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-- The illusion of fantasy riches from commodity trading!
-- The Pressure for Change (11th May 2012)
-- Communcation Outlining the Twin Roles Of Comdaq (9th May 2009)
-- Regulation in an Automated Trading Environment by Colin Howard (27th June 2009)
-- Comdaq market development plans, announcement of indexes and forward contracts – Guaranteed contract performance?
-- FrELECTRA conference in Athens on Saturday 27th, September 2003 - Lecture by Colin Howard on supply chain logistics.
-- China's Polyester Revolution, Comdaq Fibres (11th-Mar-2002)
-- Computer Security, Article in IT Week (26th-Nov-2001)
-- Is the internet relevant for your business - by Alistair Mcluskie, Head of Comdaq Rice
-- Flea syndrome, Comdaq's place in the chain - by Colin Howard (19th-Oct-2001)
-- A briefing on the security of data - by Colin Howard (15th-Oct-2001)
-- Aromatic Rice Commerce Conference Presentation - by Alistair Mcluskie, Head of Comdaq Rice
-- A B2B voice brokers view on liquidity - by Neil Grover, head of Comdaq Precious Metals and Platinum Group Metals
||The illusion of fantasy riches from commodity trading!
Commodities trading has become an area of illusion and delusion with the cascade of information provided by the Internet. It is perceived as being an opportunity for great riches. In truth it has become a breeding ground for every sort of scam and confidence trick, with plenty of criminals ready to prey on the naïve and stupid.
That is not to say that there are not genuine requirements for product by genuine buyers – and of course there are genuine sellers able to supply. The difficulty is with the due diligence required to identify the genuine from the fake. Unfortunately this is compounded by the fact that the “fakes” are very professional, extremely well organised, and totally convincing. They then hide behind a “broker” who believes their story totally, whilst at the same time obfuscating the source in the mistaken belief that he is protecting his income. Thus an honest person will provide an acceptable face of the criminal to the outside world.
To go through all the scams would take considerable time, but let us start with websites – just because you find a professional looking web presence does not mean that it is genuine! Indeed, the criminal will do his or her best to ensure that you believe it to be true; with a name that is close to a real name, and copying wholesale information from real sites.
There is only one way to be certain that you are dealing with a genuine seller, and that is to personally visit their production facility, and even then ensure that they show you proof of prior performance, allow you to meet another customer etc. Overkill? We assure you it is not, if they show any reluctance at all, then walk away.
It is harder to determine a genuine buyer, except to say that it is the person or organisation that is actually able to sign a cheque, issue the financial instrument. If an intermediary is involved, then they may wish to obfuscate their role, and act as if they were the principal. If you discover that to be the case, then once again, walk away, the deal will never complete.
That is not to say that an intermediary never has a role to play, very often they do, but they should be prepared to be open at all times. Either they are retained by the seller, or receiving commission from the buyer, in other words the party that they are acting for: in which case they are properly appointed, and remunerated. If a broker is being purely opportunist, and seeking to match buyer and seller without an agreement, then self-evidently they will be at risk of being bypassed, and that leads to all sorts of attempts to protect themselves with quasi legal documents. Put bluntly, they will always fail, the documents are not worth the paper they consume, and no trade will ever complete.
It is thus Comdaq’s policy to only ever deal with Principals that have passed due diligence checks. If the Principal appoints an intermediary formally, then we will acknowledge their authority, but only after confirming that with the Principal. We are only interested in maintaining a customer set that have proved their capability to perform, and sometimes that can cause offence. We are sorry, but it is strange that those who object most strongly tend to fail any subsequent due diligence!
There are two other key principles that all parties should adopt to protect themselves. The first is never, ever, whatever the story, incentive, “special situation”, whatever – do not pay any money in advance to anybody, for anything; almost certainly it is the last you will see of it. There should be no exceptions, although we are well aware that there are sellers who will only deal on an advance payment basis. We say, quite simply, that there is always another seller, and whatever the circumstances it is not currently safe. Even if the seller is genuine you lose all control of the timing, you have no redress on quality, and if they happen to go bankrupt without delivering your order, then you have no security as a creditor. Why on earth would you put yourself at that sort of risk, especially as it is almost certainly within a legal jurisdiction that is different from your own?
Secondly, if the price is “too good to be true”, then it is absolutely NOT TRUE! There are no bargains in a world market, there is a market price, period! Do not be taken in by any of the elaborate and clever stories that you hear – normally it is something like a special allocation for a Saudi Prince, being sold cheap, or a General close to Putin who is allowed to finance his lifestyle with oil on the side! Make no mistake about it, the scammer is certainly not stupid – indeed they could probably make an honest fortune if they chose to, they will be extremely convincing, that is how they make their living, by duping the unwary.
A final major caution is to be very careful who you use as a logistics provider; just as there is no cheap product, there are no cheap ships either. The “bargain” may totally disappear, unload at a port that is outside the remit of normal legal processes, and retire with the money they have got for a discounted cargo. International law? Yes, right, so just who do you complain to?
Comdaq seeks to provide an environment where proven participants can transact together within a closed user group structure. We provide a “rule book” that is practical and reasonable, together with clearing and settlement support for those instances where financing is a problem. We know the problems are out there, and would like to alert any reader to them, but we regret there will always be those who will wish to believe a fantasy, and in that case there will always be criminals prepared to take their money off them. Do not let that be you.
||THE PRESSURE FOR CHANGE, a Comdaq white paper.
Why commodity suppliers have to reconsider how sales are securitised.
“Correspondent banks are not immune to the economic challenges of recent years, and their trade services are feeling the squeeze.
Globally, unless banks can offer genuine added value, trade finance is becoming less profitable. To combat this, banks should focus
on delivering value across the spectrum from supply to buy side, rather than just focusing all their energies on risk mitigation.”
Ben Poole “Adapt to survive”, Global Trade Review March/April 2012
The letter of credit (or bank guarantee) has served trade well for centuries, but for reasons stated below it is either no longer
available, or not acceptable. As a consequence alternative methods have to be found to guarantee payment between two parties where
trust is impossible – for reasons which we also cover below. It is perfectly reasonable for suppliers to resist change, to continue
to demand established and certain procedures, but in many cases that will mean that a transaction cannot be concluded. The purpose
of this document is to make that clear to all parties. We encourage suppliers to consider the alternatives that Comdaq can apply to
a transaction so that trade can be executed using new procedures.
B What has changed?
1 Banking has changed, with the impact of 2007 still being felt.
2 The concept of top* 100 banks has been blown apart, with some of the largest banks now being either at risk of collapse,or having extensive aid, or even nationalisation, to keep them in business. It has made a nonsense of the “confirmation” of documents, sometimes by a weaker party than the issuer. It is also perceived as being more risky, since a confirming bank will pay out and then seek recourse, they will not argue the position strongly. (*The very term is not defined, and can mean different things.)
3 Despite Comdaq regarding trade finance as very secure, the management of many of these banks have taken a different view – based we believe on it being perceived as requiring experts (and it does) who handle “difficult” transactions. As a consequence managers have either pulled out of trade finance altogether, or made the terms so stringent as to be almost impossible.
4 Another factor affects the bank, and that is regulation. They are more afraid that the regulator will criticise an action, than they are of the risk itself. This alone makes them reluctant to be active in an area with many variables. They perceive that the fine they might incur offsets any benefit of any revenue from trade finance.
5 One specific, related to the above, is money laundering, making the formerly valuable element of an LC being “transferable” difficult for a bank to manage, together with a “know your customer” liability. Banks today want to know every single party to a transaction in advance, and that normally kills the value of the transferability. (Reference the EU directive on AML and the USA Patriot Act.)
6 Other challenges facing banks arise from Basel III (more capital is required for trade business), combined with the de-leveraging of bank balance sheets in the wake of various regulatory measures either introduced, or still proposed.
7 Just to cover the point, despite often being seen in verbiage, “divisible” within UCP 600 is considered an “undesirable” term. If a document is transferable, then it is also divisible, but adds to the “know your customer” demands”.
8 Banks have withdrawn from trust agreements with each other, now managing any “exposure” that may be well covered between the parties,but exceeding a risk level between the banks themselves. A mere customer almost never sees this, but it affects whether the transaction is executed or not.
9 Within this risk aversion, prices, terms and performance have moved against the customer wishing to execute traditional business.
10 Finally (on the banks), there really has been a quantum increase in sophisticated fraud, with very professional organisations making a business of exploiting any systemic weakness. Each discovered event reduces the bank’s appetite for trade finance.
11 This sophistication in fraud has affected everybody, with fake buyers exchanging fantasy documents through unmoderated websites with fake sellers in a manner that makes price discovery impossible. Add to that the reasonably genuine broker who is trying to match a deal, but who is terrified that the seller (who may be fake!) will contact the buyer directly (also fake!) and you have a recipe for total chaos. Misinformation has become standard, forgeries routine.
12 Buyers in some markets have found themselves to be victims of fraud through making pre-payments, or offering deposits. Indeed many will have lost money from creating very expensive letters of credit, only to find that they are rejected by sellers because the bank is too small, or it cannot be confirmed etc.
C Any one of the features mentioned above would cause a degree of change, put them altogether and you have a crisis. So, are there any redeeming features? We suggest yes.
1 First, there is still a world- wide demand for certain products, especially food, and especially to the Western states of Africa.
2 Second, despite not trusting the mechanisms of banking that the supply side would consider normal, there are some extremely wealthy traders, who generally speaking are operating a distribution system throughout their “territories” that has changed very little in two or three hundred years.
3 Third, they can and will pay, but only when they know that the goods they are buying are “real”. Nothing on earth will persuade them to make any pre-payment, which includes any form of LC, but present them with a ship in a port, and they will bid for the cargo, paying cash – this is what is happening every day, with the investors in the cargoes making fortunes.
4 Fourth, there is an opportunity to bring forward planning to this long established system, by allowing the wealthy merchants to “order” a cargo.
5 Fifth, they are willing to compromise, to the point that they will pay for a shipment as soon as documents are presented (via MT 103 direct credit transfer) – and once they have confirmed that the ship is headed for their port on one of the tracking mechanisms.
6 Sixth, they will pay without the cargo being in their name – thus avoiding the UCP 600 trap of title passing. This alone is a significant trust element.
7 Seventh, they are prepared to pay the costs of a collateral management structure that acts as a guarantor of the cargo as well as providing a line of credit to the buyer. This acts as a security for any default, and can probably liquidate any distress situation more quickly than you could cash an SBLC.
D So what, finally, can Comdaq bring to the party, how can we increase trust and offer suppliers the sort of security they can feel comfortable with, indeed, can that be achieved? The answer to the final question is going to be individual to the supplier, but let us go through some of the options.
1 Clearly any mechanism that provides a moderated pre-payment is going to be secure for both parties, and for that reason we offer our services at www.fortescrow.com with funds held in a client account. It should work, and does in a few circumstances, but normally the security of escrow is foreign to the buyer, and it is just seen as pre-payment, and rejected. One day we do believe that it will grow, not least because you avoid costly bank charges.
2 Failing that as a method, we believe our strongest contribution to trust in markets is the rule book of the Exchange, and the consequences of expulsion for defaulters. Put simply we are a closed user group, and all participants have to pass due diligence examination to confirm that they are bona fide principals – that is both buyer and seller. We do not want anything to do with the sort of Alibaba unmoderated platform, Comdaq wishes to assure sellers that buyers have the capacity, and in turn assure buyers that sellers will supply. If they fail at any point, then they are not given a second chance.
3 As trust builds then we expect trade to become bi-lateral, but until that point Comdaq will hold the hands of both sides by acting as a quasi principal.
4 It is our belief that payment by MT 103 on presentation of documents is a better, faster and cheaper payment method than a DLC, and that a collateral management agreement has the same guarantee effect as an SBLC. That may take some getting used to, and we do not recommend that it is adopted wholesale, but selectively, using proving transactions in the first instance. Crawl before you walk, walk before you run. Fact is it is cheaper, can be managed by the retail market without the suffocating impact of the bank changes, and meets the requirements of the buyers who have been comprehensively defrauded by the more sophisticated methods.
