2018

AREPORTONCOMMODITIESTRADINGECOSYSTEMINNIGERIABYTHETECHNICALCOMMITTEEONCOMMODITIESTRADINGECOSYSTEM

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Contents

TABLEOFFIGURES........................................................................................................................................................................iii

EXECUTIVESUMMARY………………………………………………………………………..………………………………………….iv

1.0 INTRODUCTION.................................................................................................................................................................1

Background................................................................................................................................................1

2.0 COMMODITYTRADINGANDITSIMPORTANCE.................................................................................................1

2.1BenefitsofCommodityExchanges...................................................................................................3

2.2DirectandCatalyticImpactsofCommodityExchanges...............................................................5

2.3 NigeriaOutputsandExportsofCommodities..........................................................................7

2.4RelativePerformanceofCommodityExchangesoperatinginNigeria...................................12

3.0 EVOLUTIONOFCOMMODITYTRADINGMARKETS.......................................................................................14

3.1 CommodityExchangesinAfrica...............................................................................................15

3.2 HistoryofCommoditiesTradinginNigeria............................................................................16

3.3 TheNigerianCommodityExchange(NCX)..............................................................................19

3.4 AFEXCommoditiesExchangeLimited.....................................................................................23

4.0 CURRENTSTRUCTUREOFTHECOMMODITYMARKET..............................................................................32

5.0 BUILDINGBLOCKSFORTHEDEVELOPMENTOFTHECOMMODITIESMARKET............................38

5.1 LargedemandandLiquidity.....................................................................................................38

5.2 Existenceofcommoditiestoformnucleusoftrading..........................................................40

5.3 PriceTransparency.....................................................................................................................42

5.4 EfficientDeliverySystem...........................................................................................................42

5.5 StandardsandGrading...............................................................................................................44

5.6 EfficientTradingSystem............................................................................................................45

5.7 LegalandRegulatoryEnvironment.........................................................................................45

5.8 RiskManagementSystem..........................................................................................................46

5.9 ClearingandSettlement.............................................................................................................47

5.10 Derivedvalueinusingthemarket...........................................................................................48

5.11 Physicalinfrastructure...............................................................................................................48

5.12 CollateralManagement..............................................................................................................49

5.13 Logistics.........................................................................................................................................49

5.14 OrganizingSmallHolderFarmerstoImproveSupplySide.................................................50

5.15 CapacityBuildingandPublicAwareness................................................................................50

6.0 COMMODITYEXCHANGEPARTICIPANTS..........................................................................................................52

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6.1 RolesandResponsibilitiesofParticipants.............................................................................52

7.0 ORGANIZINGSMALLHOLDERFARMERSINTOCOOPERATIVES.............................................................59

7.1 AdvantagesoffarmercooperativeSociety.............................................................................60

8.0 RECOMMENDATIONSFORTHEDEVELOPMENTOFATHRIVINGCOMMODITYTRADINGECOSYSTEMINNIGERIA...........................................................................................................................................................61

Ourrecommendationsare:...................................................................................................................61

8.1 Goodenablingbusinessenvironment.....................................................................................61

8.2 DevelopmentofWarehouses....................................................................................................69

8.3 GradingandCertification...........................................................................................................72

8.4 ProvisionofImprovedExtensionServices.............................................................................72

8.5 IntroductionofFlagshipCommodities....................................................................................72

8.6 Strategicpurchasesthroughtheexchanges...........................................................................73

8.7 Discountedpaymentstofarmersoninsurance.....................................................................73

8.8 Logistics.........................................................................................................................................73

8.9 Integrationofmajorplayersinthecommoditiesexchanges..............................................74

9.0 RECOMMENDATIONSANDTIMELINEFORIMPLEMENTATION.............................................................74

10.0APPENDICES.........................................................................................................................................................................79

AppendixA................................................................................................................................................79

AppendixB................................................................................................................................................81

AppendixC................................................................................................................................................82

REFERENCES..................................................................................................................................................................................83

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TABLEOFFIGURESFigure1:CommodityTradingEcosystem......................................................................................................2Figure2:TypesofCommoditiesMarket........................................................................................................7Figure3:Outputoftop20commodities,2015…………………………………….………………………………10Figure4:AdiagrammaticpresentationoftheproposedtradingsystemaspresentedbytheNCX........22Figure5:SampleofAFEXelectronicwarehousereceipt............................................................................26Figure6.1:ScreenshotsoftheAFEXelectronictradingplatform..............................................................28Figure6.2:ScreenshotsoftheAFEXelectronictradingplatform..............................................................30Figure7:SampleofAFEXMarketdataforCommoditiesacrossNigeria...................................................32Figure8:KeyInstitutionsinthemarket......................................................................................................32Figure9:Playersinthespotmarket...............................................................Error!Bookmarknotdefined.Figure10:GlobalCompetitivenessofNigeria................................................Error!Bookmarknotdefined.Figure11:SectoralDistributionofCommercialBanks’LoanandAdvances(Q42016)...Error!Bookmarknotdefined.Figure12:CommercialBanks’Credit,Loans&AdvancestoselectedSectors,2007-2016...................67Figure13:GlobalCompetitivenessofNigeria.............................................................................................68Figure14:TimelineforImplementation.....................................................................................................74

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EXECUTIVESUMMARY

TheSecuritiesandExchangeCommission(SEC)aspartof its implementationofthe10-yearCapital Market Master Plan, constituted a Technical Committee on Commodities TradingEcosystem. The mandate of the Committee was to identify challenges of the existingframework/infrastructureanddeveloparoadmapforavibrantecosystem.

An organized commodities market consists of multiple players that form the agriculturalvalue chain. They include commodity exchanges, farmers, merchants, aggregators,processors/producers, commodity market operators, warehouse operators, collateralmanagers, banks, insurance companies, clearing houses, and logistic companies. It isimportant to organize this market to enhance its efficiency, growth and competitivenesswhich will better position it to play a strong enabling role in food security, employmentgeneration and economic diversification. The Report identified about twenty benefits ofpromoting commodity exchanges and the ecosystem in general. In addition to some of thebenefits highlighted above, they provide a transparent pricing mechanism, assist inmoderating consumer prices, promote attractiveness of agribusiness, foster financialinclusion and improve industrial output and profitability as well as government revenue.They enhance thewellbeingof the farming community andhelp reduce rural - urbandrift.Furthermore, they provide risk management tools and promote quality and standards forAgro-based export commodities. Finally, they create opportunity for investment in thecommoditiesvaluechainwithmultipliereffectonsocioeconomicdevelopment.

Attempt to establish a commodity exchange in Nigeria began in 1989 when an Inter-MinisterialCommitteewasestablishedtoexaminethepossibilityofsettingupacommodityexchange following the abolishment of the commodities marketing board. Although theCommittee recommended the establishment of a commodities exchange, nothing came tofruition until August 8, 2001when the Federal Government directed the conversion of thethenAbujaStockExchangetoacommodityexchangewhichisnowcalledNigeriaCommodityExchange (NCX).NCXwas theonly commodityexchange inNigeria formore thanadecadewhen in 2014, the Securities and Exchange Commission registered AFEX CommoditiesExchange,thefirstprivatesectorcommoditiesexchange.

Thepublicandprivatesectorsneedtoworktogether inanunambiguouswaytopromoteaviable commodities trading ecosystem in the country. The public sector should principallyfocus on providing the enabling environment such as physical infrastructure, legal andregulatory framework and the right policies including access to finance, that support themarket.Governmentshouldnotbe involvedintheownershipandoperationsofcommodityexchange. IthasnotworkedinNigeria. Theprivatesectorontheotherhand,shoulddrive

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commodityexchangedevelopment;investinginandoperatingtheexchangeslikecommercialventures.

For anorganized commoditiesmarket to thrive, theremust be largedemandand liquidity,evidencedbygoodqualitynetworkofphysicalandmarketinfrastructuresuchasanefficientstandard and grading system, price transparency and effective risk management tools,collateral management system and logistics services etc. In order to build investors’confidenceinthemarket,theremustbeanefficienttradinganddeliverysystem,clearingandsettlementinfrastructureandagoodlegalandregulatoryenvironmenttoensureequityandfairnessinalldealingsontheexchange.

TheCommitteecameupwithrecommendationsonhowtodevelopathrivingecosystemandassigned responsibilities to relevant stakeholders. The recommendations are grouped intofour phases for effective implementation. In the first phase, the objective is to ensure foodsufficiencyandsecurity,pricediscoveryandmarketdevelopmentwhileinthesecondphase,focusshouldincludedevelopingstrongtradesinexportcommodities.Thethirdphaseshouldseetheintroductionofsolidminerals,energyandderivativeswhilethelastphaseshouldbegearedtowardsensuringstronginternationalpresenceinthelocalexchanges.

As part of the committee’s recommendations, there is a need to commence advocacy formacroeconomic stability andpolicieswhichwillpromote the commoditymarket (exchangerate, interest rate, inflation rate, infrastructure etc.); advocacy for amendment of existinglegislationssuchastheLandUseActandBankruptcyLawwhichimpedethedevelopmentofthe market; review SEC rules and regulations relating to commodity exchanges especiallyrulesonthespotmarket,andmakerulesoncollateralmanagement.

One major impediment towards having a vibrant commodities market is the financialexclusionof farmers, especially smallholder farmerswhoproducemostof the commoditiestraded,albeitinsmallindividualunits.Thesefarmersshouldbeorganizedintocooperativestoaggregateproduceandbeencouragedtobecomemembersoftheexchange.IntroductionoftheElectronicWarehouseReceipts(EWRs)andtheenactmentofawarehousereceiptbillintolawwillgoalongwayinensuringthatfarmerscanaccesscrediteasilyandaffordably.

Deliberateeffortsshouldbemadetodeveloppublicenlightenmentandeducationroadmapsforthecommoditiesmarkettoimproveunderstandingandencourageparticipation.Itisalsovital to encourage investment in all the requisite supportive infrastructure such aswarehousesandstoragefacilitiesbyexchangesandtheprivatesectors.Similarly,toenlargethe scope of participation, existing commodity merchants and other relevant stakeholdersshouldbeencouragedintotheexchangeseitherastradersorinvestors.

Ona finalnote,highvalueexportcommoditiessuchascocoa, sesameandgingershouldbedesignated as flagship products and trading of such commodities through the exchange

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shouldbeincentivised.AlsoexchangesshouldinstalltraceabilitysystemforNigeria’sflagshipand other export commodities that are traded through their platform.

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1.0 INTRODUCTIONBackground

OneoftherecommendationsoftheNigerianCapitalMarketMasterPlan2015–2025isthedevelopment of a thriving commodities trading ecosystem.This is necessary to deepen thecapital market, increase the number of product offering, enhance agricultural and solidmineralproductionandspureconomicdevelopment.Aspartoftheimplementationstrategytherefore,theSecuritiesandExchangeCommission(SEC)constitutedaTechnicalCommittee(TC)inJune2017ontheCommoditiesTradingEcosysteminNigeriawiththefollowingtermsofreference:

1. undertakeassessmentofexistingframework/infrastructuretoidentifychallengesandgaps;

2. developroadmapfortheenhancementoftheCommoditiesTradingEcosystem;and3. undertakeanyotheractivitythatmayberelevanttotheachievementofthismandate

2.0 COMMODITYTRADINGANDITSIMPORTANCECommoditytradingecosystemcanbedefinedastheenvironmentwithinwhichcommoditiestrading takes place and directly or indirectly, affects activities and development of thecommodities market and the exchanges. The ecosystem is comprised of various elements,which are integral to the architecture of the market and vital to the smooth and efficientfunctioningofacommoditymarketorexchange.Theecosystemencompassesallspheresofthe commodity tradingenvironment suchas itsoperations,products traded, infrastructure,logistics, traders/brokers, commodity merchants, farmers, miners, end users and otherstakeholders. It also covers the legal and regulatory environment. If these elements areabsent,inefficientorunderdeveloped,thecommoditiestradingecosystemwouldnotbewellfunctioningandsomaximumvaluemaynotbederivedfromitexistence.

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Figure1:CommodityTradingEcosystem

A commoditiesmarket is simply amarket, amedium for connecting buyers and sellers ofcommodities.Itmaybeformal(organised)orinformal(unorganised),havephysicallocationwithcentraltradingplacesorvirtualwithoutaspecifictradinglocation,inwhichcasetradingcanbeconductedremotelybyparticipants.Ourfocusishowever,primarilyonpromotingtheformalororganizedmarketsuchascommodityexchanges,whichprovideaformalandmorestructuredmechanismfortradingindesignatedcommodities.

