Established in 2010, the Indonesia Commodity and Derivatives Exchange (ICDX) has increasingly gained a reputation in commodity trading in Southeast Asia, particularly with its contracts of palm oil and tin. The Jakarta Post's Linda Yulisman recently talked to ICDX chief executive officer Megain Widjaja about his vision for the exchange. Here are excerpts of the interview.
Question: What sort of plans do you have for ICDX?
Answer: Well, our most exciting plan for this year is to issue crude palm oil contracts in US dollars. It differs from the existing contract that we have in two aspects: the usage of dollar currency and the full delivery terms, which allow whole physical absorption. The current contract in rupiah doesn't require mandatory physical delivery, so this is a sort of improvement on what exists.
The problem with the existing contract is the volatility of the rupiah and the fact most palm oil is exported. Traders and banks do not want to have additional risks caused by the rupiah. We will not abolish the rupiah-based palm oil contract and we expect people will naturally change into the US-based contract. At present, the palm oil contract in the ICDX makes up 60 percent of the palm oil reference composite price. We need a transition period to finally reflect the change in the contract in the overall price component.
So the use of the dollar will require the conversion of the domestic benchmark price from the rupiah to the US dollar?
Yes, perhaps that makes more sense.
Is there any other commodity contract that the exchange wants to launch?
Yes, most likely rubber. The idea came up two years ago and it referred to the recommendation of the International Rubber Consortium Limited [IRCo] to set up a regional rubber exchange.
The ICDX has been appointed to represent Indonesia along with Bursa Malaysia in Malaysia and the Agricultural Futures Exchange of Thailand [AFET]. However, there has been no follow up so far.
The only obstacle is that there's no clear framework on how these exchanges should collaborate. If the regional exchange can be established, it will be very good for Indonesia, Malaysia and Thailand, which account for 70 percent of the world's rubber market. Up to the present, the price of rubber has relied heavily on buyers, resulting in low prices. The prices are determined by the Singapore Commodity Exchange [SICOM] and the Tokyo Commodity Exchange [TOCOM]. A regional rubber exchange may help stabilize and increase prices.
How do you assess the possibility of rubber being traded through the exchange before it is exported, just like tin?
Yes, I think that will be a positive move. The mandatory trade through exchange enhances transparency and also improves trade arrangements. The rule also forces producers to increase the quality of their products and consequently they try to catch up. Tin is a pilot project and of course it still needs some improvement.
The government is now trying to grow the downstream industry through the development of smelters and refineries. What kind of opportunities are offered by this policy?
We see the potential for trading some key commodities, of which we are one of the world's biggest producers, like nickel and copper. We don't have to be the price maker, but we can enhance the trade system.
In the past, for instance, before mandatory trading through exchange was implemented in tin, we did not have the urge to discover the origin of the commodity. But now a certificate of origin has become a must to ensure the traceability of ore, who produces it, who sells it and the nature of its quality.
What plan do you have to develop a derivative contract?
Yes, we aim to introduce financial contracts this year. Based on a master plan on commodity futures trading issued by the Futures Exchange Supervisory Board [Bappebti], we should develop financial futures.
People sometimes associate the ICDX with the commodity exchange only. I want to change this perception by making the ICDX a real futures exchange, which like any other exchange in the world, offers financial contracts.
To launch such contracts and make the trading work, we must be supported by a definite framework and regulation. At present, the authority between the Financial Services Authority [OJK] and Bappebti remains unclear.
Which exchange is your benchmark? How would you like to be in the future?
I consider the Chicago Mercantile Exchange [CME] and IntercontinentalExchange [ICE] as our benchmarks. I believe we have a strong base because we produce the commodities. Our slogan, 'Trade @the Source', explains all. When people trade commodities in Indonesia, they should not be afraid of defaults because clearing guarantees that traded commodities will be available here.
What government policies can help develop the local exchange?
There should be a change in the current regulations. For instance, the OJK prohibits banks and other financial institutions from carrying out derivative transactions, which is misguided considering that overseas exchange does that. There should also be flexibility from Bappepti to allow securities to diversify their product offerings. The securities do not have to set up a new firm, but may get a double license that enables them to trade both stocks and futures.