INTERVIEW WITH SAMIR AHMED, MD & CEO NATIONAL COMMODITY EXCHANGE

KHALIL AHMED
(feedback@pgeconomist.com)
Dec 6 - 12, 20
10

PAGE: TELL US SOMETHING ABOUT YOURSELF?

SAMIR AHMED: I graduated in 1981 from the University of Chicago with a degree in economics and have been a part of the financial sector throughout my career. The first 10 years of my career were in commercial banking, in Pakistan and Asia-Pacific regions. I then switched fields and went into equity broking and spent the next 5 years in this area. In the early 1990s, capital markets in Pakistan were just opening up and this was a very exciting and high growth area and since then in one form or the other, I've been closely associated with markets. In the late 90s, I went to London Business School to get my Masters degree. After that, I worked as an advisor to Dubai Financial Market and was a part of the team that set up what was then the first stock market in UAE. This was my first experience of financial regulation and this has been an abiding area of interest for me since then and after DFM, I went on to join Lahore Stock Exchange as CEO. I spent 3 years at LSE in the early 2000s at a time of very significant regulatory reform so this was a tremendously exciting period. I was then approached to take over as CEO of IGI Investment Bank, which I headed for 5 years. Since August 2009, I have been at NCEL.

PAGE: WHAT IS YOUR OPINION ABOUT FOREIGN DIRECT INVESTMENT IN COMMODITY MARKET OF PAKISTAN?

SAMIR AHMED: Most of the large global commodity trading firms have a presence in Pakistan and they are involved in both buying and selling of commodities in Pakistan. Currently, there is no direct investment from foreigners on the NCEL platform, although we have initiated a dialogue with some of them and they are supportive of an orderly and regulated market in Pakistan. Part of the reason for their current non-involvement at NCEL is that we are at the very early stages of our development. I expect the situation to change in 2 to 3 years. For example, in commodities like cotton and rice we are fairly large players by global standards. Once there is an actively traded market in these commodities, I would expect that the foreign participation would come. We should actively work towards the development of our markets. Some of the larger non-western economies like China and India are now consciously moving away from the old paradigm where all commodity prices were set in the west. They are questioning why this should be so. If the major production, and increasingly consumption, for many commodities is in China or India then the price setting should also be driven from these places. This is a process that will take years and decades to achieve but it is a worthwhile ambition. We should have similar ambitions for our major crops like cotton and rice.

PAGE: YOUR VIEWS ABOUT INVESTMENT BY LOCAL INVESTORS IN COMMODITIES IN PAKISTAN.

SAMIR AHMED: Commodities as an asset class or investment class is now quite well established globally. We are at the very initial stages of awareness in Pakistan and one of our challenges at NCEL is to establish this awareness and credibility. Commodities are on a long term price upswing and investors should be able to benefit from this. There is of course some awareness of gold as an investment in Pakistan and historically households have had some of their wealth in this form. People have now also seen the price trends for oil and food stuffs in the last few years. Commodities offer diversification in any investment portfolio and depending on the individual's risk profile and risk appetite a certain proportion of any investment portfolio should be invested in commodities. Of course, until the establishment of NCEL there was no regulated and trustworthy platform for anyone wishing to invest in commodities. Increasingly we are now seeing this interest develop and this is reflected in the exponential growth in our trading volumes. We are also seeing institutional investors coming into commodities. The first gold mutual fund was launched some months ago by an asset management company and there are several more in the pipeline over the next few months.

PAGE: WHEN DID YOU ESTABLISH COMMODITY EXCHANGE IN PAKISTAN? PLEASE GIVE DETAILS ABOUT THE PROGRESS OF YOUR EXCHANGE.

SAMIR AHMED: NCEL became operational in 2007 so it has been a little over 3 years. We trade futures contracts, including commodity and financial futures. The exchange is licensed and regulated by the Securities and Exchange Commission of Pakistan . It is the first and only demutualised exchange in Pakistan. The commodity contracts currently listed at the exchange are gold, silver, crude oil, IRRI rice and palm olein. In the financial futures category we have a 3 month KIBOR interest rate futures contract. We have several more contracts in the pipeline due to be launched within the current financial year including sugar, wheat, maize, basmati rice, cotton and currency futures. NCEL is currently the largest exchange in Pakistan in terms of members, with more than 300 members. It is the second largest exchange in Pakistan in terms of traded value, after KSE. Currently, the daily traded value averages between Rs1.5 and 2 billion. It is currently in a very high growth phase and with the launch of new products and the increasing awareness and participation of investors we expect business volumes to keep growing fairly rapidly.

PAGE: WHAT IS YOUR VIEW ABOUT COMMODITY MARKET IN PAKISTAN?

SAMIR AHMED: While traditional commodity markets have operated actively in Pakistan since the beginning, the exchange traded platform that NCEL is providing is a fairly radical departure from the old practices and customs. Traditional markets include the mandis and wholesale markets in agricultural produce which number in the hundreds all over the country. Then there are gold bullion markets or sarafa bazaars in various cities. There are also several commodity specific markets, which operate at various locations and vary greatly in size and turnover. The markets currently are fragmented geographically and commodity-wise. There is a little transparency or openness. There is a little or no regulatory oversight and no recourse when there are defaults from buyers and sellers. There is a dire need to modernize our commodity markets and bring them up to par with the rest of the world. There are scores of commodity and futures exchanges all over the world and the oldest ones, in Chicago, have a history of over 150 years. So, the model is there for us - we don't need to invent anything. NCEL is an electronic market where trading is visible in real time over the internet and is therefore transparent. It is also a national market and a multi commodity market, which takes care of the fragmentation issue. It is also a regulated market with its own rules and regulations and oversight from the SECP. Futures markets perform several critical functions one of which is price discovery. Lets take an example from the stock exchange to illustrate this point. Today there is no dispute about the share price of PSO or NBP at any given time because it is traded on the stock exchange and the price and volume data is disseminated and available to all. NCEL will do the same thing for the price of sugar and wheat and so on. Futures markets also allow hedging by providing a price and tradeability for future dates. For example, an ice cream manufacturer may foresee a rise in sugar prices over the next 3 or 6 months. With a proper functioning futures market, they can then lock in their purchase price of sugar today, and then go on to make their pricing and marketing decisions based on a fixed price.

PAGE: HOW COULD WE COMPETE WITH OUR NEIGHBORING COUNTRIES IN THE FIELD OF COMMODITY EXCHANGE?

SAMIR AHMED: There is no competition with them. If anything, there is a need to collaborate and share and learn. India now has several exchanges which are trading very actively in about 60 or 70 commodities. Nepal also has multiple exchanges. Bangladesh doesn't have an exchange but their regulators are considering the matter actively. Some of the products will be common to these exchanges e.g. gold. Then there will be indigenous commodities, which will be peculiar to each country. The trend worldwide among exchanges is to collaborate and form alliances with other. For example, the largest futures exchange, Chicago Mercantile Exchange, has alliances with the Brazilian and Malaysian counterparts.

PAGE: WHAT INCENTIVES DOES COMMODITY EXCHANGE NEED FROM THE GOVERNMENT OF PAKISTAN?

SAMIR AHMED: In general, businesses should stop looking to the government for artificial props and incentives and favours. Businesses have to stand on their own and if they add value, they will survive and thrive. NCEL doesn't need any incentives. We need a forward looking, proactive and responsive regulatory environment and this is where both the SECP and SBP can play a role in the development of an active commodity and futures markets. We have an active and open consultative relationship with the Planning Commission and the Food and Agriculture ministries and departments at the federal and provincial level. The potential benefit to our economy from properly functioning markets is immense.