Loose rules make for risky futures trading: experts

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With the recent opening of the country's first commodity exchange handling futures, experts have fired off the first warning salvo.

They say an incomplete legal framework could pose risks for investors.

The Vietnam Commodity Exchange made its debut in Ho Chi Minh City on January 11, offering investment options in coffee, rubber and steel futures for businesses and individuals.

Investors will also be provided with more opportunities at the Buon Ma Thuot Coffee Exchange Center, which became operational in late 2008, and is slated to perform transactions for futures contracts in March, said the center's director Nguyen Tuan Ha.

Currently, the center only handles spot trading.

Nguyen Van Nam, former head of the Trade Research Institute of the Ministry of Industry and Trade, said futures transactions will help farmers estimate demand and prices for the next harvest and avoid an oversupply situation that will lower prices.

Such transactions will also help processors and traders make better business plans, Nam said.

"However, in the context that regulations on operations of commodity exchanges are still loose, the possibility of disputes and weak liquidity is still high," he said.

Phan Huy Chi, chairman of SME Securities, a brokerage firm that is one of the Vietnam Commodity Exchange's founding shareholders, expressed similar concerns.

"This investment option is very new in Vietnam and it will take time for us to introduce it to the broad investor community," the Financial Times quoted Chi as saying on January 12. "The legal framework has not been completed and is in the process of further development, which could cause some difficulties during the operations."

A businessman, who often trades coffee futures on overseas exchanges and wished to go unnamed, said with immature management, the local commodity exchanges might be manipulated by speculators.

Early closure

The Sai Gon Thuong Tin Commodity Exchange (Sacom - STE) opened in November 2009 to handle spot contracts. Steel was the first commodity traded at the exchange and sugar, cashew, and rubber were added several months later.

However, sugar and cashew trading came to a halt very soon. The exchange now trades only in steel and rubber.

Explaining the closure of sugar trading, Phan Vu Hung, director of Sacom - STE, said quality was not a problem as sugar must undergo quality assessments before being traded on the exchange, which satisfied both confectioners and beverage firms.

The problem was that sugar prices were very transparent when being traded at the exchange, which was not attractive for sugar firms' salesmen who preferred traditional transactions in which they earned off-the-record commissions, Hung said.

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