The Moscow Interbank Currency Exchange

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The Moscow Interbank Currency Exchange The
National Mercantile Exchange
Organization of the Grain Futures Market with
Delivery FOB in the Black Sea Basin
Materials for the international conference BLACK
SEA BASIN GRAIN MARKET Commodity Management,
Financing, Trade and Investment
Pavel Ilichev Head of the NAMEX Exchange
Technologies Division
Sofia 2005
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Organization of the Grain Future Market with
Delivery FOB in the Black Sea Basin

• Reasons to create a derivatives grain market
• Project goals
• Sample of exchange contract
• Delivery
• Legal foundation

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Reasons to create a derivatives grain market in
the Black Sea basin - 1

• The Black Sea Basin holds a prominent place in
  the world production and export of wheat1

The Black Sea basin
The Black Sea basin
1 Data of the US Department of Agriculture May
2005
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Reasons to create a derivatives grain market in
the Black Sea basin - 2

• The exchange grain market is the oldest exchange
  market (trading in derivative contracts on grain
  were launched in 1849 on the CBOT in
  pre-revolutionary Russia grain was traded on the
  Moscow exchange, the Samara Grain Exchange and
  other exchanges.)
• Exchange trade in grain is organized in the
  centers of production and consumption
• The world exchange grain market works on the
  basis of technologies of the derivatives market

• The use of exchange mechanisms for price risk
  hedging is a widespread practice in the
  international grain market

2 Method of execution of futures contracts
delivery of the underlying asset
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Reasons to create a derivatives grain market in
the Black Sea basin - 3
It is difficult to use the existing exchange
instruments
It is necessary to create an exchange market with
the Black Sea basin as the delivery basis
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Reasons to create a derivatives grain market in
the Black Sea basin - 4

• The existing over-the-counter market of farm
  products has all elements which are necessary to
  develop the exchange segment
• Participants need exchange mechanisms to carry
  out operations
• Foreign participants show their interest in
  creating a futures market in Russia At present,
  the marketing structure is ready for the creation
  of the market of wheat futures - Si Matthies
  (ACDI/VOCA)
• The state has begun to actively use exchange
  mechanisms to regulate the internal commodity
  market (grain interventions)
• There is a well-developed national exchange
  infrastructure, which has experience in
  developing national exchange markets (including
  cases of state interventions in the grain market
  on an all-Russia scale). This infrastructure can
  provide a basis for an exchange grain market in
  the Black Sea basin.

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The national exchange infrastructure composition
of the MICEX Group
E-Stock
The MICEX Clearing House
NAMEX
Clearing for the MICEX Groups markets
Trade in commodity groups. State interventions in
the grain market
Technological support of the MICEX projects
The MICEX
The National Depositary Center
Exchange trade and clearing in the currency,
stock and derivatives markets
Custody of securities and settlements for
securities
The MICEX Settlement House
Cash payments
The MICEX Stock Exchange
Listing. Trading.
Main currency and stock exchanges
Access to the MICEX Groups
trading network for main market participants
St.Petersburg Currency Exchange (SPCEX)
N.Novgorod Currency and Stock Exchange (NCSE)
Samara Currency Interbank Exchange (SCIEX)
Rostov Currency and Stock Exchange (RCSE)
Urals Regional Currency Exchange (URCEX)
Asian-Pacific Interbank Currency Exchange (?PICEX)
Siberian Interbank Currency Exchange (SICEX)
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The MICEX Groups history

• The Moscow Interbank Currency Exchange (MICEX)
  was established in 1992 as a closed joint-stock
  company
• Stockholders
• The Central Bank of the Russian Federation
• The Association of Russian Banks
• Russias leading commercial banks
• The MICEX Stock Exchange (MICEX SE) was
  established in 2004 on the basis of the MICEX
  Stock Market Section
• The National Mercantile Exchange (NAMEX) was
  established in 2002 as a closed joint-stock
  company
• Stockholders
• The Russian Grain Association
• The Association of Russian sugar producers
• Leading companies in the market of farm products
• Exchanges of the MICEX Group

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The MICEX Group the geography of the national
exchange infrastructure
The MICEX soft- and hardware complex unites parts
of the National exchange infrastructure into a
unified trading, clearing, settlement and
information area.
St.Petersburg
Nizhni Novgorod