5 This concept can be played with around the edges, by deploying performance bonds for example; if you are creating change it is wise to listen to other, and all, ideas that are proposed.
E In conclusion, this paper was intended to highlight the paradigm shift that has occurred in banking, that has made any form of trade finance instrument almost impossible to obtain within many destinations. We have sought to explain on the other hand why buyers are rejecting the classic forms of guarantee, having been defrauded by an increasingly worrying online environment. We have pointed out that there is actually considerable wealth on the receiving end, but that it is “suspicious” in the extreme, however they are prepared to compromise and provide different forms of “destination” security. If sellers are able to accept this, and consider this line of argument, then there is a great deal of business to be won, in classic markets.
The purpose of this document is to communicate the twin roles of Comdaq to
The first is as a provider of enabling infrastructure.
The second is to provide a network of parties to the transaction, and support the
trade to a conclusion.
1.0 Taking INFRASTRUCTURE First.
“The operating system for commodities”.
We use the term operating system to indicate our support infrastructural role
to the industry.
Like the operating system on a computer we provide the basic building blocks on
which trade can be built.
To work for everybody it has to be uniform, stable and comprehensive.
Then anybody can use the system to run their own applications in their own way.
There are ten basic elements of infrastructure that are required as detailed
below. These are linked by a wide area network, with subscribing components
linking in via an API (Application Programming Interface).
1.1 Community. The single most important starting point, a multi functional
database of all industry participants that is addressable and searchable as well
as being sorted against preset criteria. Provides a trade index.
1.2 Messaging. Secure, encrypted, virus and spam free interchange of trusted
information over electronic mail, available to closed user group members of the
community in 1 above only.
1.3 Administration. Comprehensive administrative support tools to manage
subscribers control of their applications, plus links to appropriate service
providers, such as inspection agents.
1.4 Location. A database providing the physical whereabouts of a commodity,
supported by procedures that warrant their identity, content and condition.
1.5 Trading area. Mechanisms to bring buyer and seller together, and then
provide support tools to reach agreement on price and other terms. Contracts may
be agreed in any manner, and are then recorded to become a part of a trackable
1.6 Finance. Links to and between the providers of trade finance, mechanisms
to commit finance to the contract, such as electronic letters of credit and escrow
1.7 Risk management. Support connections to the transaction who can provide
hedging, guarantees, synthetic capital, or other forms of underwriting to the
1.8 Payments. An integrated payments and reporting structure that ensures
compliance with agreements on time and to contract, with a low cost base of
1.9 Transport. Access to the least cost routing of goods to the required
market, by whatever means.
1.10 Compliance. Realistically this is part of our modern world, and we all
need to be a part of the support structure that ensures that rules are followed.
The community area provides information for due diligence purposes, and there will
be moderated peer review of transactions, supported by a counselling service to
avoid disputes. An independent panel of industry experts is also available to
provide a governance element. Where these exist already, then it is a question of
data interchange. If they do not exist, then a panel may be created.
It must be stressed that this is an enabling infrastructure, not an alternative to
current industry practice and participants – except where support services were
previously unavailable or not supported.
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2.0 This next section defines the roles in greater detail.
Please note that this document will define the full future scope of the system,
all of the elements being in place. However, in the establishment phase trades
will be entered and managed by appointed brokers, who will release functionality
as the network develops and as training is completed.
The basic building block of the community is the registration of an individual
who is an industry participant. Initial registration with CV and history file is
free, with charges only being applicable to the commercial and service connections
that they require. Persons seeking a post in the industry will be entered on the
jobs register free. Students, academics, journalists and other similar non
trading persons may register as market observers, also free.
Data access is dependent on the classification of the user, and is controlled in
both directions, meaning that a user will only access information that they
require for their registered task, and they may restrict external access to their
data to approved types or counter parties.
The registration of a corporate body is chargeable, based on the number of
underlying connected users who have access to the system. A nominated registrant
within each corporate must take the duty and responsibility of providing the
administrative control for the organisation. It is the administrators task to
ensure that information on their business or entity is up to date, that related
rights and terms of reference – including any applicable trading limits – of
connected individuals is current, and that they deal promptly with any compliance
queries. As such the appointed person must be considered “fit and proper” for
the task, and must be approved as such.
Government organisations requiring access to control statistics will be regarded
as a corporate body.
The minimum “unit” is a sole trader – where the term means anybody involved with
an interest in the transaction, including a government official – linked to a
single product, using the communication services offered, but as mutually
restricted. That person must also accept the role of administrator.
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Fundamentally the core service is electronic mail, but in a managed and moderated
centralised control form. It is intended solely for trading related
correspondence, and whilst it is accepted that participants may occasionally
exchange messages of a social nature this use is restricted to text. For personal
use, all registrants may record within their community information file an open
email address, which may only be read by other parties specifically authorised to
do so by the registrant.
The absolute purpose of this closed user group structure is to ensure that a
protected messaging environment does not suffer the abuse and misuse of spam and
virus distribution, and the highest standards of operational control is
permanently maintained in those areas.
By default mails are “open” but users may opt for encrypted and secure transmission
– either for all, or specific, messages.
Users should communicate with non registered addresses with their external service.
If they use their controlled address, then they must “white list” any expected
response address. Any incoming address that is ever held to be responsible for
an incorrect or abusive use of the system will be permanently excluded, regardless
of the circumstances.
Backing up the one to one email service is an open forum chat zone operating a
number of strands and counter party attachments to which users can register for
read only privileges. Responses will only be displayed where there is
communication with approved counter parties, which will be apparent because the
contributing party will be disclosed. Otherwise the content will appear anonymous.
General offers/comment must be published in the chat zone, broadcast emails are
not allowed and will be considered an abuse.
Organisations with mutual counter party recognition may also use the internal
Voice over IP structure to debate trade related terms. Once again, please note
that the use is restricted to commercial traffic. Registrants may record
alternative mechanisms for voice, such as a land line, mobile, or Skype number,
within their personal records.
The only broadcast capability will be managed directly by the messaging controller,
and will be restricted to matters of a legal, advisory, safety or security
Logistic files will be maintained as part of the application itself, attached to a
recorded contract – which may have been created online, or added post an
alternative method of arriving at an agreement, such as on the phone. In the
latter case both parties must confirm the recorded terms. Because of this
facility no attachments will be allowed on the electronic mail service. The
purpose is to create an effective record that is visible to all authorised parties
to the transaction who are recorded on the system within a single database, and
to avoid any possible confusion due to a lack of version control etc. This
feature will link with both tracking and payments in order to assist subscribers.
Mobile communications are a part of the structure of messaging, principally geared
towards payments (see payments later), but also aimed at providing a minimum
“terminal” capability to access the system.
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Substantially the administration of the system is managed individually by
subscribing corporate members, using the tools provided.
Examples of these tools would be the selection of counter party preferences,
which controls who may have access to your information, and who may communicate
with you via chat or voip. If no counter party connection exists, another
registered organisation may communicate with you via email requesting an extension
to cover them. A reply to such a request, even if it is negative, is mandatory as
a structural courtesy.
This sector also covers those service organisations that are themselves part of
the administrative structure – such as insurance companies, inspection agents,
finance providers etc. Every attempt will be made to ensure that the data is
inclusive, and incorporates any special conditions that are provided by support
Where appropriate, links to other systems will be facilitated via an API, but
these are strongly discouraged if it means the creation of a set of information
that is not retained as the latest, or relevant, version within the central
database, as it must affect the integrity of the logistic tracking process.
Particular interfaces are supported to facilitate the completion of documentation
required by government organisations, such as customs forms, for example, and then
adding them to the logistics file for a transaction.
A “price ticker” is provided that can be accessed via the administrator, and which
picks up highlighted feed data from transactions, similarly a news feed can be
provided with relevant information.
Within each transaction there is a facility for ongoing peer review of the
performance and reliability of a participant as part of the compliance philosophy.
Within the administration function there will be a moderator who will consider
‘appeals’ regarding any negative comments made. See Compliance below for further
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2.4 Location / Securitised Receipts
The location of the traded goods at any given moment in time is of great
logistical value in tracking delivery and booking supporting transportation, but
is potentially of greatest value in linking advanced methods of commodity finance,
the underwriting of risk and providing a guarantee to the transaction, see
headings F and G below.
The specific point at which goods can be identified, warranted, checked for volume,
quality and content, is when lodged in a warehouse. The system supports a range
of securitised instruments, ranging from a warehouse depositary receipt, through
exchange traded documents and including a location independent “Comdaq Depositary
To support this an electronic warehouse receipt accounts management is provided
that is independent of any market participant, as this is a real-time view of the
commodity at any point, invaluable information and confidentiality is key.
The challenge is how one converts that ton of wheat or that bag of coffee many
miles away in areas often with poor technology into a financial instrument
acceptable to the exchange and to a bank’s credit committee, involving several
languages in the process.
The development of trust and confidence can only be supported by a strong database
within an “operating system” structure, combined with an on going “peer review”
process which will rapidly expose any unsatisfactory practise, that will be seen
to be more financially damaging to the proponent than if they complied with
ethical approved practice.
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2.5 Trading Area
Within the context of an operating system it should be made quite clear that there
is no expectation of either providing exclusively, or controlling, the trading
area. Within this context we would reference the October 2006 draft paper titled
Strategic Considerations for Commodity Exchanges in Developing Economies: A
Framework and Toolkit for Equitable Growth prepared by the UNCTAD Secretariat.
(Since updated in July 2008, but containing similar definitions.)
That paper defines the many types of exchanges, their challenges and orientations.
The absolute purpose therefore of an operating system must be to support and
link those exchanges, and carry seamlessly any resultant transaction whilst adding
our service content.
The requirement is for a common and agreed protocol, an API, and also the
functional offering of support components that will enable a domestic (for
example) exchange without the high development costs of dedicated software. Thus
we can offer many to many, one to many, “white label”, or a range of auction
functions as components if required, or they can be sourced from another supplier.
The important point is that Comdaq seeks to be an open access platform within
which the registrant is a cooperative participant and not a customer who is
“owned” in the traditional (and somewhat flawed and failed) “Telco” model. Comdaq
does provide structural services, which are paid for by those participants, and to
that end there is a “customer” relationship - but in the manner of a utility, not
an exclusive ‘tied in’ relationship.
It is important to stress this, because the biggest restraint to market
development to date has been the perception that “exchanges” will disintermediate
traditional structures such as brokers. In practice an argument can be put
forward, supported by analysis of the development of equities and derivative
exchange structures, that would suggest that a suitably adaptive management would
enjoy considerable growth, but we do not seek to even have that argument. If
brokers wish to conduct their business and create contractual agreements between
the parties in the traditional way, then that is fine. The role of the Comdaq
trading area then only starts with the two way reporting of the contract.
In its simplest form, this commencement of the online logistics file, by reporting
the contract as agreed on line (or off line), post the event, saves all
participants money over legacy means – since it is very considerably cheaper than
traditional paper, or faxed documentation. Taken together with the (closed
participant) chat area, and the restricted VOIP support, the overheads of a
trade should be reduced significantly.
Having put in all those pre-qualifications, a trading area is provided, subject to
the access rights and counter party preferences of the participants, and it is
deemed logical that a domestically advertised availability might also be exposed
for the interest of a wider international audience. In certain circumstances it
might attract a better price. But there is no compulsion, and many broked trades
will continue to be connected in the traditional way, bypassing all such
transparent price discovery mechanisms, and that is fine if buyer and seller are
happy. From then onwards, fulfillment is a logistics issue, and everybody gains
from effective communication and information flows.