Webelievethatsuchmarketsprovidesignificantvalueadditiontoeconomies;areasonwhycountriesmakeconcertedeffortstodevelopthem.ThisviewisbuttressedbyChuckKowalskiwhoobserved that “it’sunlikelythattheUSwouldhaveexperiencedasmucheconomicgrowthinthelast100yearsasithaswithoutthem(commodityexchanges).’’ThisobservationbyChuckKowalskiisperhapsalsotrueofmanyothercountries.Thisimportancehasseencommodity

CommodityTrading

Ecosystem

Warehousing+Warehousereceipts

andlogistics.

Operators,otherparticipantsandstakeholders

DeliveryMechanism,clearing+settlement

Products/commodities

physicalInfrastructure

Gradingandstandardization

legalandRegulatoryFramework

Tradingsystem/tradingPlatform

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exchanges sprangup all over theworld, in developed anddeveloping countries, trading allkindsofcommoditiesfromagriculture,tometalsandpreciousstones.

While commodities exchanges have existed for more than a century in some developedcountries, they are a more recent phenomenon in developing countries. In Africa, mostexchanges, with the exception of the defunct Egyptian Commodities Exchange, which wasestablishedinthe19thCentury,arerelativelyveryrecentinitiatives.

A commodity exchange is a market, which provides facilities (platform), regulations andstandards for the orderly, efficient and transparent trading of designated (selected)commodities. Contracts are created with standardized features, which thereafter becometradablefinancial instruments.Thecommoditiestradedmayormaynotbefordeliveryandindeed inmanyexchanges,most tradesarenot forphysicaldelivery.Commodityexchangestendtogravitatefromspotmarkettoforwardtothemorecomplexderivativesmarket.

2.1BenefitsofCommodityExchanges

Thereareseveralreasonswhycommodityexchangesareimportanttotheeconomy.Manyofthesereasonshavebeenwelldocumented,someofwhicharelistedbelow:

1. Theypromoteeconomicgrowthby fostering thedevelopmentofbothsoftandhardcommodities by efficiently linking commodities to industry, which could improveindustrial output and profitability. A thriving commodities trading ecosystem, cantherefore,facilitateindustrializationoftheeconomyandimprovetaxrevenue;

2. They create employment and raise the living standard of the farming community asopportunitiesareprovided forbetteraccess tomarket,producemarketing,access tomarketpriceandotherimportantinformation,whichcouldleadtoimprovedproduceprices for farmers, among other benefits. Since small holder farmers are usually therural poor, improvement in their living standards can have positive impact on ruraldevelopmentandmitigaterural-urbanmigration;

3. Theycanserveasaplatformforsmallholderfarmerstobebroughtintothefinancialsector as they get exposed to financial services such as bank deposit and creditfacilities,therebyfosteringthemuchneededfinancialinclusion;

4. Theyengendereconomicdiversification.ThisismoresoforaneconomylikeNigeria,which is heavily dependent on a single product for its foreign exchange earnings,namely crude oil. For an essentially agrarian economy like ours, with good solidmineral deposits, developing the commodities market remains a potent way todiversifytheeconomyawayfromcrudeoil,aswellaswidenthenational taxbase.Adiversified economy will potentially diversify the export base and improvegovernmentrevenue;

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5. Theyimprovetheattractivenessofagribusinessandfosteragriculturalproductionasfarmers and end users benefit from the use of the exchange. As value is seen andderived from the exchange, more people are likely to be drawn to agribusiness.Increasedproductionwould reduce importdependenceandencouragemoreprivateinvestmentintheagriculturalsector;

6. As a platform and transparent pricing mechanism is provided for trading solidminerals, activities in this sector could go up and more investment attracted withmultipliereffectontheeconomy;

7. Through theprovisionofpriceandother information transparencyaswellasbetteraccess to market, they reduce the exploitation of smallholder farmers byintermediaries. This enhances value to farmers, improves their well-being andencouragesfarmingactivities;

8. They provide rules and regulations, which bring order to the market. This in turnforces and encourages producers, including farmers, and traders tomeet the ethicalandqualitystandardsofthemarket;

9. By efficiently linking buyers and sellers in sufficient number, commodity exchangescreate liquidity and facilitate price discovery, which further bolsters commoditytrading. Market information such as price, quantity and quality are regularly madeavailabletothepublicwhichaidsdecisionsandtrades;

10. They provide a readymarket for the sale of commodities and incentivise the use ofstoragefacilities(warehouses)whichcanhelpminimizepost-harvestlosses;

11. Throughgradingandstandardizationofcommodities,commodityexchangespromotehighstandardsofqualitytherebyboostingexportasconfidenceisstrengthenedinthequalityofcommoditiesexportedthroughtheexchange;

12. Commodityexchangesprovideriskmanagementtools;enablingentitieshedgeagainstpossibleadversedevelopmentinthefuturepricesofcommodities.Suchfacilitieshelpindustries plan by providing price and supply certainties. Farmers can also use themarkettohedgetheircommoditiesagainstadversepricefluctuation;

13. Theypromoteagriculturalproducefinancinganddevelopmentofwarehousereceiptswhich can enables farmers including small holder farmers borrow against thecommoditiesinthewarehouse;

14. Commodity exchanges provide reliable price benchmarks for non-exchange tradedmarketssuchastheOver–The–Counter(OTC)market;

15. Through the use of warehousing, they help to ensure continuous supply ofcommoditiesregardlessoftheseason.Thisguaranteesrawmaterialsfortheindustryatalltimes,reducingriskofproductiondisruptionaswellasstorageandproductioncost;

16. Commodityexchangescanalsoassist inmoderatingconsumerpricebecauseof theirabilitytodriveupagriculturalproduction;

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17. They provide opportunity for securitization of commodities through the warehousereceipt system,whichcanalsobeusedascollateraltounlockfinancefromfinancialinstitutions;

18. They provide opportunities for investment in the commodities value chain such aswarehousing,assayingservices,brokerageandlogistics;

19. Theypromotethedevelopmentofderivativemarketsasderivative instrumentswithcommoditiesastheunderlyinginstrumentsaredevelopedwiththeattendantbenefitssuchaspermittingfarmersandotherstohedgetheirinvestments;andfinally

20. A thriving commodity exchange can contribute to moderating and reducing illegalmining of solid mineral products as the exchange tracks and records the origin(source)ofallcommoditiestradedonitsplatform.2.2DirectandCatalyticImpactsofCommodityExchanges

AccordingtoGabreEleni(2012),CommodityExchangeshavebothdirectandcatalyticimpactontheeconomy.Thecatalyticimpactsarethosethatspurinvestmentandincreaseeconomicactivities in sectors outside of the commodity production and trading. In fact, the catalyticimpact of a Commodity Exchange can outweigh the direct impacts, with a wide array ofservicesthatmayemergebytheestablishmentoftheExchange.

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Commodities market can be broadly classified into the Cash or Spot Market and theDerivatives Market (see figure 1). In the cash market, transactions are conducted forimmediate delivery of physical commodities or securities while in the derivative marketdeliveryisatafuturedate.Thederivativemarketcanbebroadlycategorizedintotheforwardand futuresmarkets. The forwardmarket trades in contractsof commoditiesand financial

Table1:DirectandCatalyticImpactsofCommodityExchangesDirectImpactofCommodityExchanges Catalytic Impacts of Commodity

Exchanges

Higher farmers’ share of final price due to reducedmarketingmargins

Increased investment in modern storageinfrastructureandhandlingtechnology

Incentive for farmers to invest in inputsandproducemore

Increased investment in quality testing services(modernlaboratories)

Incentives for farmers to improve post-harvestmanagementandimprovequalityofmarketoutput

Increasedinvestmentinqualitymanagementservices(moisture drying, pest management, cleaningservices)

Lessriskofcontractfailureandlowercostsofmarketaccess resulting in increased rate ofcommercializationoffarmoutput

Increased investment in logistics services such ascommoditydeliverycoordinationservices

Better alignment between local farmgate prices andnationalpriceduetoinformationtransparency

Increasedinvestmentintransportfleet,bulktrucking,andrailwaysystems

Improveddomesticfoodsecuritywithbetterresponsetopricesignals

Increased investment in high-quality packaging(sacks)

Smoothing of price volatility as goods flow fasteracross space and time and markets are moreresponsivetopricesignals

Increaseinwarehousereceiptfinancingproductsandofferings

Increase in export volumes and better price withqualitypremium

Increased investment in market intelligence(Bloomberg-typeanalysis)services

Increaseinagro-industrialprocessingofcommoditiesanddomesticvalueaddition

Increased investment in mobile telephony relatedmarketdata,tradingandpaymentservices

Increasedtaxrevenuefrompreviouslyinformalsectoractivities

Increased investment in training and educationservices

Increased investment in datawarehousing and datasecurityservices

Source–GabreEleni’sReportonNigeriaCommodityExchange,2012

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instruments which are for future delivery but customized to the specifications of thetransactionparties.Theyaretradedover-the-counterandnotonanexchange.

Figure2:TypesofCommoditiesMarket

Inotherwords,aderivativescommoditiesmarketdealsinfinancialcontractbetweenparties,which is derived from ascertaining the value of an underlying commodity. Because thederivativemarketreliesonthepriceoftheunderlyingmarket,itisessentialthatastrongcash(spot)marketexistspriortotheintroductionofderivatives.

In the futuresmarket, buyers and sellers agree on the quality and quantity of a specifiedcommodity to be delivered at an agreed price and date in future. In the options segment,partiesenterintocontractthatconferstheright,nottheobligation,ofabuyertobuyorsellagivencommodityataparticularpricefordeliveryonorbeforeagivenperiod.

Amajordistinctionbetweenthecashandderivativescommoditiesmarketisthattransactionsin the cash market are usually carried out by buyers who have immediate use for thecommodity purchased while transactions in the derivatives market do not often result inphysicaldeliveryastheycanbeoffsetbeforethedeliverydate.

2.3 NigeriaOutputsandExportsofCommoditiesThis subsection furtherunderscores the importanceof commodities inNigeria, focusingonoutputandexports.

Tables 2-4 give the structure of Nigerian agriculture and mineral resources in terms ofproduction(GrossDomesticProduct),relativecontributionstotheeconomyandrealgrowthrates.

It is depicted that agricultureGDP rose fromN19.64trn in2015 toN21.52trn in2016.TheGDP of agriculture stood at N7.2trn in the third quarter of 2017. In terms of percentagecontribution, table 3 shows that Nigeria’s agriculture sector contributed 20.86% to the

COMMODITIESEXCHANGEMARKET

CASHMARKET DERIVATIVESMARKET

SPOT SPOT FUTURESWFUTUR

OPTIONS OPTIONS FORWARDS

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country’s GDP in 2015, 21.21% in 2016 and this rose to 24.44% in Q3 of 2017. The cropproduction sub-section of agriculture is usually responsible for about 90% of agricultureproduction while other activities like livestock, forestry and fishing contribute relativelylower.Table4furthershowsthatthegrowthratesofNigeria’sagriculturesectorhavebeenpositiveduringthereviewperiod,rangingfrom3.72%in2015to4.11%in2016and3.06%inQ3of2017.

Table2:GrossDomesticProductValuesofAgricultureandMineralResources(N’bn)

2015 2016 2017Q1 2017Q2 2017Q3

1. Agriculture 19,636.97 21,523.51 4,686.22 5,210.15 7,198.21

2. CropProduction 17,189.97 18,883.08 3,969.52 4,530.13 6,536.58

3. Livestock 1,748.03 1,875.78 487.87 474.21 465.64

4. Forestry 222.83 236.25 58.24 66.98 60.62

5. Fishing 476.14 528.39 170.59 138.82 135.36

6. MiningandQuarrying 6,100.01 5,469.55 2,153.73 2,455.64 3,288.25

7. CrudePetroleumandNaturalGas

5,990.42 5,367.32 2,142 2,420.35 3,250.09

8. CoalMining 7.98 8.49 3.11 3.00 0.67

9. MetalOres 4.46 5.74 3.49 1.90 1.47

10. QuarryingandOtherMinerals 97.15 87.99 5.16 30.39 36.03

11. GDPCurrentBasicPrice 94,144.96 101,489.49 26,028.36 27,030.25 29,451.30

Source:NBS,CBN

Table2alsodepictsthatminingandquarryingGDPfellfromN6.1trnin2015toN5.47trnin2016. The GDP of this sector stood at N3.29trn in the third quarter of 2017. In terms ofpercentage contribution, table 3 further shows that Nigeria’s mining and quarrying sectorcontributed6.48%tothecountry’sGDPin2015,5.39%in2016and11.17%inQ3of2017.Over98%oftheminingandQuarryingGDPcomefromthecrudepetroleumandnaturegassubsector;however, thegrowth ratesof theother components (solidminerals) appear lessvolatile.

