Commodities trading in Pakistan and role of PMEX

Commodity trade has achieved several milestones in the last few years. The gold rally, which carried on for 10 years till 2012, has increased the interest of domestic investors in the metal. Individual investors and financial institutions have also shown interest in crude oil, rice and other commodities. Pakistan Mercantile Exchange (PMEX), acting managing director Amjad Khan talks to Money Matters about the exchange and what investors can expect in the future.

What is the purpose of a commodities exchange?

PMEX is the first technology driven, web-based, demutualised commodities exchange in Pakistan. It is licensed and regulated by the Securities and Exchange Commission of Pakistan (SECP) and has 100 percent institutional shareholding. PMEX started its operations in May 2007 as a fully electronic exchange with nationwide reach. We are committed to providing a world-class commodity futures trading platform for market participants to trade in a wide spectrum of commodity derivatives. It name was changed from National Commodity Exchange Limited in March 2011 to better reflect its broad mandate and scope of activity to trade all types of futures contracts. The vision of PMEX is to bring international markets to a domestic platform – gold, silver, crude oil etc. – and to provide our domestic markets a gateway to international cotton, rice, wheat and sugar markets. The purpose of PMEX is to provide a platform for retail investors, corporations, farmers, millers and hedgers to make use of price discovery and price risk management (simply called hedging) according to their needs. PMEX does this by providing its target audience a legal, regulated and transparent 21-hours operational market for trading and investing in commodity futures.

How many commodities have been traded at the exchange and what are the lots?

Our product portfolio consists of metals [gold, silver, crude oil] which are internationally traded contracts, agri [rice–IRRI 6, sugar, wheat, cotton, palm olien] and financial [KIBOR] futures contracts. Each futures contract has a different unit of quantity. The lot size defines the total quantity per futures contract.  If an individual  wants to purchase 100oz. of gold, he/she has two options at the exchange. Either opt for 10 contracts of 10 oz. each, or buy one contract of 100oz. If one wants to buy 400 barrels of crude oil, then there is only one contract that has a lot size of 100 barrels. Thus, one would have to purchase four of these contracts.

How did the volume for the last calendar year compare with that for the preceding year and which commodities were popular?

In 2012, the volume traded at PMEX was Rs1.16 trillion. This represents a growth of almost 45 percent as compared to Rs802 billion traded in 2011. The most popular commodity in 2012 was our internationally traded gold contract, including the popular mini gold and tola gold physically deliverable contracts as well. The total value of gold traded on the exchange was Rs716 billion in 2012 and Rs580 billion in 2011.

What are future plans for PMEX?

PMEX envisions more commodities futures products in order to tap a larger customer base. Some of the products that are in the pipeline are international and domestic cotton futures, cottonseed oilcake futures, currency futures like USD-Japanese yen, USD-euro and USD-UK pounds, treasury bills futures, copper and steel futures and refined petroleum product futures. PMEX also intends to introduce shariah-compliant products. The opening of new offices in order to have presence in other cities across the country is also under consideration. We are working closely with asset management companies to launch commodity-based open-ended funds targeting the retail and corporate audiences.

What is the procedure for trading on the PMEX?

The first step is to open an account with a PMEX registered broker (the list can be found on the PMEX corporate website). Secondly, it is essential that the investor should be conscious of the fact that he is investing in a leveraged product and must not utilise all the leverage available or at least have extra funds at hand to deal with unforeseen volatility. The general precept for all investors is to invest only as much as they can afford to risk. The final step for opening an account is the payment of margin (which is a certain percentage of the contract value) after which the investor has the choice to trade directly on the market or place his orders with the broker who acts as his agent. However, in both the cases, the broker is the obligor to the exchange. It is advisable to demand access to an online account for the statements from the broker, and reconcile positions regularly.

Is it beneficial to start trading through mercantile exchanges or through licensed and approved brokerage houses?

An investor can only trade on PMEX through a PMEX-registered broker who is liable to the exchange in all matters pertaining to investor trading once the account is opened by the client. Make sure you don’t open your account with any commodity broker other than a registered broker.

How many brokerage house or companies have been allowed in and how many individual clients do you have?

Currently, we have 320 members on the exchange, of which 70 are actively trading. Our client portfolio consists of both retail and corporate investors; however, the majority falls in the latter category. With increasing awareness about the benefits of commodities trading, a lot of corporations are looking into the possibility of hedging their price risk using our futures contracts. The primary benefit of using futures contracts to hedge oneself is that an investor can benefit from both the scenarios i.e. price increase or decrease.

How many mercantile exchanges are operative around the world?

As of now, more than 70 exchanges exist worldwide. The Chicago Mercantile Exchange was the first modern day commodities exchange.

Is there any tax on profit made through PMEX or transaction fee charged by the exchange?

Net profit/gain from trading in futures contract is taxable as per the Income Tax Ordinance, 2001.The exchange charges a small fee per lot on each side of the trade that varies according to the contract. The brokerage house also charges a nominal fee for the trade from the buyer and seller.

How can crude oil, gold, silver or any product be tradable?

A futures contract is a legally binding agreement to buy and sell a commodity at a fixed price on a date in the future. Very simply, a futures contract (say, crude oil) derives its value from an underlying asset (in this case, crude oil – an international commodity). The settlement of contracts can be in the form of cash or physical delivery, as per the future contract specifications. Futures require a daily mark to market mechanism, along with margin requirements. This allows an opportunity for businesses and retail investors to hedge their price risk in the futures market. The writer is the head of the business desk at GEO TV.

Author: Haris Zamir
Source: Understanding the PMEX