Guidebook on African Commodity and Derivatives Exchanges Cedric Achille MBENG MEZUI Lamon RUTTEN SofianeSEKIOUA Jian ZHANG Max Magor N’DIAYE Nontle KABANYANE Yannis ARVANITIS Uche DURU Bleming NEKATI LO DE DEVE PM AINE DE N EN IC VE A T R L C F F O I U A P R N P F D E E A U M Q E N N A T B AFRICAN DEVELOPMENT BANK GROUP F O T N N E A D F K S M R N A E IC A P A B F P N T RI O DE EN CA EL VELOPM IN DE DEV Guidebook on African Commodity and Derivatives Exchanges Cedric Achille MBENG MEZUI Lamon RUTTEN SofianeSEKIOUA Jian ZHANG Max MAGOR N’DIAYE Nontle KABANYANE Yannis ARVANITIS Uche DURU Bleming NEKATI LO DE DEVE PM AINE DE N EN IC VE A T R L C F F O I U A P R N P F D E E A U M Q E N N A T B AFRICAN DEVELOPMENT BANK GROUP F O T N N E A D F K S M R N A E IC A P A B F P N T RI O DE EN CA EL VELOPM IN DE DEV Rights and Permissions All rights reserved. The information in this publication may be reproduced provided the source is acknowledged. Reproduction of the publication or any part thereof for commercial purposes is forbidden. The views expressed in this paper are entirely those of the author(s) and do not necessarily represent the view of the African Development Bank, its Board of Directors, or the countries they represent. Copyright © African Development Bank 2013 African Development Bank Avenue du Ghana Angle des Rues Pierre de Coubertin et Hédi Nouira BP 323 Tunis Belvédère 1002 Tunisia Tel.: (+216) 71 10 21 56 Fax: (+216) 71 33 26 94 Foreword African policymakers have increasingly realized that A fully functioning derivatives and commodity exchange efficient financial and commodity exchange markets are market will be pivotal in improving competitiveness, facil- important for growth as well as for equitable, inclusive and itating both domestic and international trade and integra- sustainable development. Derivatives and commodities tion of the continent to the global economy. And more exchange markets can help deliver an improved market can be done by developing further Africa’s leadership in transparency, financing of commodity chain and financial m-banking, m-agriculture and related areas. market participants, hedging and risk management, and provide the financial resources for privates sector partic- At the same time comprehensive evaluations of derivative ipation in Africa’s infrastructure development. As a sec- and commodity market development reveal the severe limits ondary effect, derivatives and exchanges can result in job of narrow approaches that are divorced from the broader creation and enhanced cross-border economic integration enabling environment within which these markets and their by offering venues for the mitigation of key financial and related economic institutions must operate. African govern- trade risks. It is in the financial sector where inclusion and ments can play a facilitating role by developing institutional innovation has taken place and can unlock Africa’s financial framework and improving the regulatory environment that potential. will encourage institutional investors to make use of these financial instruments. Commodity exchange and derivative market development has therefore become an important aspect of development The African Development Bank, in line with its role as a initiatives and aspirations in many African countries. Yet, catalytic agent at the heart of Africa’s capital and financial some notable exceptions notwithstanding (e.g., Ethiopia, markets development, disseminating best practices and South Africa), the past three decades of African exchange innovative ideas across the continent, took a lead in drafting market development have not yielded much to show for this Guide Book which aims to promote innovative ideas the effort. The results of various initiatives are being called and discourse on best practices on derivatives and com- into question for inappropriate approaches, poor results modity markets development. It draws on three decades in take-off, unsustainable impact, and inadequate use of of Africa’s development efforts in this area, complemented appropriate technologies. And factors - such as globali- with lessons and best practices from across the globe. zation, the information revolution, the tremendous growth The Guide Book also illustrates how these lessons can be in international markets -- and the development paradigm applied going forward. shifts with the prominent role of the private sector in cre- ating and sustaining markets are causing national authori- The Guide Book was written in the context of the first ties and their development partners to reassess their roles Pan-African Workshop for Regulators of Derivatives and in commodity market development. Commodity Exchanges that the Bank, in cooperation with Bourse Africa Limited and with the