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Table3:ContributionsofAgricultureandMineralResourcestoGDP(%)

2015 2016 2017Q1 2017Q2 2017Q3

Agriculture 20.86 21.21 18.00 19.28 24.44

1.CropProduction 18.26 18.61 15.25 16.76 22.19

2.Livestock 1.86 1.85 1.87 1.75 1.58

3.Forestry 0.24 0.23 0.22 0.25 0.21

4.Fishing 0.51 0.52 0.66 0.51 0.46

MiningandQuarrying 6.48 5.39 8.27 9.08 11.17

5.Crude Petroleum and NaturalGas

6.36 5.29 8.23 8.95 11.04

6.CoalMining 0.01 0.01 0.01 0.01 0.00

7.MetalOres 0.00 0.01 0.01 0.01 0.00

8.QuarryingandOtherMinerals 0.10 0.09 0.02 0.11 0.12

Source:NBS,CBN

Table4:GrowthRatesofAgricultureandMineralRecourses(%)

Source:NBS,CBN

2015 2016 2017Q1 2017Q2 2017Q3

Agriculture 3.72 4.11 3.39 3.01 3.06

1.CropProduction 3.49 4.34 3.50 3.21 3.19

2.Livestock 5.93 2.94 1.72 2.28 2.52

3.Forestry 3.67 2.62 2.59 3.89 3.95

4.Fishing 5.89 (0.72) 5.49 (2.72) (2.84)

MiningandQuarrying (5.27) (14.45) (15.40) 3.51 25.44

5.Crude Petroleum and NaturalGas

(5.45) (14.45) (15.60) 3.53 25.89

6.CoalMining 10.39 1.00 2.03 4.92 (38.49)

7.MetalOres 7.27 20.74 40.79 (1.09) 10.70

8.QuarryingandOtherMinerals 7.51 (17.42) 52.54 2.24 1.86

GDPCurrentBasicPrice 2.79 (1.58) (0.91) 0.72 1.40

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66.344.7

17.216.4

11.48.37.56.75.8

4.03.92.72.72.00.90.90.40.40.40.2

CassavaYam

MaizeSorghum

MilletVegetablesCowpeas

RiceGroundnutCocoyamSugarcaneSoyaBeanPotatoesPlantainCottonMelonRubberOilPalmCocoa

Sesame

Figure3:OutputofTop20Commodities,2015(MMT)

Source:CBNAnnualReport,2015Figure 3 shows the top 20 agricultural products in Nigeria for 2015. It was observed thatNigeriaproduced66.3millionmetrictonnesofcassavafollowedby44.7mmtyam,17.2mmtofmaize, 16.4mmt of sorghum and 11.4mmt ofmillet. The outputs of other commodities areequallydepictedinthefigure.Inaddition,governmentiscurrentlypromotinganddevelopingthesolidmineralsectorwithspecialfocusongold,coal,limestone,bitumen,led/zinc,ironoreandbarites.

Table 5 presents information on the top exporters of non-oil commodities in Nigeria. It isshown that about 80% of these are exporters of agriculture commodities. The leadingexportersincludeOlamwithexportvalueof$143.9mn,Bolawaleat$91.0mn,AISat$40.8mn,Saro at $40.8mn andWacot at $38.1mn. The commodities exported range between cocoa,beans, sesame, cashew nuts, hibiscus flowers and leather. Export destinations range fromAsia,Europe,AmericasandotherAfricancountries.

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Table5:Nigeria’stop20Non-oilExporters

Exporters Exports($m)

ExportedProducts Destination

OlamNigeriaLimited 143.9 Cocoa,Beans,Sesameseeds Japan, China, Spain,Israel

BolawaleEnterprisesNig.Limited 91.0 GoodfermentedNigeriancocoabeans Netherlands,Canada

British American Tobacco NigeriaLimited

80.6 BensonandHedgesLiberiacigarettes Liberia,Cote'dvoire

AISTradesandIndustriesLimited 40.8 Nigerian raw cashew nuts, driedhibiscusflower

Guinea,Mexico

SaroAgroAlliedLimited 40.8 Nigeriancocoabeans Netherlands

WacotLimited 38.1 Premiumqualityhulledsesameseeds,cashewnuts

Canada,Netherlands

FataTanningLimited 37.8 Crust/finishedgoatandsheepleatherA-54

India

StarlinkGlobalandIdealLimited 37.1 Nigerianrawcocoabeans Netherlands

ETCAgroCompanyNigeriaLimited 35.7 Premium quality coloursortexedsesameseeds

India,Turkey

NotoreChemicalIndustriesLimited 33.1 Fullyrefrigeratedanhydrousammonia Morocco

RubberEstatesNigeriaLimited 32.4 NigerianSesameseeds Benin,Japan

MamudaIndustries(Nig)Limited 31.5 Nigerian dried cocoa beans, finishedleather

Netherlands,Italy

EmilolaInvestmentLimited 31.5 UTC certified Nigerian raw cocoabeans

Netherlands

AtlanticShrimpersLimited 30.3 Seafrozenshrimp Netherlands

SfurnaGlobalLimited 29.5 AluminumAlloy,Driedginger Japan,Egypt

GuinnessNigeriaPlc 29.3 MaltaGuinness(330MLCan) Cameroon

MetalAfricaSteelProduction 28.0 Remeltedleadingots India

AgroTradersLimited 27.0 Technically specified naturalprocessedrubber

Italy

OlatundeInternationalLimited 27.0 Nigeriancleanedsesameseeds Japan

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TheOkomuOilPalmCompanyPlc 26.6 Processed hibiscus flowers (HPSquality),rubber

Turkey,Italy

Source:CBNAnnualReport,2015

The foregoing table shows that cropproduction is amajor sector of theNigerian economywith the growth rate oftenhigher than that of the general economy.The countryproducesmany types of agriculture commodities such as cassava, yam, maize, sorghum, millet,cowpeas, rice, groundnut, sugarcane, cocoa etc. Further, the country’s non-oil exports arelargelyagriculturecommoditiesandtherearealreadylargeplayerswhoareearningmillionsofdollarsinforeignexchangeforthecountry.

GiventhatalltheseactivitiesemploythebulkofNigerianpopulation,anyinitiativethatraisesproductivity and increases the value addition of agriculture is expected to have positivemultiplier effect on the economy. As state previously, a commodity exchange can aid pricediscovery, lower risk, and engenderproductivity and export in agriculture.All of these canhelp to increase production and market efficiency. It is therefore natural for commodityexchangesinNigeriatocommencefromtradingagriculturalproduceandlater inthefutureconsiderdiversifyingintometalsandcrudepetroleum.

This future diversification will be necessary given that the solid mineral sub-sector iscurrentlyreceivinggovernmentattentionandisonapositivegrowthtrajectory.Equally,thecountry’s foreign exchange earnings and government’s revenue are currently, largelydependent on crude petroleum and needs to be diversified. Although the activities ofcommoditiesexchangeinthecountryarestillbasic,theforegoingshowstherethemarkethashugegrowthpotential.

2.4RelativePerformanceofCommodityExchangesoperatinginNigeriaOf the two exchanges in Nigeria, AFEX Commodity Exchange is fully operationalwhile theNigerian Commodity Exchange (NCX) is not fully operational due to funding challengesoccasionedbygovernments’inaction,amidstseveralotherchallenges.Thesechallengesnonetheless,theExchangelauncheditswarehousereceiptsin2013.

Table6showsthevolumeandvaluetradedonAFEXbetweenQ22016andNovember2017.The table depicts that volume traded on the platform ranged from 2,500mt in Q2 2016 to1,943mtinQ42017withavalueofN213mandN235mrespectively.VolumeandvaluetradedpeakedbetweenQ42016andQ12017,leadingtotheexpectationofamuchhighervaluebyQ1 2018. The table also shows maize (especially white) as the most traded commodity,followedbysoyabeans,paddyrice,gingerandothers(i.e.cowpea,wheat,yellowsorghum).

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Table6:TransactionsontheAFEXCommodityExchange

Volume(MT) Total Value(N’m)

Ginger PaddyRice

SoyaBeans

Maize Others TotalVolume(MT)

2016'Q2 153 2,348 2,500 213

2016'Q3 25 123 568 2,288 3,005 348

2016'Q4 11 747 2,359 9,299 12,416 1,489

2017Q1 155 75 61 20,209 9 20,508 3,112

2017'Q2 104 522 66 2,530 417 3,639 545

2017'Q3 192 112 27 1,777 40 2,149 347

2017'Q4 (Oct-Nov)

1,910 9 24 1,943 235

Source:AFEXfilingswithSEC

That someactivitiesarealreadyoccurringon thisplatform is an indicationof thepotentialavailableincommoditytrading.Further,giventhattheleveloftransactionisstillfarlessthanthetotalproductionintheeconomy,thereisampleroomforgrowthincommoditytradinginNigeria.

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3.0 EVOLUTIONOFCOMMODITYTRADINGMARKETSCommodity trading history can be traced to the agricultural revolution of 8500BC duringwhichfarmersandtradersfashionedameanstosecurepricesofcommoditiesagainstpricefluctuationcausedbyweather,conflict,andsupplyanddemandgap.Tradingevolution,excesssupplyand thequestofmerchants toraisemoneywhilecommoditywas instorage formedthebasisforfuturesagreement.Thefirstrecordedcommodityfuturestradesoccurredinthe17thcenturyinJapan,althoughthereissomeevidencethatricemayhavebeentradedsome6,000yearsagoinChina.

The first contract for a futurepricewas created in the early1800s in theUS.Thisforwardcontractallowedabuyer topay for the commodity in advanceof takingdeliveryof it. TheChicago Board of Trade (CBOT) was set up in 1848; trading in contracts that werestandardizedintermsofquantity,qualityanddelivery.TheCBOTaddedsoybeanscontractin1936andhassincemergedwiththeChicagoMercantileExchangetoformtheCMEGroup.

Exchanges added cotton and lard contracts in the 1940swhile livestockwas added in the1950s.Contractsforpreciousmetalssuchassilverstartedtradingduringthe1960s.Bythe1970s, when global currencies were delinked from gold prices, currency value fluctuatedbased on supply and demand, and financial futures became a tradable "commodity".Withthat, it became possible for cash settlements of trades instead of the traditional physical"delivery" of commodities. In the 1980s and 90s, stock indices such as the S&P 500 andgovernmentdebtinstrumentswereintroduced.

Technologybroughtconsiderableinnovationtothemarketincludingonlinetradingwhichhasheightenedinterestincommoditiesandfuturestradingasbuyersandsellerscouldfromthecomfortoftheirhomesandoffices,placetradeordersthroughelectronictradingsystemsandonlinebrokeragehouses.

Apart fromprovidinghedging instruments forcommodities, the futuresmarkethasbecomean important hedging mechanism against possible losses in financial instruments such asstocksandbonds.However,itisimportanttostatethatinterestinfuturestradingisnotonlytohedgethepriceofacommodityagainstanadversepricemovementbutitcanalsobeusedas a speculative instrument toprofit fromadesiredpricemovementwhich couldbeupordown.

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3.1 CommodityExchangesinAfricaIn1861,theEgyptianCottonExchangewasestablishedinAlexandraandbecameoneoftheearliest commodity exchanges in theworld. It played a key role in global trade, attractingusers from the international community including Africa, Asia and the Americas. Theexchangeclosed100yearslaterin1961withtheentryofthegovernmentasaplayerinthecottontrade.

Africangovernments’questtoderegulatetheireconomiesandopenupthefinancialmarketsinthe1990striggeredtheirwithdrawalfromcommoditytradingandledtotheestablishmentof commodity exchanges in a number of African countrieswith varying degree of success.Uganda,Zambia,Zimbabwe,SouthAfrica,Kenyaallestablishedcommoditiesexchangeinthe1990s.TheAfricanUnionAbujaTreatyof1991,identifiedtheneedforanAfricanCommodityExchangeandmighthaveprovidedsomeawarenessandpushfortheset-upofcommodityexchanges in the continent, at the time. The concept of an African Commodity Exchangebecame one of the “instruments of integration” of the AfricanUnion (AU). InWest Africa,there was also an attempt to create a regional exchange for food products following theadoptionoftheUEMOAAgriculturalPolicypaperbyUEMOAheadsofstateinDecember2001.

TheSouthAfricanFuturesExchangehasbeenoneofthemostsuccessfulExchangesinAfricaandremainsoperationaltothisday.Establishedin1995itwasacquiredbytheJohannesburgStock Exchange (JSE) in 2001 and now is its subsidiary. The Zambian and Zimbabweexchanges initially thrived but successive government intervention and commodities pricevolatility led to their failure. The Kenyan and Ugandan Commodity Exchanges experiencedsimilar fate as both exchanges could not garner sufficient trade volume to survive. TheUganda Exchange subsequently transformed to the government regulator of warehouseswhileKenyaExchangebecameapricesdatadisseminator.

