Alexander Belozertsev on exchange-traded commodity derivatives, which are not yet successful in Russia

About who and why right now in Russia especially needs a developed commodity derivatives market, for what reasons the efforts of regulators do not lead to its appearance, and also about the fact that reinventing commodity exchanges already built in the world is not the best way to quickly get reliable and reliable price indicators for a changing economy, in the column for “Kommersant” says the president of the company “Alexandra” Alexander Belozertsev.

Commodity derivatives (exchange futures contracts for commodity assets – futures and exchange options) remain an important part of the global exchange market, forming 10-12% of the volume of exchange trading in derivatives. Moreover, the commodity derivatives exchange market has long become a global industry that performs at least three important socially useful functions: pricing (exchange price targets / benchmarks form prices for major commodities), hedging price risks in commodity and related markets, and, finally, an effective tool to fight inflation (due to the accumulation of huge amounts of speculative capital). This industry operates with trillions of dollars of investment, it employs millions of people around the world, and it has a significant impact on the economy of the entire global commodity sector and related industries.

The Russian exchange practice shows that, despite many years of efforts and a number of clumsy initiatives, the domestic exchange market for commodity derivatives remains in an embryonic state, and its efficiency tends to zero.

Thus, the futures contract for Russian Urals oil, announced for trading on the SPIMEX about seven years ago, still cannot show significant results (volumes, number of investors, attraction of liquidity), and the barren grain derivatives project of the Moscow Exchange has existed for nearly 25 years (contracts offered for trade remain of no interest to grain market participants, since their specifications ignore a number of important methodological requirements and are completely unjustified economically).

The effectiveness of any business process is determined by the results achieved, subject to the maximum optimization of the resources expended, and the desire for high efficiency is an integral feature of entrepreneurial activity. The efficiency of the commodity derivatives exchange market is characterized by the number of participants, liquidity, the volume of traded contracts and the number of open positions, as well as ease of entry and exit. In addition, the effectiveness of exchange-traded instruments is largely determined by their ability to quickly and sensitively respond to new market information reflected in prices and the presence of interest in a particular contract from large groups of investors at certain periods of time. All this directly depends on the parameters of the commodity contract (its specification): they must meet the various needs of commodity market participants.

In this regard, Russian commodity derivatives have nothing to boast of yet. None of the commodity contracts offered for trading on Russian exchanges (and they can be counted on the fingers) still meets the elementary criteria of efficiency. The set of contracts continues to be scarce, the volume of trade is meagre, as is the number of participants in this exchange market. As a result, the exchange prices of these contracts (primarily for Russian oil and wheat) are not taken into account by the spot market, and practically nothing is heard about the practice of hedging price risks using Russian commodity derivatives in the domestic energy and grain markets.

At the same time, a paradoxical picture is observed: bravura reports are heard at various meetings, beautiful presentations are presented at industry forums, “expert” councils regularly meet, but in practice the picture does not change for years. All the latest public events of the Russian commodity market (the annual event of the St. Petersburg International Commodity Exchange, the Russian Grain Forum in Sochi, online seminars of the Moscow Exchange, etc.) indicate an extremely low level of discussion on this important exchange topic, and the methodology of the issue remains undeveloped. At the same time, out of 38 points of the Roadmap for the Development of Organized (Exchange) Trading in Selected Commodity Markets for 2023–25, approved by the government in December 2022, only 7, to one degree or another, relate to the development of exchange trading in commodity derivatives (para. 3, 4, 13, 14, 15, 17, 26).

The remaining paternalistic nature of the Russian economy is fully reflected in the approaches to the development of the domestic market for exchange commodity derivatives, and this contradicts the very nature of this market.

Recently, the “state” arguments in favor of the development of this exchange market for the purposes of price and tax administration in the commodity sector of the economy have often been heard. But it looks very one-sided, and all the talk about the creation of the so-called state futures for commodity assets is illiterate and unpromising. Any futures contract traded on the domestic exchange should be of interest to all participants in the commodity market, and a bias in favor of state interests, albeit very important ones, will only push interested investors out of the market along with liquidity. The idea of ​​investing in an exchange contract should be embraced by the business community, which determines the price of a commodity contract and the volume of its trading with the totality of its investments, and the state, represented by the government and the Bank of Russia, is only one of the users of this information.

World famous commodity exchanges (CME Group / CBOT, ICE, Euronext, etc.) are a kind of high-tech factories for the production of price information. The products of these “factories” are widely demanded not only by numerous participants in the world commodity markets, but also by a large army of financiers and officials around the world. Russian exchange practice shows that the creation of such high-tech price “factories” is not yet within the power of domestic stock traders, just as mass production of chips, for example, is beyond the power.

Maybe the time has come to acquire turnkey technology, as the Fiat car assembly line was once bought, which turned into the Zhiguli car plant in Tolyatti, and then into the current AvtoVAZ?

This approach is already being implemented by other BRICS countries, successfully borrowing from well-known countries advanced technologies for organizing exchange trading in commodity derivatives, both in the development of this segment of the exchange market and in its management. Exchange import substitution in Russia is good for those who are engaged in it, but the real progress of the exchange commodity market should be useful to everyone.

The specification of commodity contracts is another weak spot for our stockbrokers. Their content, relevance and flexibility (the ability to quickly change depending on the needs of the market) leave much to be desired. A good example is the long-suffering futures contract of the Moscow Exchange on the wheat price index. The grain community of Russia has repeatedly drawn the attention of the management of the Moscow Exchange to the quality of the index itself (its weak representativeness, transparency, sensitivity to market conditions), but so far there has been no reaction. In this regard, a number of serious questions remain for one of the regulators of the Russian exchange market (the Central Bank of the Russian Federation), which hastened to officially approve the undeveloped index in July 2022 as a reference, that is, a role model on a national scale.

Unfortunately, the methodology for the formation of this index does not meet the global standards for calculating the leading commodity indices, therefore, the wheat price index and the futures contract for it, announced by the Moscow Exchange, are of little interest to numerous participants in the Russian grain market, and those who lack elementary managerial courage to reform these two instruments invented and registered them.

From the point of view of the current world practice, the success of the Moscow Exchange in “trading” the wheat index contract also looks doubtful: judging by the reports, almost half of the market for this contract (more than 44% of open positions) is controlled by only two legal entities. Such a situation does not at all add credibility and attractiveness to this contract and makes its promotion among Russian grain growers extremely problematic. There is no need to talk about the quality of the price information broadcast by such a contract …

The effectiveness of any exchange contract is also determined by how competitive it is in comparison with similar instruments traded on the largest commodity exchanges in the world.

The Russian exchange trade in commodity derivatives is not at all integrated into the global exchange industry, not to mention the ability to seriously compete in this segment not only with the well-known stock exchanges of North America and Europe, but at least with the exchanges of friendly BRICS countries. At the same time, integration processes within this respected organization have long required the creation of a modern (futures & options) commodity exchange of the BRICS countries for trading derivatives for energy and grain, but Russian stockbrokers and the government lack a conceptual idea and industry leadership to even initiate this an important economic project in the community.

Therefore, those who are trying to introduce domestic exchange commodity derivatives into practice must quickly learn how to effectively compete with their competitors in other countries of the world. And it is better to do it on the opponent’s field, offering competitive exchange instruments for trading and making them highly liquid, and not dejectedly backing to your own gates, thereby preserving your own backwardness in this segment of the exchange market. And yet, you need to actively learn to work on your own mistakes, the number of which is growing like a snowball … So that words, if possible, do not diverge from deeds.