support of Botswana Africa is latecomer to commodity and derivative markets. Investment and Trade Centre (BITC), organized in Gaborone, However with the recent growth dynamism on the con- Botswana in July 2012. tinent, African countries are tapping into new and inno- vative sources of financing, including exploiting the full We hope that this volume will help African countries, the potential of the commodity exchange and derivatives private sector investors and other development actors markets to facilitate the development of local capital deepen their understanding on the benefits that arise markets. Ethiopia is a good example in this regard. from exchanges and the development of paradigm- shifting structures and practices that can revolutionize African capital and commodity markets. Professor Mthuli NCUBE Chief Economist and Vice-President of the African Development Bank AFRICAN DEVELOPMENT BANK GROUP | iii Acknowledgements This is a product of the Regional Integration and Trade Department (ONRI) led by Mr. Alex Rugamba, Director of ONRI. It was produced under the strategic guidance of Ms. Moono Mupotola, Manager of the Regional Integration and Trade Division (ONRI.2). The coordinator and team leader was Cedric Achille Mbeng Mezui, Senior Financial Economist (ONRI.2), and is the result of collaborative efforts between the African Development Bank and African commodity exchanges. Within the Bank the team comprised Lamon Rutten (Consultant ONRI.2), Kamgnia Bernadette (Division Manager, EADI.2), Jian Zhang (ONRI.2), Sofiane Sekioua (OPSM.4), Yannis Arvantis (EDRE.1), Nontle Kabanyane (AFMI), Max Magor N’diaye (FTRY.4), Uche Duru (ONEC.3), Bleming Nekati (ONRI.2), Hugues Kamewe (MFW4A), Olumide Abimbola (ONRI.2), Michael Mah’moud (Consultant, ONRI.2) and Alassane Diabaté (ORNB). Externally, the Bank collaborated with Adam Gross (Bourse Africa), Chris Sturgess (SAFEX), Chris Goromonzi (Bourse Africa), Eleni Gabre-Madhin (Founder and fmr CEO, ECX), Brian Tembo (ZAMACE), Charles Furaha (CMA Rwanda), Phemo Marumoagae (Botswana NBFIRA), Tirivafi Nhundu (Securities Commission of Zimbabwe), Ombara (Kenya CMA), and Endris Negus (Ethiopia Commodity Exchange Authority). AFRICAN DEVELOPMENT BANK GROUP | v Contents Foreword | iii Acknowledgements | v Abbreviations | ix Executive simmary | xi Introduction | xiii 1 | A brief history of commodity | 1 exchange development in Africa 2 | Perspectives on the economic 2.1 Spot, futures and other commodity exchanges | 5 2.2 Making the market complete: the basic functions benefits of commodity of a commodity exchange | 8 exchanges for Africa 2.3 Boosting trade opportunities | 12 3 | Conditions and constraints 3.1 Physical market structure | 15 3.2 Product quality, standardization and grading issues | 17 for African commodity 3.3 Traceability and exchange trading | 17 exchange development 3.4 Price transparency and price volatility | 19 3.5 The potential for speculative involvement | 19 3.6 Banks’ involvement in the commodity sector | 19 4 | The current situation 4.1 Aspiring for a pan-African exchange | 21 4.2 Sub-regional initiatives | 26 with respect to African 4.3 National developments | 27 commodity exchanges, and the 4.4 Common challenges | 29 moves ahead 5.1 The principles of regulating spot and futures 5 | The regulatory response – commodity exchanges | 33 how to develop an appropriate 5.2 Regulating futures markets: a division of responsibilities | 37 legal and regulatory environment 5.3 Laws and regulations specifically pertaining to commodity exchanges, and the securities law | 38 5.4 Regulating the different market users | 40 5.5 Customer protection: defending consumers against unscrupulous brokers | 42 5.6 Regulations affecting clearing operations | 43 5.7 Regulatory aspects of the exchange delivery process | 44 5.8 Insider trading | 47 5.9 Laws and regulations affecting physical trade | 48 5.10 Relevant aspects of warehousing laws | 48 5.11 Taxation and accountancy rules | 48 5.12 Summary overview of regulatory responsibilities of exchanges and regulatory agencies | 49 AFRICAN DEVELOPMENT BANK GROUP | vii GUIDE BOOK ON AFRICAN COMMODITY AND DERIVATIVES EXCHANGES Conclusion | 51 7 | and recommendations Main references | 63 Glossary | 67 Annex – country profiles Benin | 71 Morocco | 81 Botswana | 71 Niger | 82 Burkina Faso | 71 Nigeria | 82 Cameroon | 71 Republic of Congo | 84 Côte d’Ivoire | 71 Rwanda | 84 Egypt | 72 Senegal | 85 Ethiopia | 73 South Africa | 85 Ghana | 75 Sudan | 88 Kenya | 77 Tanzania | 88 Libya | 78 Togo | 88 Malawi | 78 Uganda | 88 Mali | 81 Zambia | 90 Mauritius | 81 Zimbabwe | 92 List of Tables Table 1 The degree of sophistication of an exchange, as expressed in different characteristics | 6 Table 2 Instruments and their uses, and regulatory implications