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Trade finance is normally an absolute requirement of any transaction, and yet the
mechanism is virtually unreformed from the 16th Century! The operating system
seeks to offer a form to arrange the letter of credit online (but following all
the traditional principles), and to add escrow facilities to support lenders – to
which can be added forms of guarantee and underwriting as per paragraph G below.
Costs for banks are considerably reduced, and the critical time factor that
exposes both parties to price change risk is truncated. Since price movement
during the execution of the administrative support requirements is a major cause
of contract failure there is likely to be an incremental increase in reliability.
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2.7 Risk Management
There are a number of means of managing risk, with the holy grail of all trading
being a “guarantee”. Whether or not these become available over time, all
mechanisms will depend on the strong operating system structure predicated here
where information is constant and immediate, so that risks can be managed.
Mechanisms such as synthetic capital can emerge in this environment, but the
simplest adaptation of current market practice is to extend specialist derivatives
instruments to a wider range of commodities. Those instruments can then be
“crossed” so that buyer and seller have a hedge for the same transaction, paying
a premium for the underwriting. The only reason this has not been done to date
is the requirement for physical delivery as a condition of last resort if the
instrument matures. The key to widening that option is the electronic warehouse
receipt (EWR). The term here is used to broaden the traditional description of
Warehouse Depositary Receipt (WDR) but includes that form, because we wish to
embrace all forms of location specific securitization.
Once it has been created in a trusted environment the linkage of an electronic
warehouse receipt (EWR) to a derivatives exchange and commodity finance is
relatively simple. The derivatives exchange requires physical delivery for
positions not closed and that is done through symbolic delivery in the form of an
EWR. This is often an adjunct for an exchange only to allow it to perform its
core function to facilitate market futures trading, yet it is a necessary
administrative and risk burden of positions not closed. The commodity financier
simply requires an EWR as security for amounts owing.
This requires accreditation and standards for the negotiability of the underlying
receipt that is deliverable over the exchange and is acceptable at face value to
Once the EWR is in place, the key is a system that also can be integrated into the
practical back office operations of the bank and the derivatives exchange. Some
banks require strong integration and others just require a specific view of their
EWR register and simple tools to align EWR to internal account numbers, to value
the security and facilities to enable branch networks to engage the banks'
Commodity financiers essentially exist in the physical world and lend against
actual goods. Derivatives exchanges deal in a virtual world of futures trades and
often reluctantly see the physical side when clearing only a small percentage of
actual trades. Provided the exchange is a trusted and independent market
participant, the broad based EWR approach moves the physical world into an
electronic world (i.e. the physicals are now represented electronically) and
often allow derivatives exchanges to evolve physical or spot markets and other
It is about representing the physical goods into a secure and trusted financial
instrument in a real-time and easy to use commodity bank account for that
country’s specified commodity, creating new opportunities and efficiencies for
lending, securitising and supporting derivatives exchanges in a seamless manner
at a national commodity level.
This capability is enabled by the community structure of Comdaq and the open
access to banks, warehouses, and exchanges of all types, whether they be
specialist derivatives writers, or national spot exchanges.
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As an extension of both the provision of finance and the management of risk,
everything depends on a payment, with legacy structures requiring either a great
deal of trust to be involved through the granting of credit, or expensive
assurance of payment through the use of an intermediary third party, principally
a bank with a letter of credit – an instrument that can be frequently challenged
so as to destroy its purpose as a guarantee of timely payment.
These issues will only decline in time, not least because there are many within
the industry who deliberately set out to “play the system”, and any injection of
responsibility into the transaction is contrary to their interests.
But that is no reason for accepting the status quo, and one key to change is to
ensure rapid and inexpensive movement of money in a timely fashion, which is
enabled by “Comdaq Mobile”, a joint venture which allows secure and authenticated
payments to be made from a diverse network as authorised by the principle to the
transaction at every level.
Access to these terminals is two way and they can also be used for messaging where
an instant decision is required. Since the actual transaction cost is
significantly lower than via a traditional bank network then the payments paradigm
can be transformed, by structuring part payments to shippers, inspection agents,
brokers etc. – all as a part of the master contract, and all automated; not
conditional on the goodwill and bank balance of a principle. This alone starts to
secure the cash environment for members of the support industry. Another
application is notification and collection of a margin call, where appropriate.
Funds have to be provided to allow them to be moved, and registrants will have the
option of a portfolio account, or indeed to hold a “balance” in their terminal –
as well as having access to an escrow account. In most circumstances the terminal
will be able to communicate seamlessly with their trade finance banker and
authorise the immediate transfer to the relevant counter party. The capability
depends on the existence of a closed user group of participants who are mutually
contracted to an agreed set of operating procedures, with an underlying code of
discipline. Those who sought to “work” a system will not be able to do so, to the
massive benefit of the majority, and assisting the growth of a responsible trading
community that will increasingly be able to rely on quality, timing and cashflow.
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At the time of writing this document, the integration of transport with the
movement of commodities is a long way off. Logically that should not be so, and
perhaps it will change as aware contractors seek to register and make their
timings and capabilities generally known, so maybe the environment has to be
created before participants will get involved. Embryo efforts to organise the
industry have seen limited success, but that is also true of other commodity
In the meantime, let us ask a question. If we can track a Fedex parcel, why can
we not track a container? There can be no long term reason, and in the meantime
documents such as the bill of lading can be lodged as a part of the logistics
package to give some indication of the transport component.
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As stated in the outline, compliance is a modern requirement which is only going
to become more relevant, more necessary, and more demanding.
A major benefit of a closed user group community, and a system of tracking and
recording contracts, is that many of the elements of compliance are satisfied.
Know your customer rules are made simpler, there is transaction transparency that
limits the opportunity for money laundering, peer review will marginalise or
isolate irresponsible or unethical participants, the opportunity to close down and
open immediately elsewhere without the knowledge of the community will be removed
completely by the community structure attaching to individuals.
Where there is genuine error, misunderstanding or straight foolishness, then a
means of communication that could lead to arbitration will both support the weak
and protect from the bully. The origin of markets was based on “my word is my
bond”, a worthy principle that remains essential to trust, but which cannot be
imposed on a world of diverse cultures and communities, except through some
form of regulated environment.
Generally markets have been released from government control, and yet inevitably
the importance of the commodities industry ensures that all states will have a
proper interest in money flows, the best price to be obtained by their interests,
an equitable relationship with other countries and information access that can be
transparent enough to give them
This is a cross border, international, general question of mutual interest, that
is only satisfied by an industry that can agree to rules, and prove their
compliance with them, within an open access environment that embraces all interests.
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3.0 Providing a Network of Parties
There will be few parties to modern trade who do not recognize the logic of the
plans expressed above, indeed understand that in most cases there is a standard
application of technologies and management practices that have been accepted in
many other areas.
But anything new requires the “early adopter”, those who believe that by creating
change they can become a part of the next generation methodology. As ever, those
with the vision can expect to become a new part of the industry, which normally
expands as a consequence.
3.1 The Background
There are many people who will identify the personal opportunities, especially
within a world where all the certainties have suddenly changed. The overall
concept will require leaders and administrators, but the overwhelming challenge
is to connect vendors with the new opportunities, the traditional role of the
Comdaq has an important enabling role to make that “happen”. A broker needs two
things, first absolute security for the trade, by which it is meant that the
effort expended on behalf of the seller (or buyer) cannot be bypassed, and that a
reasonable return basis is assured. It is a sad reality that most current trade
recognizes no common law, discipline, nor ethics. The latter may be considered an
old fashioned word, but it cannot be stressed enough that trade was initially
built on a “my word is my bond” basis – and no trading house could survive the
loss of reputation caused by an abuse of trust.
As World trade has expanded the significant trade houses continue to dominate the
market, but understandably do not wish to widen access beyond their network. This
has resulted in the very considerable growth of brokers and traders who are
“outside” the traditional market, but without any common structure defaults are
almost the norm.
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3.2 The Network
The first requirement for a Brokers office is that they have access to counter
parties who can manage the other side of the trade, albeit in a different country
and a different language, probably a different currency and legal structure as
well. Thus stage one of the Comdaq plan is to make access available to suitably
qualified agencies or networks. The wider this network becomes, the more
effective will be the promise that a contract can be effected.
The second clear requirement is to ensure that nothing is being traded that is not
in a form that would prejudice the completion of a transaction. Thus there must
be a requirement for the product to be either traded as principal, or in a
securitized and negotiated format, such as an EWR. Support for those instruments
must be provided, and contracts arranged with other infrastructural parties, such
as the creators of derivative instruments.
The final essential is to ensure that an agreed code of practice is complied with
by all parties within the structure. This will not be easy, you do not convert
an entire market over night to a different style of behaviour, and there will be
tough choices to be made, especially if a major “player” feels that they have the
muscle to ignore a rule that does not suit them. But there is no long term
option, bullies must be confronted! Markets have to be based on trust, and that
has always meant the imposition of the rules of a society that forces compliance
equally on all involved. That means obeying at times when it does not suit a
person, as well as when it does.
Thus, to conclude this briefing, Comdaq seeks to provide the infrastructure that
allows the creation of a network of trading brokerage houses who deal in a secured
product, with known returns, in a disciplined manner.
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Regulation in an automated trading environment
This document details the opportunities for control within the automated trading
environments provided by Comdaq and the Alternative Electronic Stock Exchange to
various markets. It explains the essential “layering” of a regulatory approach,
and the benefits to be gained from one hundred per cent data capture, with
information being provided as ‘exception reports’, thus massively reducing
dependency on detection by staff.
Any environment that involves the movement of money will bring with it an
inevitable ‘shadow’ of fraud, thus it is a sad reality of human nature that trust
can play no part in the regulation of markets. On the other hand, these are
essential services to the community, generating wealth and GDP within countries,
so they must be accessible and user friendly. Furthermore, costs must be
constrained within the capability of participants to pay. Thus the integrity of
any market has to be defended by all governance sectors, from politicians,
the law, state organisations, the police and the general public; there can be no
exceptions to the support expected from any sector of the community if those who
spend their life committed to defrauding the system are to be beaten.
3.0 The Layers
Thus, in considering an approach to regulation, it is first necessary to define
the scope and reach of different layers of control. It is not possible for any
one organisation to perform a perfect system of checks, without the general
consent and support of the infrastructure. We shall define an ultimate “safety
net”, but the prime purpose of that ‘level’ is to ensure that nothing reaches it,
regulating to fill any perceived opportunities that may emerge over time. Any
other approach will produce failure on two levels, one being that a hole has been
found in the system, but worse is the systemic loss of confidence that follows a
perceived failure of the regulator itself. Thus the structural contribution will
be considered under the following headings:-
3.1 Population, the Law
3.2 Brokers, compliance, qualification
3.3 Banks, funds
3.4 The Exchange process
3.5 Exchange governance
3.6 Listed entities
3.7 Surveillance, regulation
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4.0 Population, the Law
The people must be able to trust their markets, despite the fact that you cannot
rely on any aspect of trust for governance purposes. Thus all politicians must
support the government in the enacting of laws that provide a basic foundation of
social behaviour. Those laws must define what the community considers to be proper
practise and ethics, and the people must then utilise the market in the manner
prescribed by those laws. It is the nature of society that people will seek to
break laws if there is an opportunity to do so without suffering any sanction.
Thus the objective of any automated system is to contain a codified structure that
ensures detection, becoming the first layer of regulation.
5.0 Brokers, Compliance, Qualification
The first layer of protection for the individual is protection from themselves.
Markets are generally centres of expertise beyond normal experience, so the
‘layman’ should not have direct access, but use the support services of an expert
who can guide them in interpreting their wishes. From the regulatory aspect, this
creates a very valuable control point, as follows:-
5.1 The broking firm is an initial source of data, on customers, their
interests, their trades, their objectives and all of this can be captured
within the total environment.
5.2 It is also an area where the exchange can impose its rule book as a
condition of membership. Thus it can require the broker to undergo
training and maintain compliance to codes of practise that are beyond
those of general law and statute.
