Godsent Imianvan
In Nigeria, it is widely believed that the deepening of the commodity exchanges market for valuable commodities will optimally improve the trade in such commodities. This obviously true for the agricultural produce because farmers are often exposed to terrible post-harvest situation with regards to production, marketing, sales and also create a new spectrum of finance procurement especially through the repurchase of warehouse receipts.
The organized approach to agricultural marketing is however not novel to Nigeria. The watershed for organized marketing commenced in 1939 when government took over produce marketing on the outbreak of world war two to keep the flow of supplies regular. At the end of the 1939 – 1940 season, the West African Cocoa Control Board was established to take over from the government.
The Board was subsequently extended in its scope in 1942 and was renamed West Africa Produce Control Board.[1] The Nigerian Cocoa Marketing Board was established in 1947 by virtue of Nigerian Cocoa Marketing Ordinance of 1947 ″to assist in the development by all possible means of the cocoa industry of Nigeria for the benefit and prosperity of the producers″.
Similar provisions were included in the ordinance which set up the other three boards two years later. The Nigerian Palm Produce Marketing Board, Nigerian Groundnut Marketing Board and Nigerian Cotton Marketing Board were established in 1949.
Other changes came which culminated in the passing of the Commodity Board Act, 1977. The Act introduced the Nigerian Cocoa Board, Nigerian Groundnut Board, Nigerian Cotton Board, the Nigerian Palm Produce Board, Nigerian Rubber Board and the Nigerian Grains Board. The Boards were tasked with, amongst other things, the responsibility of;
- Securing the most favourable arrangements for the purchase of the relevant commodity and subsequent sale thereof to meet domestic requirements and the evacuation to a port of shipment of any surplus to such requirements intended for export; and
- to purchase all relevant commodities which are offered for sale to the Board and which conform with the grades and standards of quality prescribed under any enactment; and
- to engage in the processing of the relevant commodity and, where necessary, the purchase and subsequent sale of processed and semi processed products thereof for the domestic market and for the export of any surplus to such requirements,
- to establish buying centres in all major producing areas for the relevant commodity;
Despite the Commodity Board Act 1977’s promises to deepened the agriculture sector, corruption, suspicion of shortchanging from the perspective of farmers, fear of external control and inadequate funding/poor management were strong factors led to the collapse of the Commodity boards[2].
There has been calls for the re – introduction of the Commodity Boards and calls for deepening and regulation of the Agriculture Commodity Exchange. Regardless of the complexities in the operations of the agricultural commodity exchanges, we cannot discount the fact that commodity exchanges perform important functions that benefit the producers, processors, traders and users of agricultural products and other commodities.
The poser here is, what are the constituent of the obstacles to the deepening of the commodity exchange markets in Nigeria? It can be argued that the limited size of formalised food markets, weak infrastructure, inadequate financial services to support the development of exchanges and a general lack of legal, and regulatory frameworks are the stumbling blocks to the growth of the commodity exchanges in Nigeria.
With regards to legal frameworks, it is trite that an apt and cogent regulation will prevent and remove obstructions on the trading of commodities by regulating transactions on commodity futures exchanges, limit short selling and eliminate the possibility of market manipulation.
Though the Securities and Exchange Commission (SEC) has issued guidelines for the registration of community exchanges[3] and commodity exchange operators[4], Regulation on Derivative Trading and Central Counter Party, there exist no wholesome legislative framework to regulate the affairs of the Commodity Exchanges and other related activities like warehousing and standardization.
Another poser here is, who should regulate Commodity Exchange and other activities incidental to the operation of a Commodity Exchange.
What is a Commodity Exchange
Commodities are economical goods and services that have substantial value. They include raw materials such as Agricultural produce, Currency, Solid Minerals and Oil and Gas. On the other hand, a Commodity Exchange is a market, which provide facilities (Platform), regulations and standard for the order efficient and transparent trading of designated (selected) commodities.
It is as an open, organized and regulated market place where registered members for their clients trade ownership titles to specific quantities of identified commodities[5].
Transactions or Contracts in the commodity exchange are standardized which thereafter become tradable financial instruments. Commodity exchanges tend to gravitate from sport market to forward to the more complex derivatives market[6].
The complexity or the degree of sophistication in the operation of a commodity exchange is based on the trading platform, speed of trading, trading instrument, brokerage structure, clearing and settlement, use of warehouse receipt, standard setting and grading, price information and governance of trade.[7]
The list of viability conditions for the growth of Commodity Exchange can be grouped into four broad categories, namely; commodity-specific conditions, effective regulatory environments, contract-specific conditions and other enabling conditions.[8]
There are other external activities that are catalytic to the optimal functioning of Commodity exchanges. Some of which are, Warehousing Receipt Financing, Standardization and Grading System, Clearing and Settlement.
A commodity exchange should not be confused with a stock exchange. A stock exchange trades on shares while the commodities exchange trades on commodities and their associated instrument.
At present, three commodities exchanges are in operation and registered at the Securities and Exchange Commission (SEC). Whereas the privately- owned Africa Exchange (AFEX) Commodity Exchange, registered in 2014 and the Lagos Commodities and Futures Exchange (LCFE) registered in June 2019 are running against all odds, the much older government-owned Nigerian Commodities Exchange (NCX) is still struggling to find its feet due to several challenges[9].
AFEX and NCX are currently transacting on agriculture produce, LFCE is transacting on Agricultural products, local and global currencies, oil and gas, solid minerals and metal.
