Pakistan Mercantile Exchange Limited (PMEX)is Pakistan's only licensed commodities futures exchange.PMEX has transformed into an efficient and vibrant Exchange developing at a rapid pace in recent times. The Exchange has been successful in increasing the number of investor base and enhancing the efficiency of itstrading platform to fit the rapidly growing customers' demand by integrating the trading platform with internationally renowned trading systems. It has also expanded its outreach by opening branches in Lahore & Islamabad to cater to the nation-wide broker and client base.
For the successful and smooth operations of an exchange and protection of all the stakeholders, presence of an active regulator is mandatory. In today's age, regulators and corporations are perceived as partners since the core objective of both is common. The organization's work becomes easier when the relationship with the regulator is built on mutual trust and enables open and constructive discussion as it leads to more pragmatic regulatory framework and ensures smoother implementation. PMEX is fortunate that SECP has been following a proactive and consultative approach and has created the regulatory space for the exchange to grow and prosper. The guidance and support of SECP is perhaps the primary reason for the recent transformation of PMEX into a more vibrant and robust organisation.
Going forward, the Exchange is also looking to bring the Islamic Finance Industry into its fold, by launching a Murabaha product. The Islamic Financial Industry is growing exponentially in Pakistan. However, the industry is facing difficulty in deploying the excess liquidity in an efficient manner due to unavailability of a sharia compliantvehicle to do so. It is in this context that PMEX has developed theMurabaha contract for the Islamic Financial Industry. Once this product is launched, Islamic Financial Institutions will be able to conveniently deploy their liquidity to any corporate, bank (both conventional and Islamic) and government. This will bring them at par with the conventional banks and open doors for arbitrage activities as well. The Exchange has extensively discussed this product with major Islamic Financial Institutions who are eagerly awaiting launch of the product. The product has also been certified by a prominent Shariah advisor as fully Shariah compliant. PMEX feels that the keen interest shown by the participants is encouraging and is confident that the proposed Murabaha product would greatly strengthen the Islamic Financial Sector of Pakistan. PMEX envisions that the proposed Murabaha product will eventually serve as an industry benchmark and could well become the instrument of choice for Islamic banks.Presently, all the modalities have been worked out and the Exchange is planning to launch the product as soon as it gets the necessary regulatory approval.
Pakistan, being an agriculture-based economy, provides enormous potential in terms of capitalising on opportunities in trading of agricultural products. PMEX, being aware of this, made efforts to initiate trading of agricultural commodities from its platform in 2015 with the launchof Red Chilli contractsof three different qualities. The red chilli variety listed was the one most famously traded in the country and also exported, commonly known as longior dundicut. To launch red chilli trade on the Exchange platform, PMEX collaborated with Pakistan Agriculture Coalition (PAC), Agility Pakistan and SGS Pakistan. The storage facility was created by Agility at Kunri (Sindh), SGS was responsible for quality certification of the chilli and PAC played a key role by offering on-farm technical assistance to farmers that helped in arrival of superior quality of produce to the Exchange designated warehouse of Agility.
The process of quality certification, storage at designated warehouse and trading at PMEX is aimed at facilitating not only the growers in getting the best possible price for their produce but also the buyers in getting certified quality of Red Chilli at a better price.
Though it was the first ever listing of a spice at the Exchange, the concerted efforts of all the market participants ie growers, traders and corporate buyersenabled PMEX to achieve this milestone. PMEX received an encouraging response from all the market participants for the efforts that resulted in better quality red chilli production, quick cash payout to the farmers and overall efficiency in the red chilli trade.During a brief trading span of three months, more than 600 tons of the spice was traded at the Exchange and delivered to the corporate buyers. Nearly 40 growers and acorporate buyer participated in the trade. PMEX expects to increase the trading though its platform significantly this year.In this regard, SECP has been providing full support to PMEX by sending out its team for visits to the crop markets (mandis) in Kunri, Lahore, Faisalabad and Rawalpindi to create awareness about electronic trading through the platform of PMEX.
Capitalising on this success, PMEXis now listing another varietyof Red Chilli commonly known as hybrid or sanam. This variety is grown in substantially large quantities in Sindh and Punjab as compared to Dandicut/longi. Going a step forward, PMEX is working with local banks to finance against the red chilli to the farmers enabling them to meet their immediate liquidity requirements. Under the proposed scheme, the growers will get a warehouse receipt against the deposit of their produce at the PMEX designated warehouse after getting quality certification of their produce from SGS Pakistan. Once the warehouse receipt is issued, the grower will have the option to approach the banks for borrowing money against the warehouse receipt to fulfil their immediate liquidity need and sell their produce whenever the prevailing market price is favourable for them. The SECP has already formulated draft warehousing and collateral management framework which once finalised shall provide comfort to the banks in lending to farmers within a regulated domain.
In addition to the induction of hybrid chilli in the upcoming trade season of 2016-17, PMEX is also part of SECP initiative, whereby a joint committee of all stakeholders of the agriculture value chain isworking towards providing the requisite infrastructure for the development of efficient trading of agricultural products. PMEX fully supports this initiative and will play its due role enabling it to connect to the real economy. Going forward, PMEX intends to replicate the model of Red Chilli for other agricultural commodities. As a next step, value chain mapping of rice has already commenced and it is envisaged that rice shall be listed for trading purposes before the end of this year. Other commodities planned to be listed at PMEX include wheat, maize, sugar, gram, pulses, etc.
With regards to agricultural produce of the country, PMEX's ultimate goal is to provide a market where the farmers and the agriculture value chain can exercise any of the below three options:
1. Sell their produce at the spot price, if the price is acceptable to the farmer;
2. Sell their produce at a futures price and store the produce at warehouse until delivery.
3. Store the produce at the warehouse against a warehouse receipt. The farmer can either trade the receipt at the Exchange or get financing from a financial institution against it.
The above system will work wonders in terms of reducing wastage and bringing unprecedented efficiency and convenience. Moreover, the availability of both spot and futures markets at a single trading platform would provide unique opportunity to the participants to sell their commodity either on spot or future date, whichever suits their needs. The SECP and PMEX jointly share a vision for the commodities futures market where the exchange will be playing its due role in promoting the country's agricultural sector and ultimately its economy, well beyond its role as a capital market institution.
On the international front, the Exchange being cognisant of the changing business landscape has embarked upon developing strategic ties with international exchanges to explore new business opportunities and adapting best practices. In line with this, during 2015-16 PMEX signed Memorandum of Understanding (MoUs) with four international exchanges, namely, Borsa Istanbul, Izmir Commodity Exchanges, Dubai Gold and Commodities Exchange (DGCX), and Iran Mercantile Exchange (IME). These agreements will pave the way for PMEX to work in close co-ordination for the development and enhancement of derivatives and financial markets in Pakistan, UAE, Iran and Turkey by sharing market information and expertise with each other, cross listing of physical commodities, introduce programs for cross training of staff and build upon each other's best practices and experiences.
With the recent developments and support of the SECP, PMEX is fully geared to play its due role with regards to development of the country's economy, especially the agricultural sector. PMEX is confident that the visionary resolve of the government to better organise the agriculture sector by developing the required infrastructure will have a tremendous impact with regards to improved output and fair pricing of these products in coming times.