A hot commodity

By Julian Rogers, Deputy Editor

The financial crisis has left hordes of investors with badly burnt fingers. The effect on the Dubai Gold & Commodities Exchange (DGCX) was a nosedive in trading volumes as investors fled the markets. Since then it has been a concerted effort to entice clients back, as the outgoing CEO Malcolm Wall Morris explains.

It has been another sweltering Friday on Dubai's Sheikh Zayed Road and Malcolm Wall Morris is about to head home. Unlike the majority of businesses in the Arab world, the DGCX is akin to the other major financial hubs around the world in that it's open for business from Monday to Friday. And much like the global markets too, this past year has been a white-knuckle ride for Morris as his exchange's trading volumes recuperate from the battering the financial world took 12 months ago. "I wouldn't be so bold as to say investor confidence has returned to the markets," he suggests when quizzed as to whether it's now safe to venture back in the water. "However, people are looking at alternative investments because of falling real estate prices and equity markets."

Up until the final third of 2008, DGCX – a fully automated online commodities exchange established in 2005 – was riding the crest of wave with business up by a whopping 75 percent in July compared to the same period the previous year. Introduction of the West Texas Intermediate and Brent oil contracts and Indian rupee futures contracts helped to fuel growth in the exchange, which is joint owned by Dubai Multi Commodities Centre (DMCCA), Financial Technologies India and Multi Commodities Exchange of India. Futures contracts in everything from gold to oil and currencies to steel were hot property. Then all of a sudden the financial tsunami wreaking havoc on the world's major exchanges struck Dubai and the DGCX. Morris, who has 15 years' professional commodity experience to his name, admits the impact took him by surprise. "The world came back to Dubai after the summer and Ramadan expecting it to be business as usual but it was literally as if someone had turned off the lights," he recalls. "So we went from July into two quiet months but then business seemed to suddenly dry up – it was a shock how suddenly it all happened." For instance, with construction projects shelved commodities like steel fell through the floor from record levels of US$1500. Investors and speculators needed to tread very carefully.

Analysing the results of 2008 reveals a 26 percent rise in volumes compared to 2007 but this doesn't tell the full story; DGCX volumes were up treble this amount at one point. This annual increase to a total of 1.1 million contacts traded, although still impressive, was a bitter disappointment for a somewhat crestfallen Morris. "Given the state of the financial markets in 2008, to have ended the year 26 percent higher than 2007 was a great result for us, and we were delighted with that. However, I was frustrated that we had managed to book 75 percent volume growth for the first seven months of the year and effectively gave back 50 percent in the last quarter." Amid the slide in volumes, regular top-ten brokers suddenly disappeared from Morris' radar. Some have yet to return to the top of the tree. "The effect was quite dramatic," he says. "Broker members were being taken out of the market because of the credit crisis and what was happening in the property and equity markets."

Not Dubai, surely?

There had been an underlying vibe that Dubai was insulated from the financial crisis sweeping the world. It was perhaps the gap between the meltdown hitting the West and the emirate that coaxed people into a sense of complacency. As it subsequently transpired, Dubai certainly wasn't immune, Morris concedes. With trading figures on his charts plummeting like a engineless plane in freefall, Morris needed to dust himself down and re-inject vital liquidity in the markets. He realised DGCX had to shelve expansion plans and concentrate on providing the best markets possible for clients in a concerted efforts to get investors and traders back. "We put aside our potentially aggressive growth marketing plans and we went very much down the road of ensuring that we were operating the best markets that we could and that we were working in conjunction with our customer base to ensure that they understood the benefits of transacting within our market." He elaborates: "If you've got this huge volatility going on in the markets, as there was in crude oil and precious metals and in the currencies, we were saying that there is a way that you can protect yourself against price swings. You can use the derivatives to do that."

