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An Overview of the Thai Agricultural Futures Market

An Overview of the Thai Agricultural Futures Market. By The Office of the Agricultural Futures Trading Commission Prepared for the CFTC Symposium, 18-25 October 2004. Historical Development of Commodity Future Trading in Thailand:. AGRICULTURAL FUTURES

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An Overview of the Thai Agricultural Futures Market

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  1. An Overview of the Thai Agricultural Futures Market By The Office of the Agricultural Futures Trading Commission Prepared for the CFTC Symposium, 18-25 October 2004

  2. Historical Development of Commodity Future Trading in Thailand: • AGRICULTURAL FUTURES TRADING ACT : 15 October 1999 • BOARD OF THE AFTC : 1 May 2001 • BOARD OF THE AFET : 20 September 2001 • FIRST DAY OF TRADING : 28 May 2004

  3. Highlights: • THAILAND : World Leader in Agricultural Products • AFET : Young Exchange with Efficient Operations • AFTC : Supporting Regulator with International Standards

  4. THAILAND: World Leader in Agricultural Products Example: Unit: million tons * Data as of 2002 ** Source : Rubber-Office of Agricultural Economics, Rice- United States of Department of Agricultural (as of September 2004), Cassava- Food and Agriculture Organization, Sugar-Office of Agricultural Economics

  5. AFET: Young Exchange with Efficient Operations Agricultural Futures Exchange of Thailand (AFET) Established : 2001 First Day of Trading : 28 May 2004 Trading & Clearing Systems : Fully computerized with web-based technology Rules & Regulations : International standards Strong Fundamentals : World leading producer in agricultural products

  6. AFTC: Supporting Regulator withInternational Standards Agricultural Futures Trading Commission (AFTC) Governing Law : Agricultural Futures Trading Act B.E. 2542 (1999) Established : 1 May 2001 Philosophy : Investor Protection, Price Efficiency, and Market Liquidity

  7. Agricultural Futures Exchange: Thailand’s First Futures Exchange

  8. AFET’s Profile The Agricultural Futures Exchange of Thailand: • Established under the Agricultural Trading Act B.E. 2542 (1999) to be the sole Agricultural Futures Exchange in Thailand • Initially set up and funded by the Government • Regulated by the Agricultural Futures Trading Commission (AFTC) and the Office of the AFTC

  9. AFTC Regulatory Structure The Board of Directors comprises the Minister of Commerce as Chairperson and 4 Persons: the Permanent Secretary of the Ministry of Finance, the Permanent Secretary of the Ministry of Agriculture and Co-operatives, the Permanent Secretary of the Ministry of Commerce, and the Governor of the Bank of Thailand and 5 Persons appointed by the Cabinet of Ministers + Mr. Chaipat Sahasakul, the Secretary-General of the Office of the AFTC AFET The Board of Directors comprises Dr. Suvarn Valaisathienas Chairperson and 5 Persons appointed by the AFTC and 5 Persons elected by AFET’members + Mrs. Napaporn Kurupasutachai, President of the AFET

  10. AFET’s Commitment "To be an efficient marketplace for commodity futures trading and hedging with a high degree of integrity, transparency and accountability"

  11. Futures Traded on the AFET • Rubber Futures (Ribbed Smoked Sheet No.3 Rubber: RSS3) • Rice Futures (5% Broken White Rice: WR5)

  12. Contract Specifications for “Ribbed Smoked Sheets No. 3 Rubber”(RSS3) • Description of Commodity: RSS3 according to the Green Book • Contract Months: Six consecutive months from the spot month • Trading Hours: 10:30- 12:00am. • Contract Size: 5,000 kg (5 metric tons) • Tick Size: 0.1 Baht per kg • Daily Price Limit: Depend on the standard price • Position Limits: 500 contracts for all contract months combined and/or 100 contracts for the spot month • Delivery Point: FOB term at Bangkok port as par delivery point • Last Trading Day: The third business day prior to the first day of delivery month

  13. Contract Specification for “5% Broken White Rice” (WR5) • Description of Commodity: 5% Broken White Rice according to the Thai Ministry of Commerce’s Standard • Contract Months: Jan, Mar, May, July, Sept, and Nov • Trading Hours: 10:30- 12:00 am. • Contract Size: 15,000 kg (15 metric tons) • Tick Size: 0.02 Baht per kg • Daily Price Limit: Depend on the standard price • Position Limits: 1,000 contracts for all contract months combined and/or 200 contracts for the spot month • Delivery Point: At AFET’s designated warehouses in Bangkok • Last Trading Day: The fifth business day prior to the first day of delivery month

  14. Becoming an AFET Trading Member • Only a member has privilege of directly trading on the AFET. • The following members may trade on the AFET: • Trader Member, acting only on its own account, and • Broker Member, acting on its own account or on behalf of customers. • Each member must also be a clearing member of the AFET clearing house.

