Digital Shift for Commodity Exchange
The Ethiopian Commodity Exchange (ECX) is looking to expedite the process of developing technology for an online trading system, by the end of the second quarter of 2013. After developing the technology, it is expecting to launch online trading on the exchange floor and six other remote trading sites, by the end of June 2014. The project is estimated to cost 4.1 million dollars.
The 2013 deadline is part of the conditions that the Investment Climate for Africa Fund (ICF) requires the ECX to meet, in order for it to sign a revised financing agreement for the project.
In a rush to meet these conditions, the ECX has started working on the technology in-house, and has extended the contract of Solomon Edossa – part of the original Ethiopian Diaspora management team that served as chief information officer for five years and had stayed back to serve as an advisor until mid 2013. Now his contract has been extended until 2014, in order for him to head the project.
The ECX is also looking to hire more staff, including capacity building consultants, for which it floated a Terms of Reference (ToR), two weeks ago. Furthermore, it is in the process of preparing a training session for exchange actors, on the concept of online trading, according to a senior expert at the ECX, who is working closely on the issue.
Since the Commodity Exchange – where Coffee, Seasame, Haricout beans, Maize and wheat are traded – was founded, in 2008, trading has been manual. On the octagonal trading floor present at the ECX, both sellers and buyers move around calling the price of the commodities until they find a matching offer and seal the deal with a high five. It is then that their contract is registered on the ECX database and receipts are issued.
This manual trading has shortcomings, including the restricted ability for sellers and buyers to communicate, amidst everybody shouting prices all at once, according to the executive.
Meeting face to face on a constant basis may also lead to price fixing outside, for both buyers and sellers. Moreover, in the context of the ECX, there is only one trading floor requiring faraway traders to either travel or use an intermediary, in order to participate in the Exchange.
All of these restrictions will be eliminated when using an online system, according to the ECX expert. A trader would not have to strain to hear prices, amidst the shouts and calls of other ECX members on the trading floor, when using online trading, as all the price offers will be visible online.
Moreover, as the online trading technology will be set up both at the ECX and at six remote trading sites, it will cut back on the hassle that faraway traders face. The Ethiopia Commodity Exchange Authority (ECXA) is also keen on the project, as it believes it will reduce the number of traders that collude outside, in order to fix prices inside, according to a high level official within the ECXA.
Considering such benefits, the ECX signed an agreement with the ICF, in November 2011. The ICF, established in Africa by several donors, including the British Department for International Development, the African Development Bank and the International Financial Corporation, was interested in the project, because it “falls within the mandate of removing barriers for doing business,” according to Veronica Moorhead, Projects Officer for the ICF.
In the original agreement, the ICF was expected to contribute 74pc and ECX the rest. The project also includes the training and capacity building of technical and end users, which is an area supported by ICF.
A series of changes to this original agreement, however, has led to delays and prompted the ICF to set new deadlines and cut back on its contributions.
The first setback was the fact that the initial project aimed to set up online both spot and futures trading contracts. Futures trading, whereby sellers and buyers agree on prices before the commodity is harvested, did not have the support of policymakers, who thought it would lead to speculation, so it was taken out of the agreement, which was again signed, in August 2012. After the agreement was revised, the ECX floated a tender to procure the technology for online trading, in which two companies participated, according to a source within the ECX. When the ECX was evaluating the bids, it claimed that both failed to provide enough information for the minimum requirement, Fortune learnt.
Following the delay in procurement of the technology, the ECX again designed another variation of the agreement, in which it suggested that the technology be developed locally. When this was presented to the ICF, around four months ago, they set several conditions before signing it. Furthermore, it rolled back its contributions – from the 74pc, in the original agreement, to 57pc, stating that all technology production that the ECX will do in-house ought to be covered by its own finances. The ICF also stated that it will finance remote trading centres only after the technology stated was developed, and set the deadline at mid-2013 for the ECX to make advanced progress.
Following this, the ECX decided to accept the conditions, although it is now looking for additional financing from extra donors, in order to make up for the shortfall.
Manual trading will not be completely scrapped once online trading is launched, if the current deal goes through.
“Both will be available for use, and who will get chosen to use online trading is yet to be determined,” according to an ECX expert.
Some involved in the project have expressed concerns that most of the ECX members may not have the technological know-how to trade online.
“We are designing the technology in a way that it is simple and easy to understand,” the expert at the ECX told Fortune. “We will also carefully train members, before requiring them to use the online trading system.”
Despite the ECX’s rush to meet the deadlines set by the ICF, they have still yet to sign the variation agreement, Fortune learnt.
The ICF also supports setting up an e-tax filing system in Ethiopia, for which it is working closely with the Ethiopian Revenues & Customs Authority (ERCA).
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