AnewwavetoestablishfunctionalCommodityExchangesaroseinthe2000sandsawNigeriasetup theAbujaSecuritiesandCommoditiesExchange (ASCE),nowknownas theNigerianCommodityExchange(NCX), theAfricanCommoditiesExchange(ACE) inMalawiaswellastheEastAfricanExchangeinRwanda.Anotherattempttosetupacommodityexchangewasmade by Zambia through its Agricultural Commodity Exchange (ZAMACE). The EthiopianCommoditiesExchange(ECX)thatwasestablishedin2008istodayoftenseenasamodelforotherAfricancountriesasitisconsideredasoneofthemostsuccessfulinAfrica.Basedonamodel of standardized warehouse receipts, it initially experienced low trade volumes astradingwasthenlimitedtomaize,beansandwheat.However,itsoperationssouredwhentheexchange introduced export commodities in December 2008. Furthermore, trading volumesignificantly rose on the back of government policies thatmandated export trades such ascoffeebecarriedonlythroughtheExchange.

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ThesuccessofECXhasbeenattributed largelyto thesupportof theEthiopiangovernment.Coffeeexport inEthiopiaissaidtohaveincreasedfrom$529millionin2007/2008to$797millionin2011/2012.Morerecently,ithasbeenrecognizedthatthissuccesshascomeataprice.Themainbeneficiariesoftheexchangehavebeenthetradersandnotthecoffeefarmersas hoped. Further, again because of Government intervention in standardization, themarvelousspecialistvarietiesofcoffeehadalltobesoldas‘Robusta’.Thisdidawaywithanyhopeofapremiumprice forquality.Withinthe last18months, thishasbeenrecognizedinEthiopia and the policies are changing in the hope of reducing the large black market inspecialistcoffeeswhichhasarisenasaresultofsimplisticpoliciesofstandardization

InGhana, theCocoaBoardensures transparencyandguaranteesprices to farmersdirectly,whichnegatestheneedforsuchintermediaries.Today,theGhanaCommodityExchangeisinanadvancedstageofbecomingoperational.TanzaniaandKenyacoffeeauctionsalsoprovideefficient differentiation and traceability. Ghana is currently in the process of setting up acommodityexchange.

ItisimportantthattobuildathrivingcommodityexchangesinAfrica,theexperienceofothercountries needs to be taken cognizance of in order to avoid pitfalls and gain maximumadvantage.

3.2 HistoryofCommoditiesTradinginNigeriaSome of the modern day agricultural marketing challenges such as access to market andproducefundingwerealsopresentinthecolonialeraandresponsibleforthesettingupoftheProduce Marketing Boards by the colonial administration. The boards were to link thepeasant farmers tomarket at stableprices.TheMarketingBoardswere setup in the threeexistingregionsbetween1947and1963before theWesternRegionwasspilt intoWesternandMid-WesternRegions. CocoaMarketingBoardwas established in 1947 in theWesternRegionwhileCotton andGroundnutMarketingBoardswere set up in theNorthernRegionandPalmProduceMarketingBoardintheEasternRegionin1949(Iweze,2014).

TheBoardsweresetupnotonlyforpricestabilizationbutalsotoserveasasourceoffundsfor the economic development of the regions as well as to carry out research anddevelopmentprincipallyincocoa,cotton,groundnuts,palmproductsandrubber.

Thecommodityboardssubsequentlysetup“gazettedmarkets”acrossthecountrywherethecommoditieswere subjected to quality checks before theywere bought from the LicensedBuyingAgents(LBAs).TheLBAshadproducebuyersaccreditedtobuyontheirbehalf. Theproducebuyers intheprocesswenttodifferentvillagesandfarmsteadstobuytheproducebased on weight, physical appearance of the produce and allowance for possible qualitydefects from the farmers. They paid the farmers on the spot or sometimes at a later datedepending on the relationship between them and the farmers. This arrangement largely

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promotedqualityassurancerightfromthefarmgateswheretheproducewereinspectedforqualitypriortopaymentoffarmers.

Itwasthisqualityassuranceandtheadherencetobestagronomicpracticesbyfarmersthatenhanced agricultural production and exports, and financed development projects in theregions. For storage of their produce, the regional governments builtwarehouses,many ofwhichwerelargewarehousesaroundtheportareafortheirexportcommodities.

Warehouses start usually as storage device set up by commodity owners during seasonswhen harvest exceeds consumption. It is therefore reasonable to assume that in Nigeria,farmers started storage facilities to keep seasonal harvest of the crops. With increasedcommunalinteractionsintheearlyyears,tradingactivitiesalsoincreased,elicitingdifferentformsofstoragearrangement.BythetimetheEuropeantraderscameintothescene,thefirstsetofstructuredwarehousesorstoreswerebuilt.Thesewereessentiallyowner-operatedorsubsidiary warehouses as they were operated by the owners or by subsidiary companies,which were wholly owned and controlled by their parent companies based locally oroverseas.

ColonialtradinggiantslikeJohnHolt,GBOllivantandUnitedAfricanCompany(UAC)ownedthe oldest of warehouses in Nigeria. The warehouses were used to store mainly exportproduceandimportsfromtheirparentcompanies.

The companies simplyestablish theirownwarehouse standards,whichwereadopted fromtheirparentcompanyorhomecountry.Therewerenonationalstandardsoragenciesuntilthe introduction of the Federal Produce Inspection Service (FPIS) and State ProduceInspectionService(SPIS)in1954.

Thedevelopmentalimpactofthemarketingboardscannotbeoveremphasizedasthatperiodwitnessedtheestablishmentbytheregionalgovernmentsofsomeacademiccitadelssuchasthe University College Ibadan (now University of Ibadan), University of Ife, University ofNigeriaandAhmaduBelloUniversity.Fundingoftheseinstitutionscamefromrevenuefromcommodity exports. Besides these institutions, other landmark projects and policies wereexecuted/implemented through revenue from the activities of themarketing boards. TheyincludedtheestablishmentofthefirsttelevisionstationinAfrica,theCocoaHouse,whichwasthetallestbuildinginNigeriaatthattimeandthefreeprimaryeducationprogrammebytheWesternRegionalGovernment,whichwasfundedbyproceedsfromcocoa.

The Eastern Regional government did the same by implementing free primary educationprogrammein1957fromPalmProduceandRubberexportswhiletheNorthernRegionalsoundertookdevelopmentprojectsfromsuchexportproceeds.Thesurplusthataccruedtotheregionalgovernmentsfromcommodityexportsarosefromthedifferencebetweenproducer

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pricesasfixedbythegovernmentofeachoftheregionsandthepricesatwhichtheproduceweresoldoverseasby theNigerianMarketingCompanyestablished for thispurposeby theFederal Government. The marketing boards later became Commodity Boards with thecreationofstatesin1967.

Under themarketingboardarrangement, the farmers gradually felt short changedbywhattheyreceivedandformedapressuregrouptoprotecttheirinterest.Oneremedytheysoughtwasanincreaseinproducerpricesapprovedbytheboards.Thereareargumentstoday,astothe successof themarketingboards. For instance, Iwezeargued that themarketingboardsonlysucceededtosomeextentinstabilizingseasonalproducers’price,butachievedlittleinstabilizingproducers’income.

ThecommodityboardswerescrappedfollowingtheliberalizationoftheeconomyundertheStructural Adjustment Programme (SAP) in 1986. Ironically, commodity exporters to date,stillbuycashcropsonthebasisoftheframeworkdevelopedbythecommodityboards.

However, unlike the era of commodity boardswhen farmers knew the buying price of allcommodities under each board’s control,farmers nowadays suffer from priceinformation asymmetry as they don’t knowwhatthepriceofwhattheyaresellinggoesforinthenextvillageorthenextruralmarket.Itisthese and other challenges that reinforce theneed for the establishment of commoditiesexchangesasalternativemarketingplatformforcommodities.

The Central Bank of Nigeria noticed the vacuum created by the abolition of CommodityBoards in1986 and advised theFederal government to establish aCommoditiesExchange.Therewasnogainsaying that theabolitionof thecommodityboardsaffected thestandardsand quality of commodities particularly, export produce, as there was no strong qualitycontrol and grading agency to ensure standards of the commodities. The private sectorperhapssawabusinessopportunityinthenewlyliberalizedcommoditiesbusinessandpaidlittle attention to quality. As a result, substandard commodities becamewide spread. ThisdefectwastoimpactnegativelyonthereputationofNigeria’sexportcommodities.

TheinterventionbytheCentralBankwastherefore,an attempt to address the resultant effect ofscrapping the marketing boards. The thinking was

CommodityExchangeshelpfarmerstokeep

awareofthemarketpricesoftheirproduceacrossawidegeographicalareaandthroughouttheyear

Therulesandregulationsof

CommodityExchangecanensureconsistentstandardsofqualityof

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that a commodities exchange would providestandards andgrading andassume that functionofthe commodities board and invariably promoteproduce quality, particularly of exports. Obviously,while thiswasamajor concern for theCBN, it alsorecognized the wider benefits of having a thrivingcommodityexchangeinthecountry.

An Inter-Ministerial Technical Committeewas consequently set-up in 1989 to examine thepossibilityofsettingupacommoditiesexchangeinthecountry.Thecommitteesubmitteditsreport a year later supporting the establishmentof a commodity exchange.However, therewas no evidence that concrete actionwas taken by government to do so. Nonetheless, anunsuccessful attempt was made by FALCOMEX, a private sector initiative, to establish acommodityexchange.Otherthantheseefforts,nootherattempteitherbygovernmentortheprivate sector is known to have been made until August 8, 2001 when the FederalGovernment directed the conversion of the then Abuja Stock Exchange to a CommoditiesExchangevestingtheMinistryofFinancewiththeresponsibilityofmidwifingtheconversionprocess.

The SEC was part of the Inter-ministerial Committee constituted to examine the gap thatarose after abolition of the marketing boards. Following the conversion of Abuja StockExchange to a commodities exchange, the SEC developed regulatory framework forsupervisionofthecommoditiesexchangeandengagedboththeBureauofPublicEnterprises(BPE)andtheExchangetokick-starttrading.

In 2014, SEC developed a 10-year capital market master plan to transform the Nigeriancapital market. Mindful of the need to have an organized commodities market, one of therecommendationsofthemasterplanistodevelopathrivingcommoditiestradingecosystem.To achieve this mandate, the SEC set up a committee consisting of major stakeholders toreviewandcomeupwithrecommendationsandroadmapforimplementation.Theseeffortsarekeytothedevelopmentofthecommoditiesmarket.

3.3 TheNigerianCommodityExchange(NCX)

Asstatedearlier,theFederalGovernmentin2001directedthattheAbujaStockExchangebeconvertedtoacommoditiesexchange.Theconversionprocesshowever,started3yearslaterin 2004 when an Inter-Ministerial Committee was constituted by the Federal Ministry ofCommerceandIndustryforthatpurpose.Thereportofthiscommitteegaverisetoanothercommittee, a Steering Committee that was chaired by the Deputy Governor (FSS), Central

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BankofNigeria.TheSteeringCommitteeconcludeditsworkin2005andtradingcommencedontheExchangeinJune2006.

Itwasachallengetoconverttheexchange,whichhadoperatedsolelyasastockexchangetobesuddenlyre-calibratedinallrespecttoacommodityexchange.Thesuddentransformationmeant that the trading platform had to changed, operations had to be modified, newmembership types had to be created, newproducts admitted for trading andnew capacitydeveloped,amongstotherschallenges.Thesechangesrequiredfunds,capacity,productsandnewparticipants.

Unfortunately, the exchange lackedproper funding to carry out its functions and couldnoteven mobilize sufficient funds to enable it enter into technical collaboration for capacitybuilding and knowledge transfer which it needed badly with established commodityexchanges.Inadditiontothesechallenges,theexchangefacedweaksupply,lackofinterestbyoperators in the securities market to open commodities trading subsidiaries, lowunderstandingoftheworkingsoftheExchangeandtheabsenceofsupportiveinfrastructureandinstitutionalarrangementsthatcouldstrengthenthesupplysideofthemarket.

There was also the non - existence of vibrant farmers’ co-operatives that could bulk theproduce of their members for wholesale marketing on the floor of the Exchange. Equallylackingwere commodity grades and standards aswell as farmers’ credit system based onWarehouseReceipts.

Atthetime,itwasthoughtthatgivingtheexchangeaduallicensetotradebothcommoditiesandsecurities,andthereafterprivatisingitwouldsolvesomeofthechallengesitwasfacing.Thus in 2003, in preparation for privatization,which unfortunately nevermaterialised, theBureau of Public Enterprises (BPE) directed the Exchange to change its name from AbujaCommodityExchange(ACE)toAbujaSecuritiesandCommodityExchange(ASCE).Thiswastoenableitacquireacompositetradinglicensethatwouldallowittradecommoditiesaswellassecuritiessuchasstocksandbonds.

