The Ethiopian Commodity Exchange (ECX) gets a new scope of engagement in handling hedging (future contracts), forwarding and managing contracts outside of agricultural commodities.
An amended proclamation on the ECX that was approved by Parliament two weeks ago stated that the three new operations of ECX would be launched after having additional legal frameworks.
A future contract is a price risk management that is used to minimise the risk involved in commodities trading; this system offers protection from declining prices for the farmers. A forward contract is an informal agreement traded through a network at a specified price at a certain future date.
Both futures and forwards allow farmers and traders to buy or sell at a particular time and given price, but forward contracts are not standardised or traded on an exchange, but rather are private agreements that may vary across contracts.
“The amendment came to the scene after making sure of the readiness of the country for these trading systems,” said Olero Opew, director general of the Ethiopian Commodity Exchange Authority.
These three types of trading did not formally exist in the country previously. ECX has only been engaging on-the-spot trading since its establishment eight years ago.
This shows that the country is moving in establishing a derivatives market. These types of contracts will help to ensure price predictability of commodities, according to Abdulmenan Mohammed, a financial expert with 15 years of experience in auditing, accounting and finance.
One of the added sub articles in the amended proclamation declares that ECX can manage future contracts and forward contracts in agricultural commodities. And the exchange shall be provided in the directive to be issued by the Authority and rules of exchange.
“Our approach in establishing ECX was a gradual one, with the objective to first create an orderly market addressing transaction or contract risk concerning quality, delivery and payment risks,” said founding chief executive officer (CEO) of ECX, Eleni Gabremadhin (PhD), who is also a founder and CEO of Bluemoon Ethiopia. “The next step was addressing price risks with hedging.”
“This will have positive impacts on both production as well as processing and export performance,” added Eleni.
The new proclamation also entitles ECX to trade other contracts outside of agricultural commodities after conducting a study; this privilege is subjected to the prior approval of the Ministry of Trade (MoT) or another pertinent government authority.
“This will enable us to take part in the secondary market,” said Ermias Eshetu, CEO of ECX.
This according to Ermias will enable ECX to involve and manage a secondary market, a type of financial market in which previously issued financial instruments such as shares and bonds are bought and sold.
For the launch, ECX has already finalised an assessment which was conducted for the past year, and it needs to integrate it with other assessments to be carried out by stakeholders in the country. But it needs still to complete an assessment with the stakeholders, according to Ermias.
The Ministry of Finance & Economic Cooperation (MoFEC), MoT and the National Bank of Ethiopia (NBE) will be the stakeholders to work with ECX in the launch of the secondary market.
“The main drawback that stops the country to go to the secondary market is a lack of legal framework and a regulatory institution,” said Abdulmenan.
Last year, NBE announced that the country is moving forward to the secondary market as the central bank is conducting readiness assessments and working on the legal framework to administer the market.
“As an ECX we are fully ready to handle forward, future and managing contracts for non-agricultural commodities,” said Ermias. “We are equipped with exchange platform, clearing and settlement, compliant serving and market dissemination tools.”
In addition to the new platforms, the proclamation also made adjustments in the coffee market. According to the amendment, coffee can be sold before reaching the floor of ECX during a consignment, but ECX will seal the contact of the trade with a contractual agreement that has a specification of the coffee’s origin.
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