  15. AFET Clearing Structure • Only clearing members may register and clear trades with the AFET clearing house • AFET clearing house is counter-party to all matched contracts

  16. AFET Clearing Rules • Clearing services are provided by AFET clearing house • All trades must be cleared on T+1 • Before trading, investors will be required to lodge initial margin with the brokerage firm to ensure performance of the futures contract obligation • Once traded, open positions will be marked-to-the-market at the end of every trading day • If equity value in the investors account falls below a certain level, a call will be issued to deposit money into the account up to the initial margin level (maintenance margin)

  17. Clearing Member Financial Requirements * GCM-General clearing member and CCM-Corporate clearing member ** 1 US dollar = 42 Thai Baht, approximately

  18. Margin Rate Note: 1 US dollar = 42 Thai Baht, approximately

  19. Transaction Fee Structure

  20. Overview of Rubber and 5% Broken White Rice Futures Trading

  21. Highlights: 1. Overall Volumes and Open Interests in AFET 2. Rubber Volumes and Open Interests in AFET 3. Comparison of Thai Rubber Futures and Spot Prices 4. 5% Broken White Rice Volumes and Open Interests in AFET 5. Comparison of 5% Broken White Rice Futures and Spot Prices

  22. Overall Volumes and Open Interests in AFET* Source: Agricultural Futures Exchange of Thailand *Note that rubber and 5% broken white rice were launched on May 28, 2004 and August 26, 2004, respectively.

  23. Rubber Futures Prices, Volumes and Open Interests in AFET Source: Agricultural Futures Exchange of Thailand

  24. Comparison of Thai Rubber Futures and Spot Prices Source: Agricultural Futures Exchange of Thailand and Rubber Research Institute, Thailand

  25. 5% Broken White Rice Futures Prices, Volumes and Open Interests in AFET Source: Agricultural Futures Exchange of Thailand

  26. Comparison of 5% Broken White Rice Futures and Spot Prices Source: Agricultural Futures Exchange of Thailand and Department of Internal Trade, Thailand

  27. Overview of Regulatory and Development Framework

  28. Highlights: Major Regulatory Issues According to the Agricultural Futures Trading Act B.E. 2542 (1999) 1. Categories of Agricultural Commodities and Futures Trading Businesses. 2. Regulatory Structure. 3. Supervision of the Agricultural Futures Exchange of Thailand. 4. Supervision of AgriculturalFutures Trading Businesses. 5. Investor Protection and Market Manipulation/ Over-Speculation Prevention. 6. Prohibited Conducts.

  29. Categories of AgriculturalCommodities and Futures Trading Businesses. “Agricultural Commodity” means • An agricultural produce or product processed from an agricultural produce which the Board of Directors of the Exchange has specified for futures trading. Section 3 of the Agricultural Futures Trading Act B.E. 2542

  30. 2. Regulatory Structure. Agricultural Futures Trading Commission (AFTC) supervises supervises Agricultural Futures Exchange of Thailand supervises Agricultural Futures Trading Business Exchange Member Futures Trader Futures Broker

  31. Major Issues Regarding Regulatory Supervision of the Agricultural Futures Exchange of Thailand. • Appointment of the Board of Directors of the Agricultural Futures Exchange of Thailand.* • Five persons appointed by the AFTC and other five persons elected by the members.* • Approval of rules, regulations, notifications, and orders issued by theBoard of Directors of the Exchange. ** For example: • principles for the prescription, alteration, modification, or cancellation of Agricultural Commodity. • principles, procedures, and conditions concerning becoming a Member of the Exchange. * Section 77 of the Agricultural Futures Trading Act B.E. 2542 (1999) (AFTC Act) ** Section 7(5) and 78(1) (4) (5) (8) (9) (10) (11) and (16) of the AFTC Act

  32. 4. Major Issues Regarding Regulatory Supervision of the AgriculturalFutures Trading Business. • Issuance of licenses and supervision of Futures Trading Business operations.* • Prescription of principles for Futures Trading Business operations.** Including principles for the maintenance of Futures Trading Business financial status.*** * Section 22 and Section 7(2) of the AFTC Act. ** Section 32 of the AFTC Act. *** Section 34 of the AFTC Act.

  33. 4. Major Issues Regarding Regulatory Supervision of the AgriculturalFutures Trading Business (Cont.) • Approval of the appointment of a director, manager, or person with power to manage the licensed business.**** • Suspension and revocation of license and dissolution of Futures Trading Business.***** **** Section 36 of the AFTC Act ***** E.g., section 59 of the AFTC Act

  34. 5. Investor Protection and MarketManipulation/Over-Speculation Prevention. • Tools for prevention of market manipulation and over-speculation. • Prescription of Exchange member margin required and adjustment of such margin account.* • Prescription of daily price movement limits.* • Prescription of position limit of each member or customer.* • Market Surveillance System. *According to Section 78(4) (6) and (7) of the AFTC Act.