• The core of the MICEX global trading network
  consists of two computing centers the main
  center and the reserve center
• System platform Hewlett-Packard UNIX-servers
  (over 80)
• About 10 000 clients are connected to the trading
  network
• The MICEX trading complex
• handles up to 220 000 orders a day
• registers up to 110 000 transactions a day
• 11 network providers and 279 broker systems are
  connected to the MICEX trading complex

Kazan
SPCEX
MOSCOW
Ufa
MICEX
Yekaterinburg
NCSE
NAMEX
Krasnoyarsk
URCEX
SCIEX
SICEX
RCSE
Kurgan
Novosibirsk
Saransk
APICEX
Samara
Saratov
Vladivostok
Rostov-on-Don
Orenburg
Remote access centers
exchanges
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The MICEX Group financial supermarket
The volume of trading in the Russian stock
market amounts to over 60 of the stock market
of CIS and Central and Eastern Europe
The MICEX Group has experience in organizing and
supporting exchange markets of national
significance
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Grain futures project goals
3 Export of wheat by main exporters of the Black
Sea basin amounts to 14,1 mln tons. The ratio of
the annual turnover of the world wheat
derivatives market to the volume of the world
export is 15/1. Given this ratio, the potential
volume of the derivatives market of the Black Sea
basin amounts to 211,5 mln tons.
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Grain futures brief information on the project

• 16 June 2004 the Russian Grain Association
  jointly with the MICEX and the NAMEX held a round
  table meeting The Orderly Grain Market Problems
  and Solutions involving representatives of the
  RF Ministry of Agriculture and other ministries,
  the Federal Agency for Agriculture, deputies of
  the State Duma, participants in the grain market,
  insurance and surveyor companies and banks.
  Presentation Prospects of the Exchange Market
  the Black Sea Basin Grain Futures by Si
  Matthies, a grain market expert, ACDI/VOCA (the
  USA)
• The MICEX and the NAMEX have developed the
  general scheme of circulation of the grain
  futures with the delivery of the underlying asset
  FOB the Black Sea Basin .
• March 2005 presentation of The General Scheme
  of Circulation of the Grain Futures with the
  Delivery of the Underlying Asset FOB the Black
  Sea Basin at the meeting held at the Russian
  Grain Association

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Sample of exchange contract4 - 1
4 Futures parameters are tentative
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Sample of exchange contract4 - 2
4 Futures parameters are tentative
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Sample of exchange contract4 - 3
4 Futures parameters are tentative
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Technological cycle
0945
Settlements for obligations
Obligations

• Preliminary charging of security (deposit margin)
  tied to price limits
• Deposit margin is paid in advance

1100
Setting limits of futures prices
Setting limits
0945

• Trades in the Section are held electronically in
  the form of a continuous double auction
• When an order is entered, the observance of
  limits is checked

1040
Trading session holding trades
Day ?
1900
Results of trades
Clearing session for futures

• Recording positions
• Determining obligations

2000
0945
Settlements for obligations
Obligations
?1

• Settlements for the results of trades

1100
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Delivery - 1 participants in delivery

• Buyers and sellers, who can be Members of the
  Section and their clients
• The Exchange
• The Clearing House (The CH) - clearing
  organization
• The Settlement House (The SH) - settlement
  organization
• Surveyor - controller of delivery

• If a Member of the Sections client intends to
  open a position in wheat delivery futures, the
  Member is obliged to
• register the client on the Exchange
• provide the Exchange with appropriate information
  about the client
• open a position account for the client, in which
  the clients positions are recorded
• Member of the Section is responsible for
• the performance of gross obligations for open
  positions,
• the timely transfer of funds pledged as security
  against the performance of obligations for open
  positions (deposit margin),
• the reliability of information about his clients,
• the timely transfer of documents and information
  to the Exchange and the Members client s.