The focus was on educating customers with workshops on the benefits of using derivatives as risk management tools and it started to kick-start an upturn in volumes as confidence and liquidity started flowing back into the exchange in the second half of the year. In fact, investors have been more than merely dripping their toes in the water – volumes rose 44 percent this August compared to the same month in 2008 with 151,699 contracts worth US$8.84 billion traded. And August trades were up an impressive 33 percent over July. The month also recorded the highest daily volume, worth US$583 million. "We have tried to encourage as much liquidity as possible and it seems to have worked," says Morris. "It's been a 'back to basics' approach about incentivising people to put volume on the exchange."

All that glitters...

As the name Dubai Gold and Commodities Exchange suggests, a certain yellow precious metal plays heavily in trading volumes. Dubai didn't get its moniker 'City of Gold' for nothing, especially with it being the main route for physical gold into India - the highest consumers of the metal per capita in the world. Despite being perceived as a safe haven during a bear market, gold suffered amid the crisis as investors decided to snap up physical gold instead of taking a position with an option or futures contract. The downswing in gold is a stark contrast to when the DGCX was established and it was riding high as the principal commodity in terms of volume. "Gold used to account for as much as 70 percent of our business but this has dropped to around 40 percent (including other metals) as trading volumes for other commodities increase," Morris reveals. "That's not because gold has lost its attraction," he is quick to stress. "And it's not because gold is less important to us. I would say it's because of the ongoing education process of understanding derivatives as risk management tools and investment products is working in the region." The upshot of this shift in the status quo is that currencies now make up 40 percent of volumes, with oil holding a 20 percent share. "The West Texas Intermediate [oil contract] was the most successful contract launch in the exchange's short history and very quickly became a key component of our product portfolio, and remains so today. And we now have a much better balanced portfolio in terms of where our business is coming from, rather than being dependent on the gold market."

As gold dips in terms of business, currencies on the exchange have seen a surge in business recently, with volumes up 50 percent in the first eight months of 2009 compared to the same period last year. With volatility in currencies during the economic situation people look to exchanges like DGCX as a way of protecting themselves against swings in currency values. The exchange lists four currencies – euro-dollar, yen-dollar, sterling-dollar and rupee-dollar. In fact, the DGCX is the only exchange outside of Mumbai to offer rupee futures contracts, which is not surprising considering how many Indians reside and work in Dubai. On top of this, India has also become the UAE's premier trade partner.

Caution

But while things have been looking up for certain commodities, Morris has taken a cautious approach with the launch of the plastics futures contract. The contract was signed and due to go live in February until the plug was pulled. This was after some careful consideration of the situation, Morris explains. "We took the view that it was not the right time. We had designed, in conjunction with the petrochemicals industry, plastics contracts for both this region and Southeast Asia. All industry contract specifications were written, the delivery points organised and the warehouse procedures written. Everything was ready to go." He adds: "This was going to be a brand new tool in your arsenal in order to hedge and manage price rates, as well as a transparent pricing mechanism. But look at what is going on in the world - we are all fighting to ensure that our businesses survive so now potentially isn't the right time to introduce a new way of doing business to the market." Morris believes this willingness to listen to clients is what separates it from other exchanges. "By listening to our customers, we've managed to grow the business as we have. We listened to them [with the plastics contract] and said, 'If you don't think it's right, then we will postpone the launch until the market's settled down sufficiently where you can devote enough time to actually make these contracts a success."

Pastures new

With the exchange now heading in the right direction after a turbulent period Morris has taken the decision to move to DMCCA as its new CEO. DGCX Chairman Ahmed Bin Sulayem said Morris had led the exchange into the next stage in its strategic growth. Indeed, in early October year-on-year volume traded on exchange passed one million contracts. A departing Morris says the advantages of DGCX are abundantly clear: "People are looking for somewhere else to put their money as an alternative investment, especially with the growing understanding that using a well-regulated exchange is a place that you can trade with confidence. Dubai is a gateway between East and West. It's a place with great attractions and great potential so this exchange is well suited here because it's also a stepping stone between East and West."