5.3 As a part of the operation of those codes, the broker becomes the first
line of regulation with their client. Duties to report any suspicious
behaviour can be delegated, and sanctions applied if anything is
discovered that might reasonably have been identified.
5.4 To comply with the delegated obligations, the brokers must be equipped
with an efficient integration into the automated system that ensures a two
way data flow.
5.5 Core issues, such as demonstrating competent “know your customer” rules,
control of money laundering and compliance with client money requirements
become an embedded part of daily procedures, yet with a one hundred per
cent audit oversight capability. Effectively the broker polices the
system, with the serious sanction of suspension if they fail to detect
malpractice. From the governance point of view there is no added cost to
this comprehensive regulation layer.
5.6 In addition the brokers become a point at which they can be held
accountable to their customers, meaning that the cost of incompetence can
be that compensation is payable. Whilst it is essential to provide an
insurance element to this underwriting, as a first level it is a ‘no cost’
deliverable by a government to the population, thus adding to the trust
5.7 Having regard to 5.6 above, and the integrity of the market generally, it
is essential that the financial health of the broker is known to
regulatory interests at all times, especially the maintenance of laid down
capital adequacy reserves. In this regard the one hundred per cent audit
capability, one hundred per cent of the time, of the Comdaq / AESX
automation means notification of any breach without any other control
action from the authorities. This alone saves considerable cost over
To briefly summarise this most important layer in the system, the duty to maintain
the integrity of the market system starts with the connection into the system,
namely the broker. They create the data interface with the lay customer, and all
their information is visible to both the exchange and any other oversight
authority. Automation rules monitoring their systems can provide an instant alert
of any breach, and appropriate action taken, that can in turn be monitored.
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6.0 Banks and Funds
Both banks and specialist funds can provide an alternative route to market for the
public, and the same operational and compliance rules must be applied to their
access, not least because (in the recent crisis) it has been demonstrated that a
criminal fringe can seek general to operate within this environment, as in any
other. As far as a market environment is concerned there is an additional issue,
in that banks are often extremely large businesses with attitudes, policies and
procedures that allow them at times to appear to be “above the law”. Within the
regulatory process this must be considered unacceptable, and therefore – within an
automated system, they must be treated as follows:-
6.1 Banks. To trade on a Comdaq/AESX market, a bank must apply to the
exchange to operate a brokerage account as if they were an independent operation,
thus becoming XYZ Bank (Brokers) Ltd as an example. This entity must maintain
reporting and procedures to the Exchange in exactly the same form as an ordinary
broker. There will be objections to this requirement on two counts, the first
being that the bank has to maintain the broker automation system, when they will
argue that they already have client management procedures and records. They will
also resist the oversight of any additional body. Regulators should be quite
clear on their answers to these objections. To the first, they may have client
records, but they do not have the market access and related share portfolios
within a dematerialised environment, let alone a means to demonstrate compliance
with (for example) the ‘know your customer’ rules. To be a participant in the
market, they must accept the authority (and therefore the integrity) of the market
if they want to be a player. On the second point, they have an option. If they
wish, they can put their business through an existing brokerage house. If however
they wish to enjoy the privileges and benefits of direct access, then they must
behave as any other member of the “club”. They will have to integrate the
automation with their own procedures, but that is a proper cost to them. The
alternative, which is that very expensive additional regulation resources are
required in order to cater for an exception, should not be considered
6.2 Funds. The title here is used to cover a whole range of instruments, many
of them extremely opaque, and it is the purpose of regulation to ensure that they
are exposed to transparent oversight. The solution remains the same as for banks,
in that any fund that wishes to have direct access to the market must operate as a
broker; with the same opt out option of using an existing market participant to
place their orders if they do not wish to meet the requirements of direct
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7.0 The Exchange Process
The principle absolute key to the different regulatory approach within an
automated market as opposed to a legacy environment is that the embedded accounts
structure ensures that there is “a one hundred percent audit, one hundred percent
of the time”, and that for every entry, there has to be an equal and opposite
balancing entry. This means that many functions that were previously checks
performed by clerical staff can now be entirely automated.
As a consequence, it would be a brave person who contended that “nothing can ever
go wrong”, because there are many unknown risks in the world – ranging from
hackers to brilliant fraudsters on a “Madoff” scale – but there is a much greater
chance that the process flow can pick up any unusual activity and report it.
What is more, this can be an iterative process. As new risks emerge, they can be
specifically catered for, or alerts embedded to look for a pattern of actions that
may give rise to suspicion. All this being in addition to the standard processes
of checking (all the time, not once a week) on issues such as a brokers capital
adequacy. Apply a trend line, and regulators can have an early warning of any
8.0 Exchange Governance
Within the process there must be a separation of duties and responsibilities,
which will vary from market to market. Generally speaking the exchange itself is
a further opportunity to impose a “rule book” in addition to the broker’s
regulations. Most exchanges are self regulating organisations, and this is
probably correct from the regulatory viewpoint, in that the market is a specialist
that is concerned with its own integrity for its very existence, thus it has to be
toughest critic of its membership, and the fiercest police presence in ensuring
that any malpractice is firstly made extremely difficult, and secondly severely
punished if discovered.
Furthermore it is a trading entity with its own cash flow, so from the regulatory
aspect any “police” duties that it performs are sustainable without recourse to
any tax funding (whether that be from general taxation, or fees payable by the
9.0 Listed Entities
Depending on the instrument there is an additional requirement to ensure that all
aspects of any alternative third party involvement with the market are embraced by
the automation that is available. Within equities, dematerialised stock means
much greater control because there is an automated balancing item at all times.
Post trade settlement will always expose additional risk, both in certificated
delivery and open credit positions, and should be avoided wherever possible, even
through the use of nominee positions, especially within bond trading.
Derivatives particularly have a liability on margin calls that can move very
quickly and lead to risk that liquidity will be insufficient to allow the closing
out of positions in a fast market. Automation does not remove the risk, but it
can act faster than any human interaction; with a similar capacity to alert
regulators and governance officials.
Where the listed instrument is a third party, either as a public company, a listed
fund, or the provider of a derivative product, membership and reporting rules must
be imposed, and constantly monitored, to ensure the integrity of the “other side”
of the market.
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10.0 Surveillance, Regulation
At the top of any regulatory tree there is likely to be a government department
charged with oversight of the sector. This represents the final “safety net”
within regulation, normally with specific consideration for the protection of the
consumer. Access to the automated system can deliver information on any required
level, but it will have been observed that there are already two “police” layers,
namely the broker and the exchange. If control action is taken by these levels,
then it may be considered that no further action is required elsewhere, other than
notification and a report on the action taken. It is this process that is
described as being exception reports – meaning that only required information is
presented for review, it is not necessary to expect staff to identify problems
from bulk information.
Surveillance then becomes a “macro” role, of governing the governors, ensuring
that all market participants are properly checked as being ‘fit and proper’ within
their role, that rules are kept up to date and enforced, and that there is an
active interface with law making that keeps abreast of any emerging threats.
Consider how different this approach is to the legacy market, which would have
required extensive staffing by people experienced in investigative matters, and
the difference will be appreciated. Significant challenges remain, for instance
within the administration of any compensation structure that cannot be funded by
participants, or consideration of what might amount to mis-selling; or companies
that should not be trading, listed or not.
The very specific gain achieved by regulators is that they are not exposed to the
easy criticism that flows from a ‘failure’ to detect abuse, as has been seen
recently in the banking environment.
It will be seen that automation allows the collection of data, suitably processed,
with an immediacy and accuracy that was always impossible in a legacy market, and
thus the cost of regulation falls dramatically – yet it is greatly enhanced
through iterative adaptation of the process flow.
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The Supply chain is based on trust, True or false?
My thesis is that trust plays no part in modern commerce, not least
because regulation and legislation demand evidence of fact - and taking
somebody's word cannot be evidenced, and is certainly not fact, so a means
of accurately recording the input is essential, quite apart from the
benefits to be gained from e-commerce automation.
are, first, the exploitation of labour. Much of the picking is done by
illegal immigrants who are exploited by gang masters who contract to pick a
crop, often at very short notice - and under intense pressure from a
supermarket buyer who will be dictating terms and conditions. The farmer has
no time to waste satisfying himself that the gang is a legal and properly
paid group - though many are, so this must be pre-ordained through an advance
approval and authorisation system, which is in turn audited with the payment
made by the farmer. Such a scheme will protect honest employers, and also
the farmer who uses them, and drive out of business the exploiters. At the
same time the record of the crop can have the labour accreditation "attached"
to differentiate it from lower cost produce that may not have been ethically
Let us briefly consider that supermarket buyer, somebody with
immense (and currently uncontrolled) power at a time when Tesco receives one
in every eight pounds spent in Britain, and where Walmart alone has more
purchasing power in China than the ninth largest country they deal with.
Today they dictate the terms, totally. Of course, it is unconstrained
capitalism at work, with competition existing to provide the consumer with
the lowest possible price, yet maintaining the highest possible margin for
the retailer. I do not expect anybody here to be unaware of where this
squeeze on margins finishes, it is inevitably the producer who suffers, and
who can blame them if they turn a blind eye to cheaper pickers, I would -
providing I could get away with it.
Which brings us to the
legislators, and the increasing industry surrounding consumer rights. None
of us would willingly welcome the intrusion of yet more regulation, but again
my case has to be that it is going to be inevitable, and we will only limit
the impact on scarce time and resources by accepting and adopting automation
of procedures. The single major thing that any Government hates most is the
loss of tax revenue. Now, any objective analysis of this talk is going to
very quickly determine that prices will go up, and it will be the consumer
who pays. If tax is currently not being paid, then it is not in the cost,
and thus not in the end price. To recover the tax, Government must directly
legislate to increase prices. But that is not what Governments do, because
it loses votes. The answer is to seek popular approval for the
implementation of regulation for other reasons - and the anxiety generated in
the public mind by issues such as "illegal immigrants" and "exploitation" are
sufficient camouflage for their real purpose. So expect them to demand
"proof" that crops have been picked by approved (that is tax paid) labour.
Expect them also to limit their cost of collection by placing the onus on the
retailer to prove it, and therefore - by extension - expect an "attached"
proof to become a new condition within the buyers terms.
conference has already heard a great deal about the mechanics of electronic
trade, and Comdaq are totally committed to the matching of buyer and seller,
whether exclusively or through an auction style mechanism. The commodities
industry has been very slow to adopt these techniques, preferring the old
ways, and I do accept that many of you can create your trading relationships
effectively on the phone. But my brief is to alert you to the future
economics surrounding the supply chain itself. We contend that you have to
start with a reliable record of trading parties and counter parties, and that
our form of exchange structure is essential to provide a trusted and closed
user environment. It is not that people cannot join, but it also then
requires them to establish a trusted relationship with other players, and if
they abuse that trust - then they can be expelled.