The Extant Regulations on Commodity Exchanges
The regulation of Commodity Exchanges is at the doorsteps of the Securities and Exchange Commission (SEC). Section 13 (b) of the Investment and Security Act, 2007 gave powers to SEC to register and regulate securities exchanges, capital trade points, futures, options, and derivatives exchanges, commodity exchanges and any other recognized investment exchanges.
Pursuant to Section 13 (f) which inter alia mandates SEC to prepare adequate guidelines, SEC has released guidelines though fragmented, on the establishment of the Commodity Exchange and the registration of Commodity Exchange’s operator. SEC has released Rules on the regulation on Derivatives Trading and Rules on Central Counter Party[10].
The Regulations of Derivative Trading defines an exchange as refers to Securities, Commodities or Futures Exchange where derivatives are listed and/or traded. The regulation on Derivatives Trading which applies to Exchange Trade Derivatives and the Over – The – Counter (OTC) Derivatives defines Derivatives as the means any financial instrument or contract that creates rights and obligations and whose value depends on or is derived from the value of one or more underlying, or on a default event.
The regulation lists out guidelines for the registration of a Derivative contract and registration of derivatives clearing members. The regulation makes it mandatory for SEC to approve a contract before its introduction.
The Regulation also mandates Exchanges to have a framework for the regulation of the derivatives segment separate from the framework governing the cash market and also develop rules for General Requirements, Membership Requirements, Reporting Requirements and Risk Management Requirements.
The regulation also passes the responsibility of market surveillance and setting of position limit to the Exchanges and ensure that derivatives contract prices reflect demand and supply in order to deter market manipulations.
In addition to the Derivative Regulations, SEC also introduced the Rules of Central Counter Party (CCP). A CCP is an entity registered by the SEC that interposes itself between counterparties to securities transaction traded on one or more financial markets, becoming the buyer to every seller and seller to every buyer.
The CCP also facilitate post trade management functions and, Collect and manage collateral held for the due performance of the obligations of Clearing Members. The Rule on CCP also made rules on physical delivery of instruments or commodities and mandates CCP to establish a system to monitor the performance of its Clearing Members to ensure that they have the resources and system to discharge their physical delivery obligations.
Seemingly, SEC’s regulation of Commodity Exchanges is limited to securitization of transactions in the Commodity Exchanges and the regulations on Derivative Trading and Center Counter Party cut across all other form of Exchanges in Nigeria. SEC neither has business with Warehouse operations nor standardization of commodities.
There is currently a bill at the National Assembly, to wit: Commodities Exchange Bill, 2019.[11]
The bill provides for the establishment of a Commodities Future Trading Commission to regulate the Conduct of Commodities Business, register commodities exchanges and derivative trading facilities. Section 29 of the Bill defines Commodity Exchange “an approved commodities organization such as an over the counter market, metal exchange, petroleum exchange, options, futures and derivative exchanges…”
Other functions and powers of the proposed Commission would include the registration, regulation of corporate and individual commodity future market operators, central depository companies, clearing and settlement companies and the establishment of a nationwide system for commodities future trading in Nigeria.
The Commission will also be the regulatory apex organisation for the Nigerian Commodity futures market[12].
Conclusion
The regulation of the Commodity Exchange Market is Section 13 of the Investment and Securities Act, 2007 which mandates the Security and Exchange Commission (SEC) to regulate and register Commodity Exchanges.
Merely stating that SEC has the sole mandate to regulate commodity exchanges operation is not sufficient. SEC’s failure to make a regulation specifically for commodity exchanges may be excused on the ground that the discourse of commodity exchange is nascent.
However, standing by whilst progress is being made by the commodity exchanges in line with their respective whims and caprices is not the best. Thus, a robust regulatory framework is necessary to drive the growth of commodity exchanges in Nigeria.
The regulation should encapsulate not just the trading theatrics within the physical location of the exchanges but also on the issue of financing, warehousing and trade enabler. Hopefully, the potential framework(s) will invigorate interest in commodities exchange transaction
[1] Celestine Osuala; Analysis of the Marketing Boards of Nigeria 1939 – 1966
[2]Femi Ibirogba Nigeria: Calls for Re-Introduction of Agric Marketing Boards Deepen https://allafrica.com/stories/201810220058.html
[3] Registration For Requirements As Commodities Exchange, https://sec.gov.ng/check-lists/registration-for-requirements-as-commodities-exchange/
[4] Registration Requirements Of Commodity Exchange Operator, (http://sec.gov.ng/registration-requirements-of-commodity-exchange-operator/
[5] Lagos Commodities and Future Exchange (LCFE) FAQS
[6] A Report On Commodities Trading Ecosystem In Nigeria By The Technical Committee On Commodities Trading Ecosystem, 2018
[7] Cedric Achille Mbeng Mezui, Lamon Rutten, et al (2013) Guidebook on African Commodity and Derivatives Exchanges, Copyright © African Development Bank
[8] Rashid, Shahidur. (2015), Agricultural Commodity Exchange and Market Development: What Have we Learned? 29th International Conference of Agricultural Economists
[9] Helen Oji, Unlocking commodities exchange potential in Nigeria. https://guardian.ng/business-services/unlocking-commodities-exchange-potential-in-nigeria/
[10] New Rules and Sundry Amendments As December, 23, 2019.
[11] https://www.nassnig.org/documents/bill/10388, retrieved in the 5th day of April, 2020
[12] http://placng.org/legist/reps-pass-commodities-exchange-bill-for-second-reading/, retrieved on the 4th day of April, 2020
