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ECX… An Idea Whose Time Has Come

ECX… An Idea Whose Time Has Come. There is nothing so powerful as an i dea whose time has come… Victor Hugo. Why ECX?. Because t here was a problem…. HIGH CONTRACT DEFAULT. UNRELIABLE SUPPLY. VOLATILE PRICES. POOR QUALITY. UNRELIABLE TRADING PARTNERS. POOR INFORMATION.

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ECX… An Idea Whose Time Has Come

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  1. ECX… An Idea Whose Time Has Come

  2. There is nothing so powerful as an idea whose time has come…Victor Hugo

  3. Why ECX?

  4. Because there was a problem…. HIGH CONTRACT DEFAULT UNRELIABLE SUPPLY VOLATILE PRICES POOR QUALITY UNRELIABLE TRADING PARTNERS POOR INFORMATION UNREGULATED ACTORS UNCOORDINATED MARKETS HIGH COSTS, HIGH RISKS

  5. What was needed.. A Market Solution • Commitment to free market principles • A more reliable way to connect buyers and sellers in our market • An efficient way to discover market prices • A way to level the playing field by providing market information to all • A means to empower the farmer • A way to incentivize better quality • A way to eliminate contract risk

  6. The ECX Solution

  7. What is an Exchange? • A neutral trading system that reliably and efficiently connects buyers and sellers • A means of setting and enforcing the “Rules of the Game” so that all actors can participate fairly and transparently • A service to the market: a 3rd party that takes on the risk from both sides of the trade

  8. ECX…An idea whose time has come • As Ethiopia is poised to transform its agrarian economy, so too must Ethiopia’s marketing system take the country into the new Millennium. • It is time to enter the modern age of globally connected trading systems, relying on technology and know how, while tailored to Ethiopia’s realities and conditions. • It is time to forge a new partnership between the private and the public in the new arena created by market liberalization.

  9. The Vision The vision driving the Ethiopia Commodity Exchange (ECX) is to revolutionize Ethiopian agriculture through a dynamic, efficient, and orderly marketing system that serves all.

  10. The Exchange concept is not new

  11. Why Ethiopia gains • Commercialization of smallholder agriculture is core pillar of poverty reduction strategy • Need to capitalize on gains of recent rapid economic growth (past 5 years) • Large domestic market, 2nd largest maize producer in Africa • Rapid export growth in key commodities  A better functioning domestic market is key to sustaining and scaling up growth

  12. Impact on smallholder farmers? • Power and participation Farmers are better able to negotiate prices given market transparency • Quality Farmers are able to get market premium for value added to the product (post-harvest handling) • Market access:  Farmers are not restricted or captive to local market, can access national market • Risk management Farmers can lock in prices through futures contracts • Planning Farmers can use futures prices for planting decisions

  13. SMALLHOLDER (SS) 95% STATE FARM (SF) COMMERCIAL (CF) RURAL ASSEMBLERS COOPS EGTE WHOLESALERS (SURPLUS) EXPORTERS PROCESSORS BROKERS FOOD AID AGENCIES WHOLESALERS (DEFICIT) RETAILERS CONSUMERS: DOMESTIC Current agricultural market structure in Ethiopia

  14. Structure with Exchange SMALLHOLDERS STATE FARM COMMERCIAL (CF) COOPS EGTE ASSEMBLERS WHOLESALERS (SURPLUS) COMMODITY EXCHANGE EXPORTERS WHOLESALERS (DEFICIT) FOOD AID AGENCIES PROCESSORS RETAILERS CONSUMERS: DOMESTIC

  15. An Ethiopian Exchange for Ethiopia Technical design started in 2006: • Based on extensive global best practices review and analysis • Engaged in extensive stakeholder consultation and buy-in • Building a tailored solution, not a cut-and-paste model • Committed to continuous learning and flexibility

  16. What is ECX?

  17. ECX is a marketplace that serves all market actors • The ECX marketplace brings order, integrity, transparency, and efficiency to the market

  18. Howdoes ECX bring order? • Through an organized trading platform • Through formal rules and procedures • Through standardized contracts and standardized products • Through a system of Membership based participation • Through monitoring and enforcement of compliance to the rules • Through managing risks to the market

  19. Howdoes ECX bring integrity? • Through grading and certification of the quality and quantity of products traded • Through warehouse receipting of commodities traded • Through enforcing fair competition and ethical business conduct • Through clearing all payments between buyers to sellers

  20. Howdoes ECX bring transparency? • Through a system of industry-accepted product grades and standards • Through rapid and reliable dissemination of market information to all actors • Through enforcing disclosure and audit reporting requirements for its Members

  21. Howdoes ECX bring efficiency? • Through use of information technology to automate the End-to-End system from warehousing to trading to clearing and settlement of payments to delivery of commodity • Through a centralized trading platform offering low-cost service to all market users

  22. ECX…A broad market platform • Member certification and management • Quality standard setting and certification of domestic coffees • Electronic warehouse receipting and Central Depository • Inventory management (and inventory financing facilitation) • Open-outcry and electronic trading in spot, forwards, futures delivery contracts • Clearinghouse (central counterparty) • Market data dissemination

  23. ECX…A flexible market platform • Able to accommodate large and small market actors through small lot sizes and different classes of membership • Able to accommodate origins and diversity of coffees through large number of highly differentiated contracts • Able to accommodate local specificities in market with internally developed IT system that is continuously in design

  24. ECX…A powerful market solution • Highly professional grading system • Efficient daily trading of hundreds of commodity class-grade combinations • Zero contract, payment, delivery default • Clearing of payments within hours to the seller • Transmission of market data in seconds around the country and world