So the supply chain
starts with a contract, within a disciplined closed user group. Ideally I
would like to see the contract negotiated electronically, but if you have
agreed it over the phone, then that is OK, just enter it afterwards. Your
first benefit flows from being able to exchange content, so that only one
side has to type it in, no errors are made in transcription, and the data can
be reused by back office and ERP systems without duplication. To small
producers talk of ERP systems may sound ridiculous, but that is not the case
with your macro customers, indeed I expect an increasing demand from
organisations (such as Kraft foods) to require an electronic interface for
their back office, which is the opportunity to stress the point behind all
automation, and that is the ease with which you can re-use the data,
programmatically, providing it is captured in the first place. All my
subsequent talk on supply chain management is related to adding and using
information, at less cost in time to you and other participants in the
I wonder what delegates think is the most important aspect of the
supply chain? How about getting paid?!! That is what it is all about at the
end of the day, is it not? Payment depends on meeting agreed terms
and conditions of the contract, and I would like to come back to that in
a minute, but let me first deal with the money. In situations where you
have long term supply agreements, then you probably have dedicated
arrangements involving credit and cash flow that you are perfectly
comfortable with. Good information can only make that relationship better,
but automation is not going to provide you with anything to displace the
established history. But it seems to me that the whole world is moving away
from those trusted relationships, as I said at the start, and the only
current option is the letter of credit; something that is expensive, time
consuming and inefficient for all parties, especially the banks.
happy to announce, exclusively to this Conference, that Comdaq have created
another option, in essence an "on line" letter of credit. By agreement with
Fortescrow.com the agreed contract can include staged deposits of funds by
the buyer, which are finally released to the seller, and any other providers
within the supply chain, such as a shipper, when the buyer releases the
payment on acceptance that the contract has been fulfilled. In the time
critical world of fruit and vegetables the speed of execution of this payment
mechanism will allow consideration of trading options that would never have
been possible with a letter of credit, and I hope that this announcement will
lead to adoption by many of you attending today, thus delivering on
FReLECTRA's second objective of introducing and promoting new and innovative
Returning then to the online contract, if you
are using it to contain all the terms and conditions of supply that would
have been the essence of a letter of credit, then there are many more
"supply" issues that need to be contained within it. We do not have time to
go into every last detail, so I will not labour the obvious points that this
audience will be familiar with. Clearly inspection will form part of most
contracts, and on line certificates are increasingly available from the major
inspection firms. Trucks, ships or barges can be nominated, tracked and
monitored as necessary, all the technology is available to add this in,
though the transport industry has some way to go before the promises of
automation are totally fulfilled. Because speed is essential in perishable
goods, or the maintenance of accurate temperature control, then both subjects
can be recorded for analysis, proof of performance, and evidence of fact at a
later date if necessary. If any warehousing is involved, then I think
the developments that are currently leading to the securitisation of
warehouse depositary receipts are particularly interesting, especially in the
trade finance arena, but - whilst such moves dictate once again the adoption
of electronic recording - they are not strictly supply chain issues, and
for another day.
For the issues I feel we need to introduce I must
return to my title, and thesis that no modern supply chain can be based on
trust, and it will be legislators and regulators that impose overheads on us
that will require proof, because the retailer will be held legally liable for
any claims made for the produce. How do you confirm whether or not your
produce is organic, or free of Genetically modified influences, or are you
proud to claim that GM production creates a better quality product? Can you
prove that you have followed relevant ethical guidelines in production,
whether that be religious or statutory diktats? Where is your evidence that
you have only employed authorised pesticides?
We are all aware that
regulation breeds avoidance and cheating as a corollary, but it is geared to
the protection of the genuine producer, and efforts to avoid the law will
lead to yet more determined conditions to impose discipline, we have seen
that in every arena. It means that the producer will have to create a prime
record for their production, and then "attach" that to all subsequent
transactions, providing an audit trail that contains the full record,
automatically and instantly. Any other approach will bury them in paperwork,
and expose them to subsequent challenge which will be equally time
I wonder, when you read the agenda, whether you thought of
such things as being part of the supply chain? If not, and if you believe so
now, then this conference will have fulfilled a part of its mission. We live
in an age of automation, litigation and consumer rights, where the producer
has no vote, and negligible power compared with the retail lobby. However
much you may regret the passing of trust and trading with established
relationships, the expansion of world trade and consumer rights legislation
will not allow it to continue. Your future protection is contained within
the broad subject of e-commerce, where automated support answers the
requirements of bureaucracy, whether from the state or the customer - often
at the behest of the state. The supply chain ends when you are paid, giving
you the means to do it all over again, and the producing industry will have
to use the tools provided for them to make sure they get their money.
Whether or not you consider that to be "progress" on a personal basis is an
issue I will not discuss, I merely present the future as I see it, and the
essential role that automation plays in the supply chain.
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Purpose of plan
Few people within commodities will need to be told that defaults are the scourge of markets, most often caused by fluctuations in price – created by market forces that used to be managed by Government control, but which are now free to respond to supply and demand. World markets are in a state of flux, having lost the certainty of support pricing, yet lacking the trust structure that allows a free market to operate responsibly. To move towards trust is the intention behind Comdaq’s latest initiatives, together with the ultimate aim of guaranteed performance.
The one absolute certainty is that all market operators will wish to see trust and guaranteed performance, except when it does not suit them. Sorry guys, the first building block for everybody reading this is to be clear that rules apply to both teams in a game equally, and for that to be a fact a referee is required. Nothing can MAKE you obey the referee, except that if you do not do so you cannot play the game. Thus the first starting point is an information system within Comdaq that will apply a performance index to both sides of the contract. You are totally free to accept, or reject terms until you agree a contract – but once having done so, participants must perform to its terms, including delivering the correct quantity and quality specified. If they do not do so, then a negative report will be placed within the record of that body. It can only be accessed by registered members through interaction with the Comdaq brokers, but will assist participants in their decision making.
This achieves three objectives. First it identifies reliable operators from the unreliable ones, even if buyer and seller are unknown to each other, speak a different language, and are on opposite sides of the World. Second, it ensures that there is a reason to keep to a contract which is likely to ensure that more people do so – whereas there was no sanction and no information in the past – which had to mean that even the best connected party was tempted to default. Finally it will identify those who are genuinely able to perform, thus isolating the opportunists who waste so much time, and removing them from the trading picture. Comdaq recognise that this initiative will not be welcomed by the last category, but actually expect to offer more opportunity to the genuinely effective entrepreneur, who will have a structure within which to support agreements that have utilised their skills. The temptation to bypass an introducer as soon as the counterparty is identified is another factor that damages trust, and Comdaq believes that a market is better served by having effective intermediaries, who provide genuine service support, than to be without them.
Who can supply, and where is the demand? If these questions can be answered in a structured manner, then market planning is considerably advanced. For large bulk cargoes, starting with Iron Ore, Comdaq will commence to offer a forward contracts structure from 14th February. Comdaq believe that only about 10% of Iron Ore supply is “free”, since 75% of world supply is managed by three macro suppliers, and the balance is controlled by direct government contracts. With a current strong steel demand this 10% is very volatile, and has brought new and untested providers into the market place. Other products, such as steam coal, are likely to have similar characteristics – yet variances – so this paper will concentrate on Iron Ore as being indicative of the operating methods.
Leaving aside price for the moment, the two restraints to delivery on a contract are both logistic. The seller has to deliver the fines (or lumps) to a port, and the buyer must have access to a ship to move it to their destination. Weather factors can have an impact, you cannot move fines during the monsoon season in India. The Comdaq program will build up a model and create provisional contracts based on predicted availability and predicted need and seek to project a percentage of certainty to completion for the guidance of both parties. Forward contracts will only go “firm” when a ship is nominated with a clear date set, and the seller warrants that the material will be available within that loading time. Comdaq will seek to assist with the arrangement of the shipping contract.
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Of course price is perhaps the most contentious of issues, concern as to whether it is “right” being a major cause of default. The forward contracts will accept a number of indicative pricing methods, from the freedom to mutually agree a firm future price (following the pattern of the volume market) or a price at “market” on a given day. To assist the latter Comdaq will publish a daily price on the open offers page based on supply from Goa as an FOB price, and a C and F price Goa to Tienjin – with indicative differentials for other locations and ports. (Please follow the link on the page to see the underlying basis.) Whatever is agreed between the parties will be “firm” once the contracts are exchanged. This price will be calculated from three components. First, an actual current market price; second an element of “view” derived from the forward book; finally any correction factor provided by a swap transaction (see Swaps below.) May we repeat that nobody will be compelled to accept this index. As you will see from the paragraph on risk management below a price based on the LME hot rolled coil contract may be equally relevant. The only compulsion is that once the basis of pricing is agreed as being “firm” it is not changeable, and must be complied with.
Once a contract is “firm” – or perhaps even prior to that – a party to a match may seek private negotiation of a swap of their contract. This will not be a traditional paper market, but will be conducted on a best endeavours basis, and subject to acceptance of any credit risk between the parties. It may be possible to move swaps onto a stronger and more structured basis as the market develops, but first a basic harness and discipline must be put in place.
It is expected that payment will initially follow the traditional letter of credit, with the pricing basis being set sufficiently far forward for the buyer to have the opportunity to deliver the LC from their bank in due time. However, proven transactors will be offered the option of settlement through Fortescrow (www.fortescrow.com) with the additional prospect that the buyer may release funds in advance of delivery, secured upon product, and subject to an interest charge payable to the buyer. Such a mechanism will increase certainty on both sides of the transaction and assist in financing without loss to the buyer, and in circumstances where other trade finance may not be available. It must be stressed that such benefits can only flow from well established market discipline, which in turn can only be created by adoption of the procedures set out in this paper.
Carriage and freight is every bit as important a component of price as the supply, and absolutely critical to the logistic acceptance of a contract. Comdaq will seek to interact with established ship brokers to ensure the earliest possible planning basis for nominations and best price routing of ships where a degree of pre-planning makes this possible. Links will also be provided over time to ensure the booking of port and truck capacity in line with delivery dates.
The entire purpose of all these mechanisms is to reduce risk through information, advance planning and the qualification of market participants. Taken in combination it will allow the market to develop a “membership” of proven transactors who over time may wish to consider a stronger basis for their market. The ideal would be to create sufficient strength to design a futures contract which would allow further removal of price uncertainty through deployment of traditional hedging techniques. Until such a contract becomes available there are various steel based futures, such as the LME hot rolled coil contract, and since demand for iron ore is almost entirely linked to the health of the steel sector it is likely that this contract would provide a strategy that would hedge against a collapse or unprecedented demand. Comdaq will seek to provide a link to appropriate derivatives markets to assist its registered participants.
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A market that is organised, disciplined and reliable can benefit from the ability of serious fund providers to take a position. Depending on your view, such activity may be seen to be balancing, or speculative – but it is undeniable that the liquidity available from such funds is bound to make the market more strongly based, and speed the adoption of derivative instruments – thus smoothing many of the elements that make decision making so difficult at the moment.
The dream of every seller is that their contracts will be guaranteed, and their price will be at “best”. Similarly every buyer of commodities has an underlying production need behind their purchase, and orders must be filled – whilst buying at a predictable forward price. As Comdaq publish this plan we are a “long march” from delivering on this ultimate objective, but all readers will recognise that the steps being taken lead towards that goal. Guarantees can only exist where there is reliability, uncertainty on price can only be removed if planning and hedge instruments can be deployed. Once properly ordered a market can regulate itself, and offer compensation funds and provide for delivery acceptance against a contract. As Chairman Mao is famous for quoting, “a long march starts with but a single step”. We are taking those first steps, but with a clear goal at the end. The path may not always be smooth, and doubtless it will prove that many drop out, but the belief must be that the final destination is worth it.
By registering your forward product requirements or availability with Comdaq, initially in Iron Ore, you take the first step towards the creation of trust and discipline between trading parties who prove their reliability. The provision of price, settlement and risk management options will increasingly smooth the current risk within the market, allowing the entry of investment interest and the creation of supporting derivative instruments. An additional benefit may be stock financing where trade finance is not available. The eventual target is to create an exchange structure which is able to guarantee delivery.
Enquiries, more information, please email email@example.com
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At the sixth annual Asia International Rice Conference, Alistair Mcluskie, Head
of Comdaq Rice, delivered the following paper
Is the internet relevant for your business, by Alistair McLuskie
Today, all aspects of the rice trade are represented here. We have Exporters, Traders, Brokers, Importers, Distributors, and Inspection companies. And I hope to show in the next few minutes that the internet is relevant to all these different parts of the trade.
Firstly I will briefly explain what the Internet is, then what it means for business, in general, what it means for the Asian rice business in particular, and finally a brief look into what the future will look like.