Theperceivedadvantageofaduallicensethenwastoattractenterprisesforprivatization.Inthe bid to spur activities, the exchange organized sensitization programmes for variousstakeholdergroupsandpursued the introductionofaWarehouseReceiptSystem(WRS) inNigeria.ThishasyieldedsomeresultwithanexecutivebillonthesubjectmattersenttotheNationalAssemblyin2017.Thebill,asatthetimeofpreparingthisreport,hadbeenpassedbytheSenateandawaitingtheconcurrenceofthelowerhouse.

Believingthattheenactmentofa lawoncommoditiesexchangeinNigeriawasnecessarytogetadequatefundingfromgovernmentandlegalsupportforitsoperations,theExchangein2010sponsoredaBill foranActtoestablishNigeriaCommodityExchangeandOtherAlliedMatters,whichisyettobepassedintolawbytheNationalAssembly.TheBillissaidtobeat

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theCommitteestageoftheHouseofAssembly.TheNCXhasalsobeeninvolvedinaninitiativeto develop theMarket Information System (MIS) and aNational Grading System (NGS) foragricultural produce in the country that is yet to be exposed to commodity marketparticipantsforcommentsbytheStandardsOrganisationofNigeria.In termsof improving itsoperationalefficiency, theNCXplans toacquireand installanon-proprietaryelectronictradingsystemtoprovideatradingplatformforWarehouseReceipts.Based on the size of Nigeria and the relative robustness of its telecommunications andfinancialsystem,theExchangeintendstodeployadecentralizedelectronictradingsystemforstandardized spot contracts that would facilitate a T+1 trading cycle with six (6) RemoteAccessSites(RAS)oneineachgeo-politicalzone.

TheRAS,whichitsaidwillbelocatedinareaswhereparticularcommoditiesaregrown,willprovidefacilitiesforelectronicfloor-basedtradingandwouldbeelectronicallylinkedtotheExchange'scentraltradingengineatheadofficefortheclearingandsettlementofalltrades.Thesitesaretobe locatedin;Kano(NorthWest),Gombe(NorthEast),Jos (NorthCentral),Akure(South-West),Abakaliki(SouthEast)andCalabar(SouthSouth).EachRASshallbe linked toNCXheadoffice foreffectivemanagementandservicedelivery.TheExchangestatedthatallcommoditywarehousesunderitspurviewwillbelinkedtothecentral depository to facilitate trading in electronic warehouse receiptsWR issued by theDepository.NCXhopestodeveloparobustandefficientreal-timeMarketInformationSystem(MIS)thatwill provide producers, processors, industrialists and traders with objective up-to-datemarket information analysis, market outlook, and other references to assist in marketingdecisions. As a result, the Exchange intends to set up three Market Information Centres(MICs) in each geo political zone of the country. The information provided by theMICs isexpectedtoplayakeyroleineffectivepricingandhelpineliminatingartificialtradebarriersthatmaybecreatedbymiddlemen in thevaluechain. Themarket informationcentreswillengenderperfectknowledgeofthemarketsamongvariousplayersintheagriculturalproducemarkets.ItisimportanttopointoutthattheprivatizationofNCXisstillinprogresswiththeplanned investment of theNigerian Sovereign Investment Authority (NSIA). Of course, anynewinvestormayreviewtheaforementionedplannedinitiativesoftheExchange.

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Figure4:AdiagrammaticpresentationoftheproposedtradingsystemaspresentedbytheNCX

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3.4 AFEXCommoditiesExchangeLimitedAFEXCommoditiesExchangeLimited(AFEX),asistercompanyofEastAfricaExchange(EAX),was established in Nigeria in 2014 through a Public Private Partnership with the FederalMinistry ofAgriculture andRuralDevelopment (FMARD) to establish aWarehouseReceiptSystem (WRS) andCommoditiesExchange inNigeria.AFEXNigeria secured its license as aCommoditiesExchangeincompliancewiththeInvestments&SecuritiesAct(ISA),2007andtheSecurities&ExchangeCommission’s (SEC)Rules&Regulations inMarch2015.AFEX isalsothefirstprivatesectorledandfundedCommoditiesExchangeinNigeriaandacrossWestandCentralAfrica.

AdoptinglessonslearnedandchallengesmetduringtheestablishmentofEAX,AFEXNigeriahasbuiltonexistinglogisticssystemsbyprovidingwarehousesacrossmajorgrain-producingstates in North-West, North-Central & North-East Nigeria. This has led to the creation oftradingterminalswhereprocessors,tradersandfarmersexchangevalue.

Table7.ListofAFEXwarehouses

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AFEXWarehouses

Regions Locations

Kaduna Saminaka

Pambegua

Jengre

Panyam

DokaLere

Makarfi

Zaria

Soba

Anchau

Pampaida

Kachia

Kubacha

Kwoi

Katsina Funtua

Dandume

Bakori

Taraba Jalingo

Mutumbiu

Bali

Garbachede

Gombe

Kumo

Benue Gboko

Asukunya

Buruku

Aliade

Akpagher

Kano Dawanau

Kura

Hadejia

Kebbi Suru

Argungu

Jega

Zamfara TalataMafara

AFEX’swarehousesserveasstorageandaggregationpointsforfarmers,hencesecuringyear-roundsupplytolivestockfarms,processors,industries,neighbouringcountriesaswellasthe

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broaderexportmarket.BeyondAFEX’swarehouses,itwillalsolicenseaccreditedwarehouseoperators and collateral managers who will help deepen the market and provide theseservicesacrossthecountryundertheregulationoftheSEC.

AFEXseeksto:

§ EstablishacommerciallyviablemodelforcropstorageandstandardizationinNigeria;

§ Reduce price volatility by facilitating the creation of buffer stocks and encouragingstaggered supply through theprovisionof collateralmanagement services and stockfinancing;

§ Support smallholder farmers’ access to credit through the electronic WarehouseReceiptSystem–eWRS;

§ Reducepost-harvestlossesandchampionincreaseinhighyieldcrops;

§ Createaccesstonew(andhighvalue)marketsthroughtransparentandefficienttradeontheExchange;and

§ Increase transparency of commodity markets and share of value appropriated bysmallholderfarmersfortheircrop.

CreatingValuetoSmallholderFarmers–TheAFEXModel

AFEX’soverarchingstrategyistocreateanationaltradingplatformandsupplychainnetworkin carefully identified value chains (staple and export crops), through which farmers andcommoditymerchantscanaccesscommodityandfinancialmarkets.Integralinthestrategyis the inclusiveapproachofnotonlydevelopinga tradingplatform,butalsosupporting theancillary infrastructure critical to the success of an exchange and the development ofagricultureatlargebyoperatingfourcoreservices:

i. OutreachThe AFEX approach is focused on education, capacity building and partnership withcommodity market stakeholders in a way that elevates the local economy, and providesincreased employment and wealth creation for farmers. With a robust outreach programwhichorganizes farmers in groupsand clusters, trains and certifiesOutreachOfficers1whocoordinate the activities of the farmers and provides access to financing and agriculturalinputsattherighttimetoguaranteequalityproduce,farmershavethepotentialtoearnafairshareofcreatedvalue.1Theseoutreachofficersarelocalsinfarmingcommunities,trainedtoreachoutandengagefarmers,enlighteningthemonAFEX’soperations

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ii. AggregationTwomajorbarriersthatlimittheabilityoffarmerstotradedirectlywithcommercialplayersare: lowvolumeofcommoditycultivatedandabsenceof financialserviceproviders inruralareas. AFEX mitigates these barriers through the warehouses, and combine several smalltransactionstomatchlargepurchaseordersfromtheprocessors.This increasestheincomeearnedbythefarmer.

Typically,when supplying in smaller quantities, you are paid less. However, AFEX deliversvaluebyofferingfarmersaccesstothesamepriceastradersi.e. irrespectiveofthequantitybeingdeliveredtothewarehouse,thesamevalueisbeingpaid.Thishasencouragedfarmerstotransactmorewiththeexchangewhilstsimultaneouslyincreasingtheirincome.

iii. StorageandWarehouseReceiptFinancingFarmers could potentially earn significant incremental income through access to storage,whichprovidesflexibilityonthetimingofproducesales.Creatingtheopportunityforfarmerstostoreharvestedcropsatharvestand leverageon thestoredproducts toaccess financingincreasestheirincomesignificantly.AFEXrunsahubandspokemodelforthewarehousestoensureefficiency,inclusivenessandreachtofarmingcommunities.Byoperatinganetworkofwarehousesandsilocomplexesdesignedtostorethetonsofcropsproducedeachseasonthatwould otherwise go towaste,AFEXwarehouse facilities allow farmers to safely store theirharvestatafeewithoutworryingaboutlossofvalueuntilmarketpricesarefavorable.

Withthissolution,producersandprocessorscanstoreproductsatvariouslocationsorotheraccreditedwarehouses,andmanagetheentirestoragechain,includingallintakeprocedures,product grading, and fumigation. This eliminates the extra cost of moving grains betweenstates,before sending to the finalmarket, creatingefficienciesandminimizingpost-harvestlosses.

ThefollowingillustrationisasampleofanAFEXelectronicwarehousereceipt:

Figure5:SampleofAFEXelectronicwarehousereceipt

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iv. CommodityTradingIn addition toproviding secure storageand linkingplayers across thevalue chain to creditsources, AFEX links commodity buyers (domestic and international) and sellers, andfacilitatesthecashandproductsettlement.

AFEXoperatesanelectronicmarketwhichenablessmall-holderfarmerstotradethroughthewarehouses. The company recently launched a Nasdaq-OMX trading platform that allowsparticipantsbuyandsellproductsfromtheconvenienceoftheiroffices,ortradefromtradingterminals provided by the Exchange. The new trading platform can also facilitate auctions,spot trading as well as forwards and futures contract trading. The Nasdaq –OMX tradingplatformisthesameplatformusedbytheNSE.

AFEX creates a marketplace that trades across a broad range of agricultural productsincludingmaize, soybean and rice. The approach is to ultimately act as the central counterparty for the trade of spot, forward and future contracts, and provide international andNigerianmarket participantswith a new andmore efficientmethod for price discovery aswellastheabilitytocarryouttrades.

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By tapping into the opportunity to have standardized and graded products, reduced post-harvest losses, transact with large industrial buyers without passing through chains ofmiddlemen,aswellastheabilitytodelaysalesofproductsuntillaterintheseason,additionalvalueforsmallholderfarmeriscreated.

AFEXNigeria has spent the last three (3) years building a supply chain network to ensureefficientdeliveryandsettlementoftransactions.Priortothe launchofthetradingplatform,tradesontheexchangeweresettledvianegotiatedtransactionsoverthecounter(OTC).Forinstance, ifabuyerorprocessor issuesanLPO2for10,000metrictonnesofcommodityatamaximumprice,thebidismatchedmanuallybyatradingofficerintheexchangewithoffersatthesamepriceorless,untiltheentirevolumeismet.Similartotheopenoutcrysystemoftransactingonexchangetradingfloors,thismodelofoperationissusceptibletoanumberoferrors,suchas, transcription, transpositionerrorsandthe likes. Inaddition, thebuyerdoesnothavefullcontrolandviewershiponhistransactions.AlltheseandmoreiswhatledtothedeploymentoftheNasdaqTradingSystem.

The launch of the trading system revolutionized the way trades are carried out on theexchange.Thetradingsystembringswithittransparencyandfullcontrolontransactionsforboththebuyerandtheselleraswellaseaseoftransactingattheconvenienceofeitherparty.

Figure6.1:ScreenshotsoftheAFEXelectronictradingplatform

2LocalPurchaseOrder

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Figure6.2:ScreenshotsoftheAFEXelectronictradingplatform

The deployment of the trading system has necessitated the need to operationalize itsmembership structure as brokers, dealers and clients play an integral part in the system.Currently,AFEXhasmemberswhoare licencedandhaveaccess to the tradingplatformforexecuting their transactions. Such members put their positions online and the tradingplatformautomaticallymatchesthemwithcorrespondingpositions.

The exchange currently views the electronic tradingmarket as being in its developmentalstageaskeyplayersrequiredtodrivethefulloperationalizationofthetradingsystemareyetto integrate it in their processes. AFEX is currently engaging players in the capital andfinancialmarketsonparticipationon theplatform. Also, in thisdevelopmentalstageof thecommoditiesmarket,itisnecessarytopermitflexibilityofrequirementsforregistrationandparticipation on the exchange to encourage operators to participate in the commoditiesmarkets.