  25. REGULATORY BODY MEMBERS AND CLIENTS DATA CENTER MEMBERSHIP MANAGEMENT MARKET SURVEILLANCE PRICE TICKERS WEBSITE DATA FEEDS WAREHOUSE GOODS RECEIVING (QUALITY AND QUANTITY CERTIFICATION) MARKET DATA PROCESSING WAREHOUSES CLEARING AND SETTLEMENT CENTRAL DEPOSITORY OF WAREHOUSE RECEIPTS BANKS TRADE ORDER MATCHING AND RECONCILIATION Integrated ECX Technology Solution

  26. ECX Back Office Farmer, cooperative, or trader brings product to Exchange-operated warehouse • Market information transmission • Clearing and settlement • Market surveillance • Risk management • Member database • Disaster recovery • Data center ECX Trading Floor Seller instructs broker to post offer The warehouse draws samples and issues a Product Certificate and Warehouse Receipt Order Matching Buyer deposits funds into settlement account in Exchange partner bank How it works Buyer instructs broker to post bid

  27. Seller of product Buyer of product Order Trading System: Order Matching Warehouse: Product certification Warehouse receipt Order MEMBER MEMBER Bank: Fund transfer Clearing and settlement funds receipt The Liability Chain

  28. Information Technology Finance Power the system Warehouses=Banks Legal Infrastructure Self-regulatory Electronic trade Beyond agriculture: From a sack of grain to a sack of money PRODUCT

  29. Who owns and manages ECX?

  30. ECX has a unique institutional set-up • ECX is a non-profit autonomous commercial enterprise (company) established by its own law, that can only reinvest its profits in its scaling up and innovation (no dividends to investors). • ECX is a demutualizedPublic-Private undertaking in that • Government owned entity (initially) but • Private Members permanently own Membership seats • Jointly govern ECX through a joint Board of Directors

  31. ECX management • By law, ECX management is separate from either its ownership or its membership • ECX is managed as an independent and autonomous entity • ECX has aprofessional management that reports to the Board of Directors • An ECX Management Transition Plan enables internationally recruited professionals to manage and build national capacity for the first three years

  32. ECX Management Team • Chief Executive Officer: Eleni Gabre-Madhin • Chief Information Officer: Solomon Edossa (formerly Accenture) • Chief Business Operations Officer: Aman Adinew (formerly DHL, Northwest Airlines) • Chief Compliance Officer: Yohannes Assefa (formerly Washington securities lawyer) • Chief Market Data Officer: Ahadu Woubshet (formerly Fannie Mae) • Chief Clearing and Settlement Officer: Keith Thomas (formerly BACS) • Chief Risk Officer: Kadri Alfah (formerly London Financial Exchange • Chief Finance Officer: Yonas Berhe (formerly Wells Fargo) • Senior Manager, Business Development: Ben Aschenaki (formerly Merrill Lynch) • Senior Manager, Trading Operations: Bharat Kulkarni (formerly MCX India)

  33. The ECX “Eco-System” Laws and Regulations COMMODITY EXCHANGE AUTHORITY National Exchange Actors Association Arbitration Tribunal Market Information Trading System EXCHANGE MEMBERS Clearing and Settlement Exchange Warehouses Exchange Clearing Banks Grade certification Warehouse receipt Policy and Strategy MINISTRY

  34. ECX….Looking Back on A Year of Challenges and Triumphs

  35. “There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain of its success, than to take the lead in the introduction of a new order of things” Machiavelli

  36. Challenges • Transition from old to new systems: need for continuous learning, communication, adjustment, fine-tuning. • Global commodity and financial crises • Domestic economy concerns: severe inflation, production shortfalls, chemical crisis (coffee) • Coffee crisis • Maintaining neutrality and system integrity

  37. A word on coffee crisis • Coffee is life • Coffee crisis not related to ECX • weather, foreign exchange, Japan, credit crunch, weak exports, regulatory crackdown • Coffee crisis related to ECX • system burden at warehouse, specialty market concerns, market learning and adjustment • The worst is behind us

  38. Early Achievements on the ground • 496 Trading Members (99% private) • 12% participation by smallholder cooperatives (>250,000 farmers) • 7 partner banks integrated into first ever electronic national payment system • US$ 300 million trade (coffee, sesame, beans, wheat, maize) without single default • Real time price transmission (2-4 seconds) • Improved quality impact on exports • Improved returns to farmers • Intangibles: attitudes, transparency, HOPE

  39. What the Future Holds • More commodities, more services • Grains (sesame, beans, teff) • Specialty coffee direct trade • SMS/IVR market data system • Warehouse receipt financing (w/IFC) • Online trading • Futures/forwards contracts

  40. Finally, ECX is creating new growth opportunities and spillover impacts • Technology: • mobile telephony, satellite radio, IT services • Financial sector: new financial products tailored to small market players • Services: • Transport • Packaging/Sacking • Logistics • Quality Certification, Member licensing • Insurance • Academic: information analysis, research

  41. Aweke Teshome Farmer, member of Wedera Union (Farmers Union) “Now we are members of the ECX and are happy that big volume sales can take place in a risk free environment. Additionally, as a result of our involvement with the ECX our knowledge regarding the concept of grading has increased and our resolve to produce quality products has strengthened. We are so happy to have a market which is transparent and risk free.”

  42. The future is here… YICHALAL !!

  43. WWW.ECX.COM.ET +251 -11- 554- 7001 Eleni.Gabre-Madhin@ecx.com.et

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