  35. 5. Investor Protection and MarketManipulation/Over-Speculation Prevention (Cont.) • Tools for prevention of market manipulation and over-speculation. • Temporarily suspend the Futures Trading of Agricultural Commodity of certain categories for a specified period.** • Temporarily prohibit a Member from buying or selling Agricultural Commodity on the Exchange for a specified period.** • Dispose of or revoke a Futures Contract.** ** According to Section 104(1) (2) and (3) of the AFTC Act.

  36. 6. Prohibited Conducts. Under Thai Futures Law and Regulations Relevant Futures Thai Law and Regulations • Agricultural Futures Trading Act B.E. 2542 (1999) (AFTC Act) • Notifications of the Agricultural Futures Trading Commission • (AFTC) • Notifications of the Office of the Agricultural Futures Trading • Commission • Notificationsof the Board of Directors of the Agricultural • Futures Exchange of Thailand (AFET) • Notificationsof theAFET

  37. Prohibited Conducts by Law • Corner • Squeeze • Dissemination of Misleading Information • Wash Sale • Insider Trading • Churning

  38. Prohibited Conducts by Notifications • Trading Ahead Customers • Trading Against Customers • Bucketing • Withholding Customer Orders • Preferential Trading

  39. Administrative Sanctions imposed by AFTC1 , AFET2 • Warning1 • Probationary Notice1,2 • Fine2 • Suspension of trading opration2 • Revocation of AFET Membership2 • Suspension of marketing officer’s license1 • Suspension of Futures Trading Business license1 • Revocation of marketing officer’s license1 • Revocation of Futures Trading Business license1

  40. Corner • Section 121 of the AFTC Act • Sanctions ≥ 3 years imprisonment term and/or fine of ≥ US$ 7,142

  41. Squeeze • Section 119 of the AFTC Act • Sanctions 6 months – 5 years imprisonment term and fine of US$ 11,905 - 2 times of benefit received • Section 121 of the AFTC Act • Sanction ≥ 3 years imprisonment term and/or fine of ≥ US$ 7,142

  42. Dissemination of Misleading Information • Section 122 of the AFTC Act • Sanctions ≥ 3 years imprisonment term and/or fine of ≥ US$ 7,142

  43. Wash sale • Section 119 of the AFTC Act • Sanctions 6 months – 5 years imprisonment term and fine of US$ 11,905 - 2 times of benefit received • Section 121 of the AFTC Act • Sanction ≥ 3 years imprisonment term and/or fine of ≥ US$ 7,142

  44. Insider Trading • Section 120 of the AFTC Act • Sanctions 6 months – 5 years imprisonment term and fine of US$ 11,905 - 2 times of benefit received

  45. Churning • Section 122 and 123 of the AFTC Act • Sanctions ≥ 3 years imprisonment term and/or fine of ≥ US$ 7,142

  46. AFTC Act • Section 119. No person shall, directly or indirectly, make a futures trade or offer to make a futures trade, or do any acts involving Futures Trading to such a likely extent that another person understands that the traded Agricultural Commodity has a rising, falling, stable, or fluctuating price which is in conflict with the normal market conditions. (Squeeze, Wash Sale)

  47. AFTC Act • Section 120.No person shall, directly or indirectly, make a futures trade or offer to make a futures trade, or do any acts involving Futures Trading in such a way likely to be an act to take advantage of others by using facts concerning Futures Trading which have not been disclosed to the public and he knows by virtue of his office or performance of duty in such Futures Trading or he knows because he receives them from the aforementioned regardless of whether the foregoing acts are done for the benefits of himself or others, or by disclosing, in consideration of benefit, the foregoing facts for others to act. (Insider Trading)

  48. AFTC Act • Section 121. No person shall do any act to the extent that is likely to mislead another person to believe that there is a large volume of futures purchase or sale of Agricultural Commodity of any category or kind or that the price of the Agricultural Commodity of such category or kind has changed inconsistently or has not changed consistently with the normal market conditions.  (Corner, Squeeze and Wash Sale)

  49. AFTC Act • Section 122. No person shall impart or disseminate any false statement concerning an Agricultural Commodity or Futures Trading of an Agricultural Commodity of any category or kind or impart or disseminate any other statement that may cause others to be mistaken in the material respect concerning Futures Trading of an Agricultural Commodity of any category or kind and such act is likely to result in the price of such Agricultural Commodity to be inconsistent with the normal market conditions or likely to cause another person to engage in Futures Trading. (Dissemination of Misleading Information, Churning)

  50. AFTC Act • Section 123. No person shall assure or forecast for another person concerning an Agricultural Commodity or Futures Trading of an Agricultural Commodity of any category or kind if such assurance or forecast is false or may cause a mistake in the material respect and such act is likely to cause such person to engage in Futures Trading. (Churning)

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