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v. MarketDataBelowisasampleofmarketdatafromtheAFEXCommoditiesExchangesourcedfromvariouslocalmarketsacrossNigeriafortheperiod19thJanuary–25thJanuary2017.

A noteworthy case study is the Nasarawa Women Cooperative.

The relationship between AFEX and the Nasarawa Women Cooperative started in 2015 when the cooperative planned to access financing from a commercial bank for collective input purchase, but could not access the loan on time and AFEX had to step-in to facilitate the provision of the loan by a micro-finance bank.

In 2017, the number of members who could access the facility had increased to 31 cooperatives of 10 women each, and the value of input which they received increased by up to 50%. In addition to the facility for input, AFEX also helped the women group procure a yield index insurance product.

AFEX sees a need to extend this practice to some of the male groups and expand the learning from these groups across other women groups in cultivation, as well as other service provider groups across the value chain (typically women and youths).

AFEX has so far been able to offer the women cooperative storage facilities, access to new markets as well as continuity in input financing.

AFEX created a special input financing program different from what was generally offered, but tailored to suit their abilities. The association pays a 30% equity contribution out of the amount they require. This group of women are AFEX model farmers and are currently in the 3rd year of engagement with them.

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Figure7:SampleofAFEXMarketdataforCommoditiesacrossNigeria

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4.0 CURRENTSTRUCTUREOFTHECOMMODITYMARKET

Thecurrentstructureandkeyinstitutionsinthemarketareshownbelow

Figure8:KeyInstitutionsinthemarket

ThecurrentmarketstructureshowstheactiveinvolvementofkeyFederalMinistriessuchasFederalMinistryofAgricultureandRuralDevelopment(FMARD);FederalMinistryofMinesandSteelDevelopment(FMMSD);FederalMinistryofIndustry,TradeandInvestment(FMITI)aswellasFederalMinistryofFinance(FMOF)intheecosystem.

Their roles are primarily policy setting, policy implementation, and oversight of theirrespective sectors. FMARD and FMMSD oversee the development of soft and hardcommodities respectively. The Ministry of Finance is the supervisory Ministry for theSecuritiesandExchangeCommission(SEC)whichregulatesthecapitalmarketincludingthecommodity exchanges. However, the NCX as a Federal Government owned and fundedinstitution reports to FMITI. The Bureau of Public Enterprises (BPE) holds the ownershipinterest inNCXonbehalfof theFederalGovernmentandhasoccasionallyexerted influenceontheNCX.

TheCBNhadinthepast,madefinancialcontributionstowardstheoperationsoftheNCX.ItisclearthattheNCXiscurrentlyunderthesupervisionoftwoministries,directlybyFMITIandindirectly by FMF through its supervision of SEC. This arrangement, no doubt, sometimescreates ambiguity and conflict onmatters of the exchange anddoes not augurwell for theexchange and regulation by the SEC. It is expected that the reporting line of NCX will be

33

streamlinedwhen the proposed divestment of the NCX is concluded.With the divestment,FMITIshouldceasetosuperviseNCX.

There are other government agencies, whichhave been very prominent in the commoditiesecosystem.TheCBNstandsoutgivenitsstrongdevelopmental role, particularly in de-riskingtheagriculturalsector.TheBankofAgriculture(BOA), Bank of Industry (BOI) and NigerianExport – ImportBank (NEXIM) also play somerole especially in the provision of credit andcapacity development to agriculture andagribusinesses.

CommodityexchangesareregulatedbytheSEC,whichderivesthepowertodosofromtheInvestmentsandSecuritiesAct(ISA)2007.Section13(b)oftheActspecificallygavepowerstoSECto:

” register and regulate securities exchanges, capital tradepoints, futures, options, andderivative exchanges, commodity exchanges and any other recognized investmentexchanges.”

Section 13(f) requires the SEC to “prepare adequate guidelines and organize trainingprograms and disseminate information necessary for the establishment of securitiesexchangesandcapitaltradepoints.

UnderInterpretationandCitation,asecuritiesexchangeisdefinedas:

“an exchange or approved trading facility such as a commodity exchange, metalexchange,petroleumexchange,options,futuresexchange,over-the-countermarket,andotherderivativesexchanges”

It also defines securities to include “commodities futures, contracts, options and otherderivatives….”

PartVoftheISAmadeextensiveprovisionsfortheregistrationandregulationsofsecuritiesexchange, capital tradepoint andother self- regulatoryorganizations. Severalprovisionsofthe Act made reference to securities exchanges which are also applicable to commodityexchanges.Inadditiontoregisteringtheexchanges,theSECisrequiredtoregistercommoditybrokers and other operators in the commodity exchanges while they are required to belicensedbytheexchangebeforecommencingtradingonanysuchplatform.

Clearandstraightforward

regulationisrequiredfortheeffectiveoperationofacommodityexchange

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Currently,therearenoregisteredcommoditybrokersorothercommodityoperatorstradingon both exchanges, although SEC has rules for the registration of commodity exchangeoperators. The NCX has not been trading for about a decade. In its early years (as AbujaSecuritiesandCommodityExchange)ithadafewlicensedcommoditybrokerswhoalsohadstockbroking licenses andwere active on theNigerian StockExchange (NSE).AFEX, on theotherhand,providestradingaccessto itsplatformtosomeinstitutions,whichareyettoberegisteredwith the SEC.These institutionsdonot trade for clients butdo so for their ownaccountandessentiallyplaytheroleofcommoditytraders(dealers).

ItisimportantthattheseinstitutionsareregisteredbytheSECasnotregisteringviolatestheprovisionofSection38(1)oftheISA,whetherornotsuchtradingisforownaccount.Section38(1) (b) state that “no person shall carry on investment or securities business unless theperson is registered in accordancewith this Act and the rules and regulationsmade thereunder”. Section 13(g) also gives powers to the SEC “toregisterandregulatecorporateandindividualcapitalmarketoperatorsasdefinedintheact”.TheActdefinesamarketoperatoras“any person (individual or corporate) duly registered by the Commission to perform specificfunctions in the capital market”. AFEX is currently making efforts to get operators on itsplatformregisteredbySEC.

However,thequestiontoaskiswhytherehasbeenlittleinteresttooperateinthecommoditymarketastherearecurrentlynoregisteredcommodityoperators?Wethinkthatthereislackofunderstandingofthepotentialbenefitsandworkingsofthemarket.Moreneedstobedonein this regard by the SEC and the exchanges. The stockbroking community and otherstakeholders who showed early interest in participating became disillusioned with theoperations/developmentinASCEnowNCX.Astradingintheexchangewentmoribund,theyeffectivelywithdrew.Withrecenteffortstorevampthemarket, interestofthestockbrokingcommunity is being rekindled as they are said to be contemplating the establishment of acommodityexchange inLagosunder theaegisof theAssociationofStockbrokingHousesofNigeria(ASHON).

In addition, the current minimum capitalrequirement for broker/dealer is nowN300million while it is N200Million andN100Millionforbrokeranddealerrespectively.There is no clarity whether these capitalrequirements are applicable to both stock andcommodity brokers and dealers. At thisdevelopmental stage, a high capital base willdiscourage participation and is perhaps one of

Commoditybrokers/dealersshouldbeencouragedtotradeand

notpenalizedbyexcessivelyhighcapital

requirements

35

thereasonsfornorecordedregistrationbytheSECpresently.

We recommend that the capital base for commoditybrokers/traderswhobuyand sell justphysical commodities and do not trade financial instruments such as futures and optionscontractsasispresentlythecase,shouldnottobeburdenedwithhighminimumcapitalbase.Theytradeinphysicalcommodities,whichareforimmediate(e.g.onetothreedays)paymentagainstdelivery.Thecounterpartyriskistherefore,notashighasinderivativescontracts.

Inmanyother commoditymarkets, spotmarketbrokers tradingonlyphysical contractsdonot carry any mandatory capital base. A review of the SEC Rules and Regulations onCommodity and Futures Exchanges shows a heavy concentration on regulation of futuresmarket with little focus on spot trading which the platforms of the exchanges presentlysupport.ItisthusnecessaryfortheSECtointroduceclear-cutrequirementsthatwouldalsosupportthespotsmarket.Asderivativesareintroduced,therulesshouldnecessarilybemademuch more robust. The regulation of brokers/traders and other operators in the spotcommoditiesmarketshouldbedelegated to theexchangesby theSEC.TheSEChaspowersunder Sec. 13(o) to delegate responsibilities to the exchanges. This is common practice inotherwell-regulatedandtightlycontrolledjurisdictionsincludingLondon.

However,theExchangesmustbeunderobligationtosubmitperiodicreporttotheSEContheactivities of their brokers. In SEC rules and regulations, the following participants arementioned:

• FutureCommissionMerchants;• IntroducingBroker;• CommodityPoolOperator/fundmanager;• CommodityTradingAdvisor;• LeverageTransactionMerchant;• FloorBrokerand;• FloorTrader.

Technologyhasnowmaderemotetradingcommonplaceinexchange.Therefore,abrokerortraderdoesnotnecessarilyhavetobestationedonafloororinapittoexecutetransactions.Itcanbedoneremotely.

Nigeriacurrentlyoperatesaspotmarketforcommodities.Derivativesareyettobetradedinthe Nigerian commodities market. The players in the spot market are shown below. Theexchanges play a vital developmental role interfacing and working with the various

Regulationofthespotmarketsshouldbedevolved

fromtheSECtotheCommodityExchanges

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stakeholders from the farmers to the processors to strengthen their participation on theexchanges.

Figure9:Playersinthespotmarket

For instance, AFEX has made efforts to organize farmers in different locations appointingoutreachofficerswithinthelocalitiestointerfaceandcoordinatethefarmers.Onitspart,theNCX has in the past utilized the existing cooperatives and attempted to structure forwardcontractswithofftakers.Althoughtheeffortshavenotledtoconsummationoftransactionontheexchange,thestrengtheningoffarmercooperativesasshouldbetheultimateobjective,isastepintherightdirection.

Webelievethatorganizingsmallholderfarmersintoblocksthroughstrongcooperativeswillnotonly improve theireconomiccircumstances,butwillboost liquidity in thecommoditiesmarkets. Part of the developmental work of the exchanges has been the acquisition ofwarehouses,whichhavealsoservedasaggregationvenuesforfarmproduce.Thepointisthatat this nascent stage of the market, the exchanges have devoted significant energy andresourcestodevelopmentalactivitieswhichmatureexchangeswillbotherlessabout.Amajorissueishowdowemaketheexchangeaplaceofchoiceforfarmerswhoaresometimespaidby commoditymerchant/processors in advance of harvest even though theymay be shortchanged;sellingatbelowmarketpriceintheprocess.Smallholderfarmersarediscussedinalatersection.

COMMODITIESEXCHANGE

SEC

PROCESSORS

FINANCIALINSTITUTIONS

CLEARINGAND

SETTLEMENT

LOGISTICS

WAREHOUSE

AGGREGATORS

FARMERS

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Trading spot on a commodity exchange should just be a starting point in the process ofbuilding a thriving commodities market and should never be the comfort zone. In otherwords, it should be a means to an end and not an end in itself. It should be a means toachieving a bigger objective, which should be to create financial instruments whose valuewouldbederivedfromthevalueofthephysicalcommodities.Itshouldbeameansofcreatingsignificant volume and activities in the physical market. Introducing derivatives should beaimedatsupportingindustriesandotherentitiestohedgetheirrisks,improveliquidity,growthephysicalmarket,deepenthecapitalmarket,andfostereconomicgrowth.

We are of the view that with relevant actions taken including implementation of therecommendationsof this report theprocess for introducingderivatives in the commoditiesmarket can commence within the next two years. The process will require training andcapacitybuilding,developingrelevantderivativemarketinfrastructuresuchasaCCPorusingexistingfacility,developingstrongriskmanagementframework,designingthecontractsanddetermining the commodities onwhich contractswould be based, reviewing existing rulesandregulations tobring themup to speedonderivative tradingand technology to supportderivatives.

Obviously, the exchanges would determine when they are ready to introduce futures andoptions but a timeline as contained in the recommendations (roadmap) should be a guide.Given theeffortsof theNSEandFMDQ indevelopingderivativesbasedonstocksand fixedincomesecuritiesaswellasFX,therewouldbelessonslearnttofacilitatetheintroductionofcommodity-basedderivatives.

However, to be clear,we believe that derivative product should only be introduced on thefoundationofastrongspotmarketinthecommodity,providingrealtimeinformationonthecommodities.Withoutthis,thederivativemarketwouldnotbewellgroundedandrisksbeingdetached from the underlying market for the commodity or worse, may simply become avenueforpricespeculation.