WHAT IS THE INTERNET
The internet is a network of networks, it allows computers to talk to each other. So what you have in your computer can be transferred to any other computer. The most common applications are the email and the web site. With the email, you type a message on your screen, give instructions as to where this message should go, and it comes up on that persons screen. A web site is a combination of different web pages, where you can put up information, and instead of giving instructions as to where this information should go, prior access is given to people who then retrieve this information. This access is controlled by issuing passwords. A web site can also have software programs inside it to transfer information just like a software program in your computer.
The internet is not actually that new. The first network of computers was developed in 1962, and the first email program was developed in 1972. By 1990 most of the major International Trading companies had their own private email system.
What is new is the high speed and low cost at which this network of network operates. Recent technological developments have meant that the internet is now available almost anywhere in the world.
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WHAT DOES THIS MEAN FOR BUSINESS, IN GENERAL
It breaks down barriers to communication. Having a network of networks means that a business can communicate from A to Z instantly. It also means that they can greatly increase the access to their information, but always under their control.
The retail business is a good example of where the internet brought enormous benefits, as it enabled the companies to communicate directly with their customers. Huge savings have been made in retail banking, where in the US a recent study showed that the cost of processing a payment is
USD 1.25 over the counter
54 cents over the telephone
24 cents through an ATM machine
and 2 cents over the internet
In Europe when the new lowcost airlines set up, they started by putting their telephone number on the side of their planes. Now they have their website and they give you a USD 10 discount if you book over the internet, which is presumably because they are saving USD 10.
Amazon.com the internet bookseller has increased the size of the market in the UK by 10pct, through making buying a book easier, and by getting closer to their customers.
So the internet creates efficiency in communication and reduces costs. It doesn't necessarily make the product or service better or cheaper, it just improves the communication. In fact it is a tool to assist you in your business, it will not necessarily create an alternative way to doing your business. It is very interesting to note that broadly speaking, the companies that have benefited from the internet today are those that were already established in their particular line of business and have used the internet to create a better business, rather than those companies who saw the internet as a way of creating new business practices and attempted to use the internet as a way of entering a new business.
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WHAT DOES THIS MEAN FOR THE ASIAN RICE TRADE
Let us take a brief look at the Asian rice trade, breaking it down into its separate catagories. Trading is basically either FOB, CNF, or distribution, which tends to be ex-warehouse for the breakbulk and retail distribution for the packaged products. I am just going to look at the FOB business and packaged distribution business, because the CNF and ex-warehouse tends to be in Africa where internet access is not that good.
Trading rice FOB involves the following:
Now some of these areas are purely about communication, and to do them efficiently you need the most efficient form of communication, which, I would suggest, is the internet. Some of these areas have nothing to do with communication and are about knowledge, relationships, physically doing the job. The internet can only be helpful to those functions that are concerning communication.
- Having market information and analysis
- securing reliable buyers
- securing reliable suppliers
- servicing these buyers and sellers
- negotiating the contract
- executing the contract, both physically and contractually
- financing the contract, both negotiating and executing
- receiving feedback from your customers
I would suggest, that from the above list, these are
The internet, through providing more efficient communication, can help in these areas.
- Having market information
- Servicing the buyers
- executing the documentary side of the contract
- executing the financial side of the contract
- receiving feedback from your customers
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Creating a network of networks, linking computers together so that they can talk to each other, has greatly increased the availability of information. But it has done nothing to the quality, or analysis of that information. It is like selling books over the internet, they might be selling more books, but it doesn't mean to say that they are better books.
Most people think that the role of the internet is to pass more information to more people. I think that the value in this is limited unless you actually do something with the information. People say that market transparency has increased due to the internet, which may be true, but it is not the only value of the internet.
SERVICING YOUR CUSTOMERS
This is where the internet has a real advantage, because it reduces the costs. Today communication with customers is by telephone, fax, sometimes email. Now a lot of that communication has to be interactive, you are building a relationship, can learn from the tone of the conversation. But a lot of the communication is just passing information, prices, market developments, competition's activity. This can be done over the internet by email or on a web page.
The cost of an overseas telephone call from Asia is about USD 1 per minute. The cost of gaining access to the internet varies from country to country,
In Thailand it is Baht 8 per hour or from Baht 1500 per month That's 30 minutes on the phone.
There is a huge saving to be made by separating the information you send your customers into what needs to be direct and what can be indirect..
From the buyers side, he might want your information, but not at the time that you are giving it to him. How do you know when is the best time to catch him, when he is going to be the most receptive. How often have you spoken to a buyer or seller and you feel that he is not actually paying any attention. His mind is elsewhere, while he wants to hear from you, now is not a good time. Put the information on an email or a web page, and he can read it at his leisure.
For the inspection companies, cargo information tends to be on a spread sheet sent to the buyer. Why not put it on a web page, so that all interested parties can see it.
It is also proven that people take in 5 times more if they see it than read it. Which is why I am putting some of my comments up behind me.
I am not saying stop using the phone, I am saying think how much more efficient for you and for your buyers it is if, for some communication, you use the internet.
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EXECUTING THE DOCUMENTARY SIDE OF THE CONTRACT
Today, in order to execute a contract you need to physically receive the notices, and raise the documents. Each contract probably requires a folder one inch thick to store all the paperwork. The documents have to be passed from one office to another, it takes time. And this folder can only be stored in one place, usually the office.
Well what if all these notices, documents, were all stored on a computer. Accessible by you, your customers, your colleagues, moved from one office to another instantaneously. That is what the internet is all about : network of networks, computers talking to each other, accessible by all.
It would make your business, both for the exporters and the buyers, much more efficient, you would save time, you would save costs. It costs about USD 100,000 to employ a execution clerk in Europe - how much of their time is spent in chasing documents, getting changes made, putting them in the right order. A lot of this could be done more efficiently across the internet.
There is another point. Accessibility. The internet allows you to view the information from anywhere, when you are traveling, at home, in another office. There are two things here :
1/ How many traders amongst you when traveling, spend the evening in the hotel calling the office to check on the progress of the execution of various contracts, with one eye on the clock to check whether your people are still there. This could all be accessible to you across the internet, on your web page, waiting for you to view it when you want to.
2/ It costs USD 100,000 to employ an execution clerk in Europe, probably USD 50,000 in Singapore, USD 15,000 in India ? The internet offers accessibility, you can put your execution off-shore.
But again, I am not suggesting all your execution, or all your clerks can be replaced by the internet, just some of it. It is the same as servicing your customers : how much more efficient it could be for you, if you put some of your execution across the internet.
EXECUTING THE FINANCIAL SIDE OF THE CONTRACT
Today, in order to get paid, you have to physically present the documents to the bank, they might then have to present them to another bank. It takes time getting the documents to the bank, or from one bank to another, and it takes time for each bank to check them.
All this could be done on the internet. The documents could be placed on the internet, and the relevant parties view and authorize them there. Could take one day, as opposed to two or three days per bank.
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RECEIVING FEEDBACK FROM YOUR CUSTOMERS
I don't think in the Asian rice trade this happens much. The Exporter prepares the cargo, loads the vessel, and cashes the documents. How often do they ever get any feedback from the final customer as to whether the cargo was up to expectations, the bags were in good condition or the bag marks were what they wanted. Not very often, yet it could be useful information when preparing the next cargo.
One of the reasons that they don't get this information, I suspect, is because it is anecdotal. Just word of mouth, and lost in the general conversation. Well with the internet, the final customer could put his comments on a website as and when he makes them and the original supplier could view them. Nothing contractual, just passing information.
For the Packaged Distribution business, and the fully integrated Supply Chain business, the functions are essentially the same, and the role of the internet is the same. There are the 5 main areas that we have discussed
plus recording any stock levels in the distribution chain. In a fully integrated supply Chain business, it is easier to realise the benefits of the internet as there are no third parties involved and a lot of the documentary and financial side can be done on trust.
- Having market information
- Servicing the buyers
- executing the documentary side and the financial side of the contract
- receiving feedback from your customers
I have outlined some of the uses of the internet for your business, whether you are an Exporter, Trader, Broker, Importer, Distributor, or Inspection company. But the internet can not be applied to all of these functions today, because the trading practices of the market do not allow it.
Specifically, the presentation of documents and transfer of funds is not permissible over the internet today. However receiving information, servicing your customers more efficiently, exchanging notices, and receiving feedback is all possible over the internet and those benefits are there for you to take today.
But what about the benefits that I suggest will be there tomorrow ? Is it necessary to bother about those today ? I think so, because with the pace of technological development, tomorrow will be here sooner than we think. If fact we are getting closer to presenting documents and transferring funds over the internet. We will here shortly from Dominique Ottevaere what SGS is doing with regard to electronic documents, and the main Trade Finance Banks in Asia are offering their clients the ability to check their documents over the net.
So the internet is evolving, and more importantly, the uses of the internet are developing quickly, and it is important to keep up with these developments. You don't want to be left behind. Look at the airline industry and book selling that I have mentioned before. The new low-cost airlines in Europe came in using the internet as a marketing tool and very quickly took 20pct of the market. The established airlines are now imitating them, but they are coming from behind and are having to catch up. In the US the established bookstores let amazon.com gain significant market share, before setting up their own websites.
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WHAT WILL THE FUTURE LOOK LIKE
From the outside, it will look the same : prices fluctuating, over buying, over selling, high stocks, low stocks, building upon some relationships, losing others, some months will be good, some not so good. But from the inside you will be doing your business with better communication, less paperwork, and from a lower cost base.
From the Exporters and Brokers point of view, you will be able to
All at the cost of a local phone call
From the Traders, Importers, and Distributors point of view, you will be able to
- reach all your buyers at the click of a button
- get your name and your product in front of your buyers every day
- receive feedback from your buyers
From the Inspection companies point of view, you will be able to
- know what your suppliers are saying at the click of a button, wherever you are, whenever you want
- have all the execution details of all your contracts in one place, but accessible from many places
- run your business from a lower cost base
And for those in a fully integrated Supply Chain, you will be working with all the information in one place. So as well as the rice flowing smoothly from the origin to the final destination, all the information and execution functions will flow smoothly from beginning to end.
- increase the access to the cargo information that you give
- put all the documents in one place for checking and amending
So in conclusion, the internet is
- a tool to assist you in your business
- it gives you greater access to your customers
- it allows you to follow your business more closely
- and it reduces your costs
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||At the inaugural Aromatic Rice Commerce 2001 conference held by IBC in Dubai 29/30 April, Alistair McLuskie, head of Comdaq rice, lead the panel session on "e-commerce in the Rice Industry" ' Here is the paper that he delivered|
||WHAT DOES THE 'e' STAND FOR IN ECOMMERCE?
I want to ask the question: "What does the 'e' stand for in e-commerce ?".
Does it stand for:
I don't think so. Business is never easy, especially the rice business.
With globalisation and the development of the internet, business, if anything,
has become less easy.
Well, the rise and fall of the internet companies has certainly been exciting,
but that was not their purpose. You could say that the rise and fall of these
companies has been Enjoyable, as they started out telling everybody what they
were going to do, with the expectation that the 'old economy' would follow, and now
a lot of them have disappeared but the 'old economy' is still in place doing what it
has always been doing .
But exciting or not, this is not the reason to be in business.
Possibly, we are getting closer.
E-commerce enables business to perform better. E-commerce is a service, an addition,
to existing businesses. It is not a substitute for existing businesses and, by itself,
e-commerce is nothing. E-commerce does substitute some functions within a business,
and that is where the value lies, but it is not a substitute in itself to existing
This is what e-commerce is all about.
Business Efficiency. Whether it is about finding new buyers or sellers, passing on
information, or improving the operations process, e-commerce is about creating and
improving business efficiency.
I would like to spend a few minutes discussing this. Firstly, I would like to offer
a definition of Business Efficiency, then show where e-commerce is creating
efficiencies in other businesses, and finally explain how it can create efficiencies
in your business.
