"African countries can benefit immensely from well-regulated derivatives commodity exchanges - which in turn could provide a useful tool for Africa's development," said Moono Mupotola, manager in charge of Regional integration and trade at the African Development Bank (AfDB), ahead of the Bank-sponsored Pan-African Workshop for Regulators of Derivatives and Commodity Exchanges to be held in Gaborone, Botswana, from 25-27 July 2012.
Why is it important today to launch a debate in Africa on regulatory frameworks for derivatives and commodity exchanges?
At the AfDB, we believe that efficient and well-regulated derivative and commodity exchanges are a key component of the overall commodity and capital market development in Africa. And it was with this in mind, that the AfDB chose to take the lead in organising this event. This is really in line with the Bank's role as a catalytic agent at the heart of Africa's capital and financial markets.
We are a knowledge broker, you understand, and this workshop gives us an opportunity to promote innovative ideas and discourse on best practices on this subject across the continent. We hope that participants will leave with a better understanding of the benefits that arise from commodity exchanges and the types of structures and regulations that can revolutionise African capital and commodity markets.
Some would argue that derivatives were the types of instruments that were responsible for the global financial crisis...
Well, this is true and we have to understand that in the aftermath of the global financial crisis which originated in 2008, there has been significant debate at global, regional and national levels on the causes of the crisis, and the role played by different financial instruments, regulators and so on. While forms of derivative financial instrument may have played a part in causing or exacerbating the crisis, it has also been recognised that derivatives are important as risk management instruments for commodity chains, companies, banks, financial institutions and investors that can actually enhance the stability and robustness of financial systems, as long as they are structured and regulated in an appropriate manner.
As a result, for example in September 2009, the G-20 Leaders declared that: "All standardised over the counter derivative contracts should be traded on exchanges or electronic trading platforms, and cleared through central counterparties by end 2012 at the latest." As a result of this we expect that the key principles of global regulatory reform will migrate derivative contracts onto exchanges and clear derivative obligations through central counterparty clearinghouses (CCPs). Having such transparent, well-regulated, systemically robust institutions - central to today's global regulatory agenda - and such mechanisms do not yetexist in Africa and the Bank would like to support their development.
If African countries go the way of derivates exchange as you suggest, what would be some of the benefits that they would obtain?
It appears to be universally appreciated that efficient financial and commodity markets are a prerequisite for equitable, inclusive and sustainable development. And you will find this notion embodied in the African Union's Arusha Plan of Action and Declaration on African Commodities, 2005, as well as in the Final Communique from the COMESA-EAC-SADC Tripartite Summit of Heads of State and Government, 2008.
As an immediate effect, we believe derivatives and commodities exchanges can help to create a foundation for a broad spectrum of issues such as improved price discovery, market transparency, financing of commodity chain and financial market participants, hedging and risk management, infrastructure development. As a secondary effect, derivatives and exchanges can result in job creation and enhance cross-border economic integration. by offering venues for the mitigation of key trade risks, currency risks, commodity price risk, interest rate risk, and so on.
So in view of the mandate from the Arusha Plan of Action and the costs and benefits to derivates and exchanges that you have just outlined, how do you plan to bring this all together in the Pan-African Workshop for Regulators of Derivatives and Commodity Exchanges to be held in Gaborone, Botswana, from 25-27 July 2012?
Well, the workshop has clear objectives. We want to create a forum where African regulators, central banks and finance ministers can come together and develop a mutual and better understanding of the role, function and benefits of derivative and commodity exchanges. But the legal framework for these instruments has to be carefully designed.
Therefore, this 'improved understanding', if I can call it that, has to be combined with an appreciation of the regulatory prerequisites and reforms that must be in place to ensure that the exchange institutions operate in a robust and secure manner, in line with international standards and norms. We are hoping that participants will identify the areas in which they need to develop rules, structures and procedures, that can then form the basis for regulatory development plans whose implementation we can support.
In closing, can you say who will be among the Participants of the workshop?
Moono Mupotola: Oh it will be quite a diverse and interesting group. We have invited representatives that include financial sector regulators, central banks, commodity exchanges and finance ministries from across Africa, as well as representatives from the African Union, African regional economic commissions and international organisations. The resource persons include an exciting line-up of leading experts on the regulation of derivative and commodity exchanges from across the world. With such a mix of participants we expect it to be a very rich and robust discussion.