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5.0 BUILDING BLOCKS FOR THE DEVELOPMENT OF THECOMMODITIESMARKET

5.1 LargedemandandLiquidityOneofthemostimportantfactorsinimprovingtheattractivenessofacommodityexchangeorindeedastockexchangeandconsequently,encouragingparticipationisliquidity.Liquidityis theabilityofaparticipantor investor tobuyorsellacommodityor financial instrumentwith ease and without significant price change. Liquidity in commodity exchanges canimprove when there is a large number of competing buyers and sellers, large volumes oftradesand timely releaseofmarket information suchasprice information toaiddecisions.The participation of many buyers and sellers can lower transaction costs and promoteeffectivepricediscovery.Inotherwords,liquidityisfundamentaltothedeterminationofthefairpriceofcommodities,whichisoneofthehallmarksofanefficientmarket.

When there is significantlymore supply of commodities than there is demand, prices willnaturally fall, which in turn, could discourage participation of farmers who may see nobenefits inusingthemarket.Similarly, ifsignificantlymoredemandthansupplyexit,priceswouldriseundesirablyanddiscouragetheuseoftheexchangebyprocessorsandotherendusers. This is particularly so, when such imbalances in supply and demand arise fromoperationalinefficienciesoftheexchangeorabusebymarketparticipants.

Itisatruismthatmarketpricestypically,neverremainstaticbutfluctuatesovertimeduetodifferent factors includingdemandand supply.The factors canbeexternal to theexchangesuchasweatherandseasonalfluctuationsinsupplyordemandbutcanalsobeinternaltotheexchangesuchasoperational inefficiencies,whichcandiscourageuseof itsplatform.Whilefluctuationsareinevitable,significantimbalancesindemandandsupplycannegativelyaffectpriceandthegrowthofthemarket.Thisiswhyitisessentialtoensurethatthemarkethasadequateparticipationonbothsides.Derivativemarketsaredevelopedtohedgetheriskofcommoditypriceuncertaintybuttheyshouldnotbeusedtohedgetheinefficientoperationoftheunderlyingphysicalmarket.Indeed,derivativesmarketcanpromotetheefficiencyintheunderlyingmarketandliquidityinthecommoditiesmarketasawhole.

The presence of different types of participants in the commodities market with differentobjectivessuchashedging,speculatingandarbitragingisimportanttoliquiditycreation.Forinstance, speculators help liquidity by taking the risk, which hedgers try to avoid. Thesedifferent participants bring their interest to bear on the market and collectively createliquidity.Nonetheless,excessivespeculationcanleadtoexcessivevolatility,whichisnotgoodfor markets and why speculative position limits are required by commodity and futureexchangestomoderateexcessivespeculation.Acommodityexchangeshouldthus,operatein

39

amanner,whichwouldbeattractivetobothbuyersandsellersinsufficientnumber,asthiswouldhelpreducesignificantimbalanceinthemarket.

Furthermore, the existence of an active physical market helps liquidity by ensuring theavailabilityof commodities for tradingatall timesanddeliveryof commoditiesondeliverydate. Consequently, it will have a positive effect on prices and is a sine qua non to thedevelopment of commodity exchanges. The existence of a professional class, active anddynamic in the commodities market would be useful in creating awareness, promotinginnovationandengenderbestpracticesinthemarket.

ThecommodityexchangesinNigeriaarepresentlybesetbyweaksupplyanddemand.Aswesawpreviously,onlyAFEXtrades,andhascontinuedtodevelop innovativemeanstocreatesome liquidity. At this nascent stage of the development of the commodities market,concertedeffortsandboldmeasuresarenecessarytonurturethemarketintoathrivingone.

To improve liquidity, bringing on board smallholder farmers through well-organizedcooperatives is required.Thepassageof thewarehousereceiptbill into lawshouldmake itpossible for exchanges to develop standardize warehouse receipts for trading and whichshouldcreatesomeliquidity.Structuredenlightenmentofstakeholdersonthebenefitsoftheuseoftheexchangeaswellastheintroductionofcredibleandtransparenttradingplatformtoprovidetimelypriceinformationwouldalsobevitalforliquidityenhancement.

The warehouses can be useful information centers to farmers and participants in variouslocations. Given that many of the warehouses are within farming vicinity, the exchangesshouldasamatterpolicy,designatethewarehousesaspriceinformationcenters;displayingpriceandotherinformationelectronically,onblackboardsorothermeans.TheSECandtheexchangesshouldalsoengagerelevantagenciessuchastheMinistryofAgriculture,NigerianTelecommunications Commission (NCC) and the Telcos on disseminating key marketinformation via text messages to farmers by the exchanges. This has been successful inEthiopiawhere theECXdisseminatesdaily information through text to farmersandothers.ThisinitiativeaccordingtotheIFC,hasledto70%ofsmallscalefarmersreceivingfinalpriceinformation (see EMCompass, April 2017). This same approach has also been successfullyusedbyACEexchangeinMalawi.

Ifsmallholderfarmersareavailedofdailypriceand other information it would sharpen theirknowledge of the market and bargainingposition with commodity merchant who oftenbuyofftheproducefromsuchfarmersatbelowmarket price. It would also enlighten them

CommodityExchangescanhelpfarmerstokeepawareofthemarketpricesoftheirproduceacrossawidegeographicalareaandthroughout

theyear.

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aboutofthecommodityexchangeandhopefullydrawthemintoit.

The committee is of the opinion that the commodities exchange can serve as a vehicle forpromotingthemuchneededqualityandstandardsforNigeria’sexportcommoditiessomeofwhicharepresentlynot allowed into somecountries.Byadoptingapolicy that encouragesprime export commodities like cocoa to be traded through the exchange, both quality ofexportsandliquidityofthemarketcouldimprove.ThiswillnotbenovelasEthiopiawasableto attract volumes into the Ethiopian Commodities Exchange (ECX) through governmentmandatorypolicy in2008, that trades in coffee exportsbe conducted though theECX.Thissingular act was one of the game changers for coffee exports in Ethiopia. The ECX nowprovidestheplatformfor98%ofcoffeeexportinEthiopia(CollaborativeCoffeeSource,June10,2016).

More importantly, coffee is today the main flagship commodity of the country as it hasbecome a major source of global supply and main producer in Africa. According to theInternationalFoodPolicyResearch InstituteandEthiopianDevelopmentResearch Institute,coffeetradingvalueontheECXrosefrom$381millionin2009to$800millionin2014whilevolumeincreasedfrom171,990Mtto244,230Mtduringthesameperiod.

However, it’sbeenarguedthattherisksofsuchanapproachneedtobeconsideredsoastoavoid thepitfalls of a restrictedmarket (over-restrictive standardization and a largeblack-marketinspecialistcoffee)whichtheEthiopianGovernmentisseekingtoaddress.

5.2 ExistenceofcommoditiestoformnucleusoftradingMarketsmusthaveproductstotrade.Tohaveathrivingmarketitisessentialtoidentifyandselectcommoditiesthatareavailableinrelativelygoodquantitythatwouldformthenucleusof trading. Itmakesnosense introducingcommodities thatarequite low insupply,as thiswouldadverselyaffectliquidity,priceanddeliveryandcouldinfact,leadtoeventualcollapseoftheexchange.

For success, an exchange should have relatively high volume commodities and graduallyintroducedmorecommoditiesasexpertiseisdeveloped,andneedarises.Manymarketsstartwith agricultural products such as cocoa, coffee, cotton and grainswith long shelf life andlateraddonmetalsandpreciousstones.

Nigeria has many commodities, food and export crops as well as solid minerals. Theagriculturalcommodities includemaize,millet,sorghum,wheat,beans,ginger,sesameseed,rice,soyabeanscassava,groundnut,Sheanut,palmoil,rubber,cotton,timberandcocoa.Thecountryalsoboastsofseveraluntappedsolidmineralssuchasgold,granite,uranium,copper,

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kaolin, coal, limestone, columbite, iron ore, bitumen and all types of precious stones. Thiswidearrayofcommoditiesnotwithstanding,AFEX,theonlyfunctionalcommoditiesexchange,currentlyprovides tradingonly forginger, soyabeans,maizeandpaddyricewithnomajorexportcommoditylikecocoaorcottononboard.

MaizeisthemostactiveofthecommoditiesaspertablesVandVI.Tradingontheexchangeisstill low,althoughweacknowledgethevariousmeasurestakenbyAFEXto improvetradingactivities.However, to do someaningfully, government support of commodity exchanges isnecessary.WhattheEthiopiangovernmentdidfortheECXisinstructive.Maizeisoneofthecommodities with highest volume and demand and therefore one of the tradablecommodities.

Therehasbeensomerevolutionaroundriceproduction,whichcouldalsoformthenucleusofcommodities on the exchange. AFEX already trades paddy rice, which in fact recorded thehighesttradedvolumeof1910MTinOctober/November2017.Clearly,thereisopportunityforathrivingcommodityexchangetocontributeinbreachingthesupply–demandgapandbolster the growthofmanyof the commodities listedbelow.The state of these crops evenmakesitmoreurgenttodevelopthrivingcommodityexchanges,whichwillnotonlypromotecommoditiesforlocalconsumptionbutalsotransformexportofkeycommodities.

Table8:GapsinNigeriaDemandandSupplyAcrossKeyCropsandActivities(2016estimates)

Crop Demand

(tons)

Supply

(tons)

Observation

Rice 6.3million 2.3million Insufficientsupplychainintegrationremainsissue

Wheat 4.7million 0.06million Driven by demand for various types of wheat (white, hard,durum)etc.forbread,biscuitandsemovita.

Maize/corn 7.5million 7.0million Limitedimportrequiredbutcanshiftduetofeeddemand

SoyaBeans 0.75million 0.6million AnimalfeedandprotectioncostAlt.drivingdemand

Chicken 200 millionbirds

140million Gap filled by illegal imports that entermarket at lower pricepoints than domestic producers; gap also a moving targetbasedonfastfoodQSRdemand

Fish 2.7million 0.8million Falloffinoceancastandweaknessinaquacultureyieldsduetocostoffishfeedaconstraintongrowth.

Milk/Diary 2.0million 0.6million Driven by insufficient milking cows and low yields (15-25liters/dayversusnormof35-40litersNZ/US).

Tomatoes 2.2million 0.8million Actualproductionis1.5milliontonsbut0.7milliontonsislostpost-production.

Yams 39million 37million Limited gap today but volume expected to rise in planningperiod.

Oilpalm 8.0million 4.5million Referstofreshfruitbunch(FFB)fromwhichoilisextractedat

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a10%-20%efficiencyrate.Cocoa 3.6million 0.25million Demand is a global demandwhichwill rise to 4.5million in

2020Cotton 0.7million 0.2million Demandisforseedcotton,whichcouldriseto1.0million–1.5

milliontonssubjecttotextilesectorrevival.Sorghum 7.0million 6.2million Demandwillrisefurtherasuseinfeedgrowsin2016–2020.

Importofmaltextractandglucose syrup is currentlyused tomanagegap,henceacommercialthreatforNigerianfarmers.

Source“FMARD”AgriculturePromotionPolicy(2016-2020)

5.3 PriceTransparencyThe commodities market should be fed with real time information on price, volume andquality of trade by the exchange. Such information would aid decision making bystakeholders, reduce uncertainty and price volatility. Price transparency is an importantfunctionofcommoditiesexchangeandencouragesparticipation.

Atthespotlevel,whichisphysicaltradingofcommoditiesondeliveryvs.paymentsettlementbases, very extensive disclosure requirements, similar to the stock market, may beunnecessaryandmadeavailabletoparticipants.Atthisstageofthemarket,price,qualityanddeliveryinformationaremostimportant.Moreover,theintegrityofthedeliverymechanismwouldbeofinteresttoparticipantandshouldthereforebeofregulatoryfocus.

As themarketgravitates into trading financial instrumentssuchas futuresandoptions, theSECandtheexchangesshoulddevelopandrequiremoreextensiveinformation/disclosure.Infact, itmakes sense to review the current disclosure requirementsnow toupscale them tointernational standards in view of the present move by the NSE and FMDQ to introducederivativeproducts. Thepricingprocessshouldbemarketdeterminedandneverbebasedonanynon-marketmeans,otherwiseconfidencewouldbelost.

Technology would help achieve pricetransparencyand speed in trading.Technologyshouldthereforebeamust forallexchanges inthe country. Indeed, the committee believes itshould be a requirement for exchanges in thecountrytohaveaminimumleveloftechnology.AFEXaswas statedearlier recently introducedtheNasdaq-OMQtradingsystemto improve itsoperations.