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Business efficiency is where all the functions are carried out perfectly at minimum
cost. How do you achieve this ? You achieve this by automating the process, and
having it done by a machine. The gains from such automation are that it tends to be
cheaper than employing people, and that there are no mistakes. It also relieves
people to be used for more creative purposes.
Lower costs are what most businesses are aiming for these days. Increasing revenues
is becoming more and more difficult, so reducing costs is the key to increasing
BUSINESS EFFICIENCIES THAT ARE BEING CREATED IN OTHER INDUSTRIES
The best example is in banking. According to the magazine Businessweek, the cost of
an individual banking transaction in the US is as follows :
across the counter USD 1.25,
by phone 54 cents,
by ATM machine 24 cents,
and by internet 2 cents.
I now do all my banking on the internet. If I want to transfer money I used to have
to get in the car, go to the bank, initially queue to talk to a cashier, but latterly
queue to "talk" to a machine, get back in the car, and go home. And all of this had to
be done during a time that suited the banks. Now I access my account from my home or my
office in a place that suits me, at a time that suits me. It benefits both me and the
Another example is buying airline tickets. In Europe we have a low cost airline that
aims to sell its tickets on the internet. They give you a 5 pound discount if you buy
the ticket over the internet. This isn't because they enjoy using the internet, it's
because, presumably, they save more than 5 pounds by selling over the internet. For
them it's efficient.
Now you are going to tell me, "That's fine, but that isn't the rice business. The
examples that you have given us refer to businesses with huge markets, huge opportunities
to cut costs, dealing in a homogeneous product that can be bought and sold with a piece of
You are right, my examples refer to markets that have few similarities with the complexities
of the Aromatic rice market. But I am not selling a product, I am selling a concept. And
the concept is that of bringing efficiencies to your business. Where we bring these, and
how, is the key. The commodity business, with its physical delivery of goods, with the
goods being naturally grown rather than manufactured, is more complicated than transferring
money, or selling airline tickets. And that is the challenge facing the e-commerce companies
involved in the Commodity trade today.
We at Comdaq are meeting that challenge in the following ways:
Firstly, we are a blend of Technicians and Commodity Market professionals. In fact
Comdaq is a software house with 25 technicians based in Pune, India and 10 commodity
professionals based in Europe. And in between we have 3 translators, because I can assure
you that commodity traders and computer technicians don't speak the same language. In fact
I am on my way to Pune, so that I can better understand the scope and potential of the
technology that we have.
Secondly, Comdaq is in the business of selling a concept, not a product. It is up to the
commodity professionals to translate that concept into a saleable product that brings value
to their particular commodity, and revenue to Comdaq. The value is business efficiency, and
is brought to different commodities in different ways. Comdaq has a total of 15 exchanges:
amongst them a Precious Metals Trading Exchange, a Soya Bean Meal Trading Exchange for
imports to Europe, a Coffee Auction Exchange for exports, and most recently, a Rice
Process Exchange for the origination of rice in Asia for Africa.
All these are different exchanges, bringing different values, but highly focused on the
requirements of the individual commodity. And they are all built by the same technicians
with the same aim in mind: bringing efficiency to business.
Finally, Comdaq is spreading itself over as many commodities and trade flows as possible.
That way we can spread the development costs, thereby reducing the development cost and'
therefore, the charges per commodity. It also means that we can afford a few failures,
which when you are developing a new business, are bound to happen.
Now, if you accept the concept, then it's up to the e-commerce companies to produce a
product that serves your business, creates value for your business, and together we can
grow and take advantage of the benefits of this revolution in technology that is happening
all around us.
Which is precisely the reason that I am here today.
So far on rice Comdaq has produced a Process Exchange for the Asia / Africa trade flow.
Very briefly, we are aiming to automate the process of procuring rice at the origin,
from receiving the market information, through monitoring the preparation of the cargo,
to loading and sailing the vessel. There are 13 steps in this process and we maintain
that 8 of them can be done across a Comdaq network with all the instructions and
information being available on one web page.
Why have we focused on this particular trade flow ? Because, quite simply, this is the
trade flow that I know. I have worked it for the last 5 years, I know the people
involved, the parts that are easy, the parts that are difficult. As I said before,
Comdaq takes on Commodity professionals to translate the concept into a useable product.
I don't know your trade flow, but from what I have learnt in the last two days, I can
see there are some areas where the technology could bring benefits.
There are two other words that the 'e' in e-commerce stands for :
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When I first met Comdaq, the Development Director told me to imagine a football game.
"Yes, I can imagine that", I thought. Because I was a bit nervous; I am not a computer
buff. I didn't really understand the technology behind all this internet stuff.
"The crowd arrive in the stadium" he said.
"Yes, I can see that".
"The players run onto the pitch".
"Fine, I can see that"
"The referee blows his whistle".
"And the game begins".
"Great", I said
"We have not even entered the stadium
" the Development Director said.
And that is where e-commerce is today: we are at the absolute beginning.
When I am selling our Process Exchange, I explain to the traders that we can automate 8
out of the 13 functions. Ultimately we will be able to automate all 13. When, I don't
know. It depends upon how quickly other aspects of the trade catch up, and how quickly
technological advances become more cost effective.
To get back to my original example of banking. How would the sellers amongst you
appreciate a system where you debit your buyer's account for your payment? Or for the
buyers amongst you, how would you appreciate a system where you create the necessary
documents for importation? In Europe our household service charges, such as gas,
electricity, and telephone are all debited directly from our accounts by the respective
service provider. Why not in your business as well?
In your particular business, Aromatic rice from Asia to the Middle East, Europe and
United States, how would you like a system which tracks the daily movement of each
container? So that every morning you can see on a map on your computer the exact
whereabouts of the container. Is this possible? Of course it's possible. Is it possible
today economically? I don't have a clue, but if that's what you want, that is what we
Last week, the Head of Programming for Comdaq told me to stop promising to take my
clients to the moon and back. I said I wasn't promising to take them to the moon
taking them to Mars.
But back to today.
The 'e', of course stands for electronic. But about that I can't tell you anything,
because I am a commodity trader not a computer technician. Perhaps after my trip to
Pune I might be able to explain some things, but somehow I doubt it.
So, Ladies and Gentlemen, I leave you with the thoughts that actually e-commerce is
- enabling you to do you business
- creating efficiencies in your business
- and it is evolving in such a way that we do not know today what value it will bring
to your business tomorrow
but if you give us the opportunity, we will create a system that allows you to
participate and reap the benefits of e-commerce and the internet.
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Neil Grover is head of the Comdaq Precious Metals and Platinum Group Metals. Comdaq.net, (Commodity Dealers
Automated Quotations Network) for trading commodities online, offers marketplaces in agri-commodities, precious
metals, and fibers and yarns. Grover has been a broker and trader in the precious metals industry for 21 years.
A B2B Voice Brokers View on Liquidity @Markets Mag - January/February Issue
We are an online physical commodity exchange that has extended itself, as of January 16, to a traditional
brokerage role within the precious and platinum group metals industries. The metals we cover include gold,
silver, platinum, palladium, rhodium, iridium and ruthenium. We trade both physical platinum and metals,
and what is termed unallocated platinum and palladium, all on a swap and forward basis. We also are fairly
active in location and quality swaps. In time we will have 12 trading vehicles within our precious metals
system. Were both a voice broker and an Internet trading engine. Although using voice brokers was always
part of our business plan, it was just implemented in mid-January.
We incorporated brokers into our business plan because in order to make the Internet successful, it has to
be aided and abetted by traditional methods. You cannot ignore the traditional methods. The businesses we
are involved in are people businesses. The Internet will slowly come into fashion when the customer base is
comfortable with it, but it will take a lot of handholding. Of course, the one thing people can do that the
Internet cant is take note of potential interest and revert to people when they are interested in a market
on the exchange. And that possibly is something where a number of Internet sites have failed. They expected
business to naturally gravitate to a low-cost medium. We have the technology, but we will not turn our back
on the way the industry likes to do business until the industry is ready to move and that will be a gradual
processwhether it is two months or two years is of no consequence to us.
We are both hiring brokers and partnering with existing broker groups. Currently we employ four people in
London as voice brokers between 7:00 a.m. and 7:30 p.m. As demand dictates, we will either extend our hours
or expand geographically.
The measure of successful markets is not liquidity; its price. It may be liquidity in certain industries,
but I believe that the price is more important to the deal than the actual depth of the market behind it.
Were not in a futures market situation here. Were dealing in a physical commodities environment where people
are looking to place specific quantities of metal at a prescribed price. Its the price that is more interesting
to them than the fact that we have, at the moment, 10 tons of gold interest on the site. It is completely irrelevant
if you cannot transact at the price. People tend to say whenever you make presentations that its all about
liquidity, but I believe that is just a statement made by people looking for excuses. Everybody is quoted that
they want liquidity on their site, but, I want transactions. If you can put deals together, you can generate a
lot more interest than if you dont. Liquidity stems from price.
||- (by Neil Grover) you can also see this article at
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A briefing on the security of data, by Colin Howard (15th-Oct-2001)
There is a myth that data controlled on your own server is more secure than
a professionally controlled "central" database. In fact, unless you are
spending millions maintaining your system, the reverse is likely to be true.
They key to this starts with the resources you have. Do you really believe
that you have all the very latest and most expensive firewalls, virus
checkers and anti hacking procedures in place - and do you have staff
constantly ensuring that is so? Indeed is your system truly resilient?
Because an inability to access your information is almost as bad as having
it stolen by a hacker.
However, that is not the greatest risk area to your data. That comes from
an analysis of those who would most benefit from gaining access, and the
answer to that is often quite disturbing - because it is from your own
internal staff that the greatest threat is often presumed to come. An
employee does not have to be disaffected to steal your information. They
may be planning to set up their own operation, or seek employment with a
competitor. Would you value a new member of staff who could "bring
something with him"? Realistically, you know it happens.
By contrast the central operation can only exist through an ability to
provide a totally resilient and secure centre, and their reputation will
only survive if they do ensure that effective "chinese walls" are
maintained. This is actually easier centrally. First, the software has to
be written properly, so that the password and user name access structure
does work - but that is now well proven technology. Secondly, the acccess
rights can be limited by your own adminstrator - and an audit trail of those
accesses is available, so nobody can "look" without authority and your
knowing. Finally, only authorised elements can ever be down - loaded, so an
attempt to copy, say, the customer database will fail. Add to that the
knowledge that the anti-hacking and virus control standards will be state of
the art - and we would suggest that you will have greater control of your
data in this environment.
Of course it is true that if something goes wrong with your data - an input
error perhaps - then it has to be corrected, and that means that "somebody"
who is not in your employment has to have access to "your" data. Three
issues there. First, that "person" is going to be an engineer - who is most
unlikely to understand what the sensitivity of the data is, or at least in
comparison with a trader. Secondly, the central provider will offer you (if
you ask) a second level of password confirmation, which would mean that even
an engineering access cannot be conducted without your specific consent.
Finally, with or without this latter protection, all accesses are logged and
can be reported on. The central management will be controlling those
accesses as part of the maintenance of their own credibility, but if you
were concerned then you could ask to see that too on a regular basis.
You may have already recognised that we have given you more indication of
reporting and risk management control from the central operation than you
currently have considered asking for if you manage your own data. We hope
that dispels some of the myths!
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Flea syndrome, Comdaq's place in the chain, (Comdaq Ltd., 19th-Oct-2001)
It is most unfortunate that an industry that seeks to sell "change" to
people inexperienced in the use of "IT" makes it sound so complicated.
This paper seeks to remove some of the mystery, and put the various
acronyms used within their context. It is to be hoped that readers will
find that they DO understand the application to their business, and they
will recognise that is all they need to understand!
The first principle is to define the achievable boundaries. What does a
particular expression actually MEAN when applied to a business, and what
good does it do? Together with that comes the first bit of advice, and
that is to reject anybody who tells you that they can do "everything"!