The Exchange transfers copies of documents,
containing information about the client, to the
Surveyor (for the registration of sale
contracts), including notarized samples of
signatures of authorized persons for the signing
of sale contracts, and their requisite details
certified by the Member of the Section.
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Delivery - 2 the last day of trades
Open positions of buyers and sellers become
delivery positions

• open positions are closed out afterr performance
  of obligations to deliver grain

Delivery margin remains blocked in the CH account
with the SH as security for performance of
delivery obligations

• the deposit margin, deposited by the buyer
  against open positions, is recorded as part of
  the delivery margin deposited as security for
  obligations under the sale contract

Day ?
CH
Buyer
Seller

• Forms pairs of buyers and sellers
• Assigns numbers to sale contracts
• Sends reports to Members of the Section
• reports on obligations to pay for the delivery
  with specified counterparty in delivery
• reports on delivery obligations with specified
  counterparty in delivery and the number of the
  sale contract
• Sends to the Exchange (for the Surveyor) lists of
  counterparties along with numbers of delivery
  contracts and counterparties obligations

The procedure of forming counterparties in
delivery
?1
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Delivery - 3 concluding sale contracts
Members of the Section send reports to clients
with specified counterparties

• Report on open positions is needed for filling
  out sale contract

Sale contract
Sale contract
Buyer
Seller

• sings contracts

Buyer and seller fill out and sign sale contracts

• sings contracts

Day ?4
If the Surveyor has not received the filled out
and signed copy of the sale contracts within the
specified period, it is assumed that the party
has not performed its delivery obligations. This
partys delivery margin is transferred to the
counterparty.
Buyer and seller send filled out and signed sale
contracts to Surveyor

• The Surveyor
• accepts, checks, registers and sends sale
  contracts in paper form and by fax

Surveyor controls the procedure of signing sale
contracts
Sale contract
Sale contract
Sale contract
Surveyor
?5
Seller
Buyer
Sale contract

• notifies the Exchange of receiving signed sale
  contracts

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Delivery - 4 payment for grain5
The buyer performs his obligations to pay
for the commodity under the sale contract

• The buyer makes payment in the form of letter of
  credit, opened in the sellers bank. Payment is
  made against the provision of the following title
  documents to the buyer

• Bill of lading
• Sellers invoice
• Certificate of quality
• Certificate of weight
• Certificate of origin
• Veterinary health certificate
• Certificate of radioactivity
• Phytosanitary certificate
• Certificate of fumigation
• Customs declaration

Day ?30

• The Exchange receives information on signed sale
  contract from the Surveyor.
• Obligations under the sale contract are assumed
  to be unexecuted if one of the parties
• has not signed the sale contract.
• In this case
• the open positions of the buyer and the seller
  are closed out
• the delivery margin of the defaulting party is
  transferred to the other party
• to the delivery contract.

5 The form of payment and the list of title
documents are tentative
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Delivery - 5 actions of counterparties in
delivery

• The seller
• coordinates with the buyer the schedule of
  delivery of grain
• notifies the Surveyor of the delivery schedule

The seller delivers the commodity
The buyer places the ship under loading

• The buyer
• nominates the ship
• places the ship under loading
• informs the seller and the Surveyor of the name
  of the ship, place of loading, time of loading,
  name of the ship agent and/or freight forwarder

Day ?30
If the buyer has failed to place the ship under
loading, e.i. has failed to comply with FOB
terms of delivery, his delivery margin is
transferred to the seller

• The Surveyor arrives to control the quantity and
  the quality of the grain during loading

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Delivery - 6 loading

• The seller
• loads commodity on the buyers ship at the
  sellers expense
• provides the buyer with necessary title documents
  (copies are transferred to the Surveyor)

The seller loads grain on the buyers ship
If the seller has failed to load grain on the
ship, i.e. has failed to comply with FOB terms
of delivery, his delivery margin is transferred
to the buyer.
Day ?30
Control of the quantity and the quality of grain

• The Surveyor controls

The sellers delivery obligations under the sale
contract are executed after the transfer of the
commodity to the carrier. The date of delivery is
the date specified in the bill of lading.
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Delivery - 7 confirmation of delivery

• The Surveyor
• prepares the notice of delivery for each contract
  on the basis of the bill of lading and title
  documents
• in the event of nonperformance of obligations
  under the sale contract by a party to this
  contract, prepares the notice of non-delivery and
  specifies the defaulting party and the reasons of
  nonperformance of obligations
• owing to the fault of the buyer in case of
  absence of the ship or its unfitness for loading
• owing to the fault of the seller - in case of
  absence of the commodity or its nonconformity to
  the specification or in case of failure to ensure
  the loading of commodity on the buyers ship
• sends to the Exchange the above notices