5.4 EfficientDeliverySystemDeliveryisavitalaspectofthecommoditymarketandindeed,theemergenceofcommodityexchanges was influenced in part, by the desire of users to lock in price and quantity for

Pricesshouldalwaysbedeterminedbythe

marketandneverbesetartificially

43

futuredelivery.Thedeliverymechanismisalsoanintegralpartofthesettlementsystem.Forinstance,whenapartyentersacontractfordeliveryofacommodityatafuturedate, itwillexpectthatthecommodity,inthequalityandquantityspecifiedinthecontract,willbetrulyavailablefordeliveryonthedatestated.

Thesellerwillalsoexpectthatpaymentwillbeeffectedontheduedate. Inotherwords,asthecommodityissuppliedpaymentisrequiredtobemade.Thatassurance(deliveryversuspayment) is fundamental to the integrity of a commodities exchange as it engenders trust,confidence and participation. The efficiency of the delivery arrangements is thus, veryimportanttothecommoditytradingsystem.

How then can the exchange ensure that partiesmeettheircontractualobligationsandmitigatedefaultrisk?In a physical market, a strong rule-based settlementsystem will be sufficient. On the other hand, for aderivatives market, the clearinghouse provides thisassurance. It is part of the commodity exchangeecosystem specifically established to guaranteeperformance of obligations by parties. Theclearinghouse system is most important when theexchange tradesderivatives suchas forwards, futuresandoptions.

There are differentmodels of clearinghouse ownership. It can be a part of the exchange, asubsidiaryof the exchangeor a completely independent entity. The clearinghouse canbe acentral counter party clearinghouse (CCP) which is best practice for exchange-tradedderivatives,oritcanjustbeacentralclearinghouse(CCH)withoutthecounterpartyfunction.ACCHcaneventuallyconverttoaCCP.InaCCP,theclearinghouseactsascounterpartytoalltrades,standingas thebuyerto thesellerandtheseller to thebuyerwith licensedclearingmembersservingasintermediariesbetweenbuyersandsellers.

Irrespective of the model, the clearinghouse must have an extensive risk managementmechanism to prevent counter party risk and protect the integrity of the exchange. Inaddition,asthecommodityexchangeaddsderivativeproducts,mosttradesmaynotresultinphysicaldeliveryofcommoditiesbutmayendupcashsettled.Whencommodityexchangestradeonlyphysicals,theymustalsoclearandsettletradesandusuallydesignanefficientandcrediblemechanismtodosobutnotnecessarilythroughafull-blownclearinghousesuchasaCCPasdescribedearlier.

Aclearinghousemustbe

establishedwhenderivativesareto

betraded

44

TheNCXforinstance,hadonceusedtheCSCStoclearitsfailedwarehousereceiptsattimeoflaunch.However,whenfuturesandotherderivativesareintroducedaclearinghousewillbeinevitable. The settlement system usually provides for settlement banks, which areresponsible for settling cleared transactions. The delivery arrangements or mechanismshould be well known to market participants and should be included in the rules of theexchange.Itisimportanttonotethatfailureofthedeliverysystemcouldtriggerthefailureoftheexchangeitself.

5.5 StandardsandGradingOne of the unique features of a commodities exchange is the standardization of to thecommodities traded on its platform. Each commodity traded on the exchange is graded byquality, size, weight and other criteria. The grades and standards are determined by theexchange but should take into cognizance international standards and grading on suchcommodities in setting the local standards. Imbibing international standards for exportcommodities should not be compromised if the exchanges have to play important role inexportpromotion.

Unfortunately, the quality of some of thecountry’s agricultural produce has not been intandem with global benchmarks given therecent ban by the EuropeanUnion. A thrivingcommodity exchange could help bring qualityand reverse the situation. After all, commodityexchanges are known for setting qualitystandards. The standardisation processwouldrequire collaboration with the StandardsOrganisationofNigeria(SON).

One of the activities,which the commodities exchanges can assume in order to strengthenglobal acceptance of Nigeria’s export commodities is the tracking of the country’s exportcommodities including inputsources from farmgateall theway to the importeroutside itsshores. Traceability of food and agricultural commodities,which is required for health andsafety purposes, has become a major requirement by many developed countries forcommoditiesbeingimportedintotheircountries.

TheOECD,EUandUnitedStates inparticular, requiretraceability of such import commodities. The countrystands to lose from such exports if it is perceived tolack a credible traceability mechanism. Given theactivities of commodity exchanges as credible trading

AcommodityexchangeenforcingstrongqualitystandardscanimprovethereputationofNigerian

exports

Acommodityexchangecanhelptoensurethehighstandardsof

tracingandsourcingrecordsnowrequiredbyUSA,EUandUK

45

platforms as well as being regulated entities, theyshouldberequiredto incorporate trackingsystemforexports commodities through the exchanges. InEthiopia, the ECX does so, and few years agointroduced a cloud based IBM enabled nationaltraceability system for export commodities (EMCompass,April2017).LikeECX,donorfundingcanbesoughtforfundingthetraceabilitysysteminNigeria.

5.6 EfficientTradingSystemAnefficientandmoderntradingecosystemisrequiredtoensurethattradingoperationsaresmooth, fair, and transparent and promote price discovery. The trading system can beelectronic or open outcry. With technological advancements, trading platforms are nowlargely automated enabling speedy execution of trades, real time information, lowertransactioncostandimprovedmarketaccess.Mostplatformsalsoprovideonlinesurveillancefacilitiesthatproviderealtimepricedisseminationandmonitoringofmarketoperationsbyexchanges. The exchanges should ensure that the trading system incorporates all of these.Technologyshouldbearequirementfortheexchanges.

Theexchangeshouldhowever,bearinmindthatnotallcommoditiesneedtobetradedinacontinuous trading system, as some commodities may not have sufficient volume forcontinuous trading. It may therefore be more effective to adopt an auction rather thancontinues trading system in such situations.Thishasbeenused formanyyearsby tobaccoexchanges.Intheauctionsystem,tradescanbeconductedhourly,dailyorwheneverthereissufficient volume to trade but it should be on a regular basis to ensure that potentialparticipantsknowwhentheauctionistooccur.Agoodelectronictradingsystemwillbeabletofacilitateauctionandcontinuoustradingmarketmodels

5.7 LegalandRegulatoryEnvironmentA broad objective of commodity exchange regulation is to foster the smooth, efficient andtransparent operations of the market, preventing abusive practices and systemic risk.Regulationinstillsorderandmarketdisciplineandpromotesprofessionalismandfairness,allofwhicharevitaltomarket integrity.Thelegal frameworkforcommodityexchangesvariesfrom country to country. For instance, while some countries have specific legislation toregulatecommoditiesmarket,otherscombinecommoditiesandsecuritiesregulation inonelaw.Insomecases,specializedgovernmentagenciesaresetupwithoversightresponsibilitiesofthemarket,whilesomeothermarketsvestthisresponsibilityonagovernmentministry.

Although there may be statutory regulation, commodity exchanges trading spot/physicalcommoditiesareusually self-regulatingwith rulesand regulations toguide themarket and

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standardsforcontracts.Regardlessofthemodel,theregulatoryenvironmentshouldpromoteconfidence, integrity and efficiency. Trust attracts participation, which in turn bolstersgrowth.Ifparticipantsdonothaveconfidenceintheintegrityofthemarket,beitthetradingplatform,theclearingandsettlementmechanismortheregulatoryenvironment,theywilljustnot participate and the desired outcome for setting up a commodity exchangemay not berealized.Regulationisthereforeimportanttothedevelopmentofcommoditymarkets.

Giventhecomplexitiesandriskassociatedwithderivativetrading,theregulatoryframeworkfor trading derivatives should be much stronger and more robust than that for spotcommoditiestrading.Regulatoryoversightisusuallyvestedinagovernmentregulator,whichhaspowerstomakerulesandregulations,sanctionandmonitortheactivitiesofregistrants.However,overregulationofthemarketshouldbeavoidedasthiscanstiflethedevelopmentofmarkets;drowningparticipationandinnovation.Inotherwords,thereshouldbeabalancebetween market development and market regulation. Apart from laws and regulationsspecifictothemarket,theefficiencyofthejudicialsysteminresolvingdisputes,efficiencyofcontractenforcementaswellasissuesaroundpropertyright,landownershiplaws/system,amongothers,canaffecttheefficientoperationanddevelopmentofthecommoditiesmarkets.Somecountrieshavewarehousereceipts lawsregulatingwarehousereceiptswhilenosuchlawsarenecessaryinothercountries.InNigeria,boththecommodityandstockmarketsareregulated the same agency, the SEC, under the ISA.However, the provisions of the ISA aremoreconcentratedonstocksandbonds.Thisisnotnecessarilyadefect,astheSECshouldfillthegapbywayofdetailedrulesandregulationoncommoditiestrading.Regulationsprovideflexibility,aschangescanbemoreeasilyeffected,particularlyasderivativesareintroduced.

NigeriacanbenefitfromtheexperienceofotherexchangesinAfrica.Forexample,Malawihasrecentlyrevieweditslawsfortheregulationofwarehouses;amodelwhichwassaidtohavebeeninfluencedbytheACEexchange.

5.8 RiskManagementSystemManaging risk is at theheartof commodities andderivative exchanges.Therefore,withoutproper riskmanagement framework/mechanisman exchangewouldnot functionproperly.Forthesereasonsanexchangeshouldnaturallyhavestrongriskmanagementmechanismtocover all aspects of its activities. It should be capable of mitigating potential risk to theexchange and promote liquidity and operational efficiency. Some risks associated withcommodityexchangearehighlightedbelow:

• Pre-LicensingRiskManagement

Risksonacommodityexchangecanbetriggeredbytheactivitiesoftradingmembers,clientsof the tradingmembers,warehouse operators, assaying companies and logistic companies,

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among others. To this end, an exchange has to take necessary precautions before licensingoperatorsinitsecosystem.Exchangesmusthaverequirementsforlicensingeachcategoryofoperatorsandensurethateachprospectiveregistrantmeetsallthenecessarypreconditionsbeforegrantinglicense.Wherederivativessuchasfuturesaretraded,apreconditionshouldbetheexistenceofacentralclearinghouse.It isveryimportantthatthereareadequateriskpolicies,includinginitialandvariationmarginsforposttradeactivities.

• Post-LicensingRiskManagement

Post-Licensingriskmanagementguidelinesshouldinclude:

(i) Periodiconandoff-siteinspectionsoflicensedmarketparticipants(ii) Surveillanceoftradingactivities(iii) Settingpricelimit(priceband)(iv) Tradingauthorizationcodeforbrokers(v) Periodic inspection of warehouses to ascertain continuous compliance with

minimumstandards(vi) Ensuringthatalldeliverywarehousesareinsuredagainsttheft,flood,fireetc.(vii) Ensuring that all deliverywarehouses possess valid performance guarantee of a

fixedsumfromreputableinsurancecompanies(viii) EnsuringStandardOperatingProcedures forqualityassaying companies licensed

to conduct quality checks on commodities traded on the exchange meet theminimumrequirementssetbytheexchange.

(ix) Introducing a framework to prevent issuance of air warrants (i.e. issuingwarehousereceiptoncommoditiesthatarenonexistent)

(x) Gettingtheclearinghousetosetmarginrequirementsandpositionlimits(xi) Markingtomarketthemarginaccountforderivativetrading(whenintroduced)(xii) IntroduceaSettlementGuaranteeFund(SGF)forClearingMembers(xiii) Puttinginplacetradealertsfortradingtransactions(xiv) Ensuringthattradingaccountsareadequatelyfundedpriortotradingactivities..(xv) Ensuringeffectiveenforcementoftherules

5.9 ClearingandSettlementTheclearingsystemplaysanimportantroleinmanagingcounterpartyriskandupholdingtheintegrity of the exchange by ensuring that the risk of default is remote. The exchange canchoose to have an in-house clearing and settlement system or outsource such function tolicensed thirdpartiessuchas theCSCS.Outsourcing the functionofclearingandsettlement

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will reducesetupcostaswellas thecostof softandhardwaremaintenance.However, thechoicewouldbethatoftheexchange.

Thetradingarchitectureshouldbedesignedinawaythatthetradingsystemcanspeaktothedepository and the warehouses. Before trading takes place, the trading system shouldconfirmcommodityavailability fromthedepositoryandconfirmthefundingpositionofthebuyingbrokerfromthesettlementbank.

Thedepositoryshouldbelinkeddirectlytoallthedeliverywarehouses,whichinturnshouldelectronically issuewarehouse receipts to depositors. Thatmeans all depositorswill haveaccounts with the depository and the Settlement banks for direct settlement aftertransactions.Withthistradingarchitecture,deliveryandpaymentdefaultwillbeminimalasthesellingbrokershavewhattheyaresellingandthebuyingbrokershaveadequatefundsintheirtradingaccountstocovertheirpurