This article aims to analyze the role and limitations of commodity derivative products and presents the development status of commodity derivative markets globally and in Vietnam.
In Vietnam, several businesses have implemented futures trading models for commodities such as rice, coffee, rubber, pepper, cashew nuts, steel, and others. In these markets, customers buy or sell a specified amount of goods at a fixed price, and the delivery is made in the future. Key aspects such as quantity, expiration time, product standards, and prices are regulated by the exchanges.
Some banks have also created channels for Vietnamese businesses to participate in international commodity exchanges, but the participation rate remains limited. The article discusses the current situation of trading at commodity exchanges in Vietnam and worldwide, the role and limitations of commodity derivatives, and offers recommendations.
Global Commodity Derivatives Market
According to the Futures Industry Association (FIA) 2004 report, the first official futures markets were rice exchanges in the 18th century in Japan. The FIA statistics reveal that most global derivative markets focus on financial products, with traditional commodity futures and options, including precious metals and agricultural commodities, accounting for only 7.8% of the market. The relative decline in non-financial commodities is not due to shrinking but rather slower growth compared to financial products.
U.S. exchanges remain a dominant force in global commodity futures and options markets. FIA statistics also highlight the rise of China, with two of its exchanges, the Commodities Exchange and Shanghai Futures Exchange, being prominent. The Shanghai Futures Exchange has even surpassed the Chicago Board of Trade (CBOT) to become the third-largest commodity exchange globally, particularly in agricultural commodity futures trading. This surge in China’s futures market reflects the growing demand for commodities to support the country’s rapid economic growth.
The development of commodity futures markets has been driven by the need for price risk management for key products. Modern financial theory suggests that the emergence of derivative markets in spot markets helps complete the price discovery process, hedging risks related to price volatility in spot markets at low cost (Shamsher et al., 2007). According to this study, there are 19 emerging commodity futures markets in Asia, with some countries like Japan developing these markets with high liquidity, while most emerging Asian markets are still in their early stages. Liquidity constraints, lack of legal frameworks, and financial institutions are major challenges.
A study by Jayne et al. (2014) on the African market identified six main factors hindering agricultural commodity futures trading:
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Difficulty attracting financial institutions to commit to commodity trading and facilitate payments between buyers, sellers, and lenders.
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Demand for investor-specific contracts is unmet.
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Lack of currency hedging tools.
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Weak enforcement of contracts and protection mechanisms.
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Conflicts of interest between brokers.
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Market manipulation risk due to low trading volumes.
Euna Shim (2006) provided insights through case studies in Argentina, Brazil, India, Indonesia, Malaysia, South Africa, and Thailand, highlighting liquidity as a crucial factor for the success of futures contracts. The study also pointed out the importance of a stable macroeconomy and a sufficiently large domestic market for underlying futures contracts. Panos (1999) also recommended overcoming market barriers like regulatory hurdles, government intervention, and understanding of derivative markets for developing agricultural commodity futures markets in developing countries.
In developing countries, the volatility of agricultural commodity prices and the lack of investment channels are significant issues affecting the development of futures markets. Studies by Irfan Ul Haq and colleagues (2004) examined price instability and the emergence of substitute goods, leading to price depreciation and instability in the short term.
Adammer et al. (2015) explored the pricing process of agricultural futures traded in limited volumes on the European Exchange, showing that low trading volume thresholds are necessary for effective price discovery.
Commodity Derivatives Market Development in Vietnam
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Cashew Futures Trading at Ho Chi Minh Stock Exchange: On March 7, 2002, the Ho Chi Minh Stock Exchange, in collaboration with Nuttrade.com LLC, launched the first cashew futures market. The aim was to promote agricultural commodity trading in Vietnam and enable Vietnamese businesses to trade globally. However, this market was short-lived, and operations ceased due to limited trading activity.
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Can Gio Seafood Exchange: Established in May 2002, the Can Gio Seafood Exchange attracted traders with its transparent pricing and support infrastructure. However, after a few months, participation declined, and the exchange stopped operations due to lack of continued trade.
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Buon Ma Thuot Coffee Exchange Center (BCEC): Founded in December 2006, BCEC aimed to serve both primary and secondary markets for coffee. While it had well-developed procedures, the coffee futures market at BCEC did not achieve expected growth and faced issues such as unclear regulations and limited investor interest.
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Sacom – STE Commodity Exchange: Established in March 2010, this exchange dealt with raw and refined sugar. Despite initial support from Sacombank, the market failed to grow, with limited trading volumes and lack of sustainable transactions.
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Vietnam Commodity Exchange (MXV): Initially founded as VNX in September 2010, it became the first licensed commodity exchange in Vietnam. After facing challenges such as IT system issues, it was restructured and officially relaunched as MXV in June 2018. MXV now handles a range of commodity products, including agricultural products, industrial materials, and energy resources.
Conclusion
In line with global trends, Vietnam has developed and established domestic commodity exchanges, many of which have connected with international exchanges. As of now, the Vietnam Commodity Exchange (MXV) is the only surviving exchange, playing a central role in linking domestic investors with international markets. The article highlights the challenges and limitations in the development of commodity derivatives markets in Vietnam and the need for further research to improve these markets and the overall trading environment.