Early in June, just after it launched its new crude oil contracts, HardAssetsInvestor.com reporter Tom Vulcan had the opportunity to talk with the CEO of the Dubai Gold & Commodities Exchange (DGCX), Malcolm Wall Morris, both about the exchange and its new futures contracts.
Tom Vulcan (Vulcan): Why can the Middle East aspire to become a global hub for commodities derivatives?
Malcolm Wall Morris (Wall Morris): Well, that's a very interesting question.
In various parts of the world, you tend to have producing regions, and you have consuming regions. And you have, of course, the financial centers in London, New York, Chicago, Tokyo, Singapore, etc., where you have a mixture of the two within a robust banking and regulatory environment.
Dubai is a trading center - a physical commodities trading center for the Middle East. Dubai was the very first free port in the region. It's known as the gateway to India. There's a large flow of physical goods that passes through Dubai, and always has passed through Dubai.
So, taking that next step on: If you've got a flow of physical commodity goods coming through Dubai, it would seem a very logical, and also an essential step, to be able to provide risk management and investment products, or tools or services to facilitate that.
That is, if you like, how DGCX came about. We're here to provide the framework to encourage the flow of physical goods through Dubai, and therefore we should provide not only, for example, the warehousing, the transfer of goods systems, but also an exchange on which you can manage price volatility.
If you look at the growth of this particular region - the liquidity that exists here, whether that be from the GCC [Gulf Cooperation Council] countries and other Gulf states, the Indian subcontinent, etc. - there are funds that are very happy to flow into Dubai and flow into this region which potentially aren't so happy (for myriad of reasons, whether they be geophysical, whatever), to be in the London markets or, indeed, the Japanese markets or the U.S. markets.
The fact is that the globalization phenomenon that's taking place and the centricity that's been going on in London, New York, Chicago and the other financial centers, are now looking at the Middle East actually as a huge pool of liquidity, and are therefore able to service and better provide markets and the products that the liquidity would like to trade. It makes perfect sense, therefore, to have a financial center here.
Vulcan: What advantages are there to investing in commodity futures in the Middle East itself?
Wall Morris: Well, I think for that one you need to look at the existing client base at DGCX. DGCX currently has 217 members. If we look at this client base, and at the proportion of business that transacts every single day - to give you an idea of that, we trade every day between four and five times the volume of any other commodity derivatives exchange within the MENA [Middle East and North Africa] region - we are the region's largest commodities derivatives exchange.
Approximately 35% of our business originates from within the UAE - companies that are based in the UAE. A similar amount of business actually comes out of the U.S. And, then, a further 20% of the business comes out of Western Europe, mainly the UK. The balance is coming out of the Far East, Australasia, etc. We have a very interesting spread of international businesses who transact with the liquidity that exists through the Middle East.
If you ask our local clients (who account for 35% of the business that takes place today), they transact business here on our market potentially for two reasons.
The first is that they have funds within the UAE, or funds within the region, and they're able to access prices, management and investment products on our exchange without having to incur the costly, and sometimes cumbersome, effects of having to transfer funds into the international markets.
