest in the world. The size of India’s diamond trades comprising of cut and polished diamonds, is estimated to be around $20 billion or Rs 1,40,000 crore per annum. Almost every mined diamond anywhere across the world passes through the skilled hands of Indian workers, especially those in Gujarat, for cutting and polishing. Surat alone is regarded as the global centre for cutting and polishing of diamonds where 90% of the world’s diamonds are sent.
India is also the largest importer of rough diamond and the largest exporter of cut and polished diamond in the world with annual revenues close to $8.5 billion (Rs. 552 Billions), which is rapidly growing. The third largest economy of the world in terms of purchasing power parity, India is also third largest consumer of polished diamond.
For the last one year, the Indian diamond industry has been plagued with several problems, starting with a huge fall in prices by 25-30% owing to fall in global demand. The industry was carrying huge inventory that resulted into losses and capital erosion for traders, merchants and jewellers.
Thousands of jobs were lost and many skilled workers who were the masters of the craft of cutting and polishing were forced to change their profession in search of a better livelihood. As the industry was trying to cope under these various debilitating factors, ICEX started discussions with the industry participants to design diamond futures contracts that would help the diamond traders, merchants, jewellers and investors to minimise their risks.
Now with the launch of the ICEX diamond futures, hopes have been raised to see the shine coming back on to the diamond industry.
Difference is in design
ICEX, which is promoted by a mix of public-private partnership comprising of PSUs including MMTC, Indian Potash, KRIBHCO and IDFC Bank among others with the Reliance Group as anchor, has studied in detail the various issues related to the diamond industry before formulating the diamond futures contracts.
ICEX has prepared the contract specifications with an extensive research to back and inputs from stakeholders of the diamond industry across the value chain and under the guidance of the market regulator, after consultations with industry players. The contract design and terms were firmed up after being analyzed for over a year before their launch.
The diamond contracts launched by ICEX are in three lots size of 1 carat, 50 cents and 30 cents with compulsory delivery in electronic units. The small lot size is to attract retail crowd who would have to put in just Rs 3,500 for investing in diamonds.
ICEX is creating entirely a new market where the sellers can offload their certified quality diamond among different set of buyers. The launch of Diamond Futures trading on the ICEX means the price discovery of diamonds will now happen out of India and in a scientific manner based on the demand and supply of the commodity.