The Surveyor notifies the Exchange of delivery
or nondelivery of grain
Day ?30

• The Exchange (the CH)
• on receiving the notice of delivery sends to the
  Settlement House an order to release the delivery
  margin and return it to the buyer and the seller
• closes out the buyers and the sellers open
  positions in futures

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Alternative delivery procedure
The buyer and the seller fill out and sign the
notice of settlement of obligations
The seller
The buyer

• Signs the notice

• Signs the notice

notice of settlement of obligations
Day ?30
The Exchange (the CH) orders the Settlement House
to release the deposit margin of the buyer and
the seller r on the basis of the Surveyors
notice of delivery. The buyer and the seller
(counterparties in the delivery) can settle
obligations before signing the sale contract or
during its implementation. In this case, they
must send to the Exchange (Controller of the
delivery) a notice of settlement of obligations.

• The Exchange (the CH)
• orders the Settlement House to return the
  delivery margin of the buyer and the seller
• closes out the buyers and the sellers open
  positions in futures

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The market of grain futures new opportunities
for participants

• Own operations
• Insurance against the risk of unfavorable price
  changes
• Effective sales within a wide circle of
  participants in the grain market
• Development of client business
• A large number of market participants who do not
  have appropriate infrastructure to work in the
  derivatives market
• Gains from acting as Guarantee Supplier
• The possibility of selling (buying) grain at
  prices higher (lower) than market prices as a
  result of receiving delivery margin from the
  defaulting party

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Guarantee supplier 1 principles of work

• Relations between the Exchange and the
  participant wishing to act as guarantee supplier
  are regulated by an Agreement of performing the
  functions of guarantee supplier
• A guarantee supplier delivers (buys) grain at the
  price and in the quantity specified in the sale
  contract, obligations under which were not
  performed by one of the parties, independently of
  the prevailing market prices
• There can be several guarantee suppliers
• The Clearing House transfers to the guarantee
  supplier, participating in the guaranteed
  delivery, the guarantee deposit (delivery margin)
  of the participant who has failed to perform his
  obligations under the sale contract

The guarantee supplier
The buyer
notice of delivery

The Surveyor
has not delivered grain
The seller
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Guarantee supplier 2 - principles of work

• Example6
• Initial conditions
• Delivery period 30 calendar days.
• Price of grain under the sale contract
  85,86/ton (price of the 4th class wheat FOB the
  Black Sea on 18.09.02)
• Guarantee deposit for the delivery period - 5,25
  of the value of the sale contract - amounts to
  4,51 (85,865,25)/ton.
• A party to the sale contract failed to deliver
  grain at 85,86/ton. His guarantee deposit of
  4,51/ton is written off.
• At the time of delivery, the price of the 4th
  class wheat FOB the Black Sea is 87,4/ton (on
  18.10.02).
• The guarantee supplier delivers grain under the
  sale contract at the price of 85,86/ton (e.g.,
  after buying grain on the market for 87,4/ton).
• The Clearing House transfers the guarantee
  deposit of 4,51/ton to the guarantee supplier
• as a result, the guarantee supplier has sold
  grain at 90,37 (85,864,51)/ton, i.e., 2,97
  (90,37-87,4)/ton higher than the market price
  (87,4/ton). This is the guarantee suppliers
  profit.

6 Prices of the 4th class wheat FOB the Black Sea
are obtained by adding the price of the 4th class
wheat FOB Rostov-on-Don and the transportation
costs from Rostov-on-Don port to the Black Sea
amounting to 10/ton. Price of the 4th class
wheat FOB Rostov-on-Don was provided by
Agricultural Market Institute (IKAR).
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Guarantee supplier 3 - principles of work

• To make up for possible losses, which may arise
  if the guarantee deposit is insufficient to
  compensate for delivery (purchase) costs, a
  guarantee supplier is granted a priority right to
  deliver in the event of another nonperformance of
  obligations under a sale contract.

The results of work of the Guarantee Supplier dur
ing the period of 20.2.02 08.4.05.
The results of work of the Guarantee Supplier are
given as progressive total
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Legal foundation of the market of derivative
instruments on grain

• The market of derivative instruments on grain is
  regulated by the Law on Commodity Exchanges and
  Exchange Trade (2383-I, 20.02.92)
• There are no limitations on the work of foreign
  companies and organizations on the market of
  derivative instruments on grain in Russia

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Contact information