As a technical intellectual exercise it may possibly be true, given an
unlimited budget and time, but since both are scarce resources in any
business it has to be better to buy the right product, from the right
supplier at the right price so that it is delivered on time and with
minimum disruption. Hence the title, following the ditty..
Have little fleas
On their backs to bite them
And little fleas
Have smaller fleas
And so ad infinitum!
If you accept this reality, then you will choose the right "flea" for
the job. You will not be conned by the "standards" industry who claim
that only they have the answer, nor will you end up with an overwhelming
leach which will just suck your business dry. In this context Comdaq is
one of the smaller fleas, but we will come to that later.
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The first, and most basic "flea" is the initial use of automation in a
business. This started, generally speaking, with an accounts package
(especially concentrating on credit control information), followed by
payroll. Then we started talking about targets, and management by
objectives - which needed to be defined and measured so that they could
be reported on. As it became more sophisticated it involved all
elements of planning the resources of the enterprise, so to call it
Enterprise Resource Planning is pretty easy to understand. "ERP" was a
natural acronym, but not very helpful if you just say that, and don't
explain what it means!
What happened was that a number of mega firms emerged as suppliers of
ERP solutions, and they remain an excellent product for several reasons.
The first is because they were originally developed, and then refined,
by some of the best and largest businesses around. The program became a
distillation of a great deal of knowledge. Secondly, the purchaser
could materially improve their management productivity by just "plugging
in" this inherited wisdom. The practical benefit to that was that
Spanish practices and inherited inefficiencies were swept away without
argument. Given such off the shelf and proven conclusions it must be
madness - surely - for any firm to think that they can replicate it from
their own resources.
It wasn't quite just a matter of signing a cheque, but almost. What
always intruded was the "legacy" issue where everything you had done
before had to be integrated into the new solution. To do this you
needed short term support from experts who could provide the integration
and then move on. Enter the consultant flea. An expensive version, but
if you had got your sums right the resulting business would be leaner,
more efficient and better informed - able to react quickly to future
change. A material win.
Let me please briefly divert in order to introduce another flea that has
been displaced by new techniques. In days gone by, the really big
"world" companies had the luxury of communicating directly with each
other on their own (very expensive) networks. This exchange of data in
an electronic format included corporate messages - and reasonably enough
became known as electronic data interchange. By the time it had been
shortened to EDI it was less comprehensible!
I know, you will already be ahead of me now, and saying that of course
the messaging has been overtaken by email, and that is part of the
point. The magic of technology is that it gets cheaper all the time,
and thus more accessible to an ever wider audience, bringing the
benefits that used to be the preserve of the largest to some of the
smallest. But it is interesting, is it not, to reflect that there is
nothing new in much of what we are doing; it is just that more people
can get involved and derive the benefits.
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So what has EDI become today? My contention is that here we really are
talking logically about selecting the right "flea" for the job. Let us
start with email, is there any case not to use a mainstream product,
together with a largely supported interface to read it? You wouldn't
ask your ERP supplier for email would you? I would think not, any more
than they would be the best supplier of your word processing software.
It is at this point that the dividing line between applications begins
to become blurred, because you cannot disassociate the supply of
something from its payment, or a delivery from the customer who receives
it. Thus companies that wrote software, that only did one bit of the
equation, tried to "stretch" their product to cover areas in which they
were not specialised. To illustrate this point I will try to come into
the various areas from a number of different directions.
Perhaps the next biggest flea was the management of the supply chain
(Supply chain management - SCM), because that was the sort of historical
thing that large vendors such as IBM could do with suppliers like Intel
with their EDI networks. We got used to the car companies talking about
"just in time" delivery - and once again some very able specialist firms
created programs that could improve efficiency by plugging in a SCM
package to an ERP enabled enterprise.
But to Intel, continuing the example above, IBM were a customer, not a
supplier - and they required subtly different data, leading to an
alternative version of much the same thing - but from their perspective
it was customer relationship management software, or CRM. The people
who wrote their package had a different focus, but there was probably a
75% crossover in requirements. But SCM was not necessarily CRM,
especially if your focus was something like insurance, with a high
degree of personal customer contact. Then you needed another factor,
that is integration of your computer information with the telephone -
computer telephony integration, or CTI of course.
It was a very small step to ensure that quotes, invoices, statements and
payment confirmations went out electronically. The savings in clerical
staff were so great as to lead to firms wishing to ensure that all
procured goods were bought in this way. All the standard things, such
as stationery, could be easily coped with, because they were the same
everywhere. But the expert firm supplying the car industry was going to
be very distinct from the computer firm supplier - yet both could use
the same stationery software - indeed it would be crazy not to!
Am I, perhaps, beginning to make sense of my flea syndrome? The
stationery flea can be thoroughly useful, but distinct from the major
thrust of your supply chain, which may well not need CTI support - even
on the customer side. It makes sense, to me, to use the best ERP base
software, and then plug on the most appropriate SCM and
procurement/accounting package you can find. Very possibly your
customer focus would be better suited with a different CRM package -
providing always that you end up with a return on your investment (ROI)
and your consultants can manage the technical integration.
If so, I can go on and explain where Comdaq fits in. However they are
negotiated or traded, commodities are not stationery, so cannot be
forced to behave as such. A lot of specialist data is required, with
proper risk controls, dedicated and timely responses. It is work for
specialised experts. And yet, in terms of supply chain management - or
indeed customer relationship management - the final information, that is
summarised for senior management in the ERP reporting, needs to know
none of that. All that is necessary is for them to know that wheat
purchases were supplied on time and within budget.
So Comdaq, in that sense, are a "smaller flea". We deliver a
contribution to the infrastructure of those involved in the trading,
delivery and management of payments - and if anything goes wrong then
the trail can be fully examined - but we are an essential supplement to
the "normal" systems, and our legacy task is to present the summary of
data needed by those packages in a way that they can handle.
In the future, there are going to be many more fleas, some of them
little ones, such as the logistic support links that become a
contributor to the contract process - like insurance, inspection and
shipping. Others may be very large ones, like banking consortiums
handling payments. Will it make sense for us to try and occupy their
territory? No, of course not. All these fleas are interdependent upon
And so ad infinitum!
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Article IT Week, 26/11 Computer Security
The bumper sticker said, Users are Losers!
Couldnt have agreed more, whether it refers to drugs or not.
If we didnt have to let users onto the computers or indeed, visitors into the building, customers into the shop, contractors on site, or developers near our applications wed have a wonderful level of security. Thats impossible of course, and so we have to find a way to handle it.
Part of the answer is technology: firewalls, intrusion detection systems, CCTV, IIS hardening, etc, etc. There are a lot of ways of applying technology that has been specifically developed to address many of these issues. But at heart, these are solutions to the effects of the problems, rather than to the causes. People introduce security problems, and people take advantage of them; people make mistakes, and others attempt to utilise those mistakes to their advantage.
The problems are to do with people rather than with technology.
Ive written before about the issues of engendering a culture of security within an organisation, and of how that is much more important than the simple introduction of security products. The culture encompasses formal things such as recorded policy documents and the set up of various protective systems
but it also encompasses the attitude that users of the systems and workers in the company have towards information security. In an organisation of cultural security, social engineering, shoulder surfing, tailgating and a host of other non-technical exploits are made more difficult; and of course, technology that is introduced is used to its advantage.
Training is a part of this; indeed, it would be impossible to engender and maintain a security culture without education. Equally, recruitment and internal communication is a part of it
as is the provision of appropriate reporting procedures and other internal support mechanisms. But perhaps most important of all is the active, obvious and enthusiastic support of senior management
and as anyone involved in the industry knows, often the most culpable of company members are those who sit at the big table.
How many laptops do company directors lose? How many have simple passwords, shared with their secretaries? How many insist that they are provided with remote access from home, hotel or train, bypassing the firewall because its a nuisance? How many insist that security testing of new applications is abbreviated because of pressure of business?
And how, in a reality that must include these people, can we then build a culture of security, and hence protect personal data and business-critical data more effectively?
Well, there are pressures that can be brought externally. Corporate governance requires that the company officers demonstrate that adequate audit measures are in place to protect company activities; this includes information systems. The Data Protection Act makes it clear that adequate security must be in place if personal data a now much wider collection of information is to be held and processed. And of course, there are industry-specific requirements, such as those that the Financial Services Authority might require.
In addition to these external pressures, there is also a new way of introducing pressure internally. I was recently asked to support and be involved with the so-called Human Firewall a loose, non-profit industry affiliation that encourages the view of security as a people issue and that provides a framework for establishing the security culture that all in the industry would like to see widespread.
Nothing will ever prevent organisations from suffering from information security incidents; but by encouraging a more cultural and less technical view of the problem, we can address a lot of the problems very efficiently.
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China's Polyester Revolution
After having captured a sizeable share of the global market in textiles and apparel, China is now eyeing the manmade fibre (MMF) segment, polyester in particular.
The Chinese government has embarked upon a massive restructuring programme in the polyester industry, which accounts for 74 per cent of China's total fibre production. It is learnt that the industry is planning to become self-sufficient in polyester within the next 2-3 years.
The industry is planning to reduce imports of raw materials, especially PTA, and increase local production of the same. At present, China has a production capacity of around 2 million tonnes of PTA, as against consumption of 5 million tonnes, per annum, according to sources. The main
suppliers of PTA to China include Taiwan and Korea. Similarly, the industry is planning to increase its production of polyester yarn, to meet local demand of the same.
The Chinese industry is attracting foreign investments for building up capacities, as also restructuring the industry. Taiwan's Far Eastern Textile has already announced that it will set up production base in China. Similarly, BP-Amoco has begun building a 350,000 tonne PTA plant, in Zhuhai city, in the Guangdong province. Another facility is planned in Shanghai, in association with Sinopec.
Besides, the industry will invest in technological upgradation of the existing facilities. China's manmade fibre sector mainly comprises small companies unable to invest in the newest technology. The industry will have to go in for mergers, which would lead to modern and integrated groups. The government is planning to reduce the share of the state-owned companies,
from the present 50 per cent. The industry will focus on high value products, and specialty fibres and yarns, too.
What could be the implications of this for the Indian polyester sector, which is already under pressure? According to the industry, the pressure will increase further within the next 1-2 years. Market analysts say that Taiwan and Korea will have to look elsewhere to sell their products, and India could be one of the markets, thus bringing down prices of both the raw
material and the finished goods.
China will go in for large capacities, which will fetch economies of scale. Besides, as of today, production costs in China are very low due to the heavy subsidies that the Chinese government offers on power and other infrastructure, the low interest rates, and other industry-friendly
policies. This will make it easier for China to compete in the world market, and will also keep prices under pressure,said an industry source.
So, will the Indian industry be able to withstand the pressure? Market analysts point out that a large number of Indian polyester manufacturers, which are already finding survival difficult, will have to shut shop. It is only the world class producers such as Reliance and some others with some sort of backward integration, that will finally remain. Reliance today is
the lowest cost producer in the world. According to analysts, the company's backward integration upto the refinery stage, has helped it in controlling costs.
However, a section of the industry does not feel that the Chinese threat would affect the efficient players. According to an industry source, Korea and Taiwan may have excess capacity once China moves into polyester. But they will not be in a position to dump into India. Already, a number of polyester units in these countries have shut down. Almost 30 per cent of Taiwan's polyester capacity is today lying idle. These countries have not really come out of the recession, but are slipping into a second recession. And even if the economies of these countries rebound, the currency hardening will make them uncompetitive in the global market. Some of the countries are facing labour problems. Indonesia, another major player in polyester may also not remain competitive, as labour costs here are today higher than in India. The south east Asian countries will have no option but to move out of textiles. And the process has already begun.? Sources further state that countries such as Taiwan and Korea have depended mainly on the Chinese
market, whereas India has focussed on its domestic market. However, analysts feel that to survive, the Indian manufacturers will have to look at the export markets too.
In the final analysis, only China, India and Pakistan would emerge as world suppliers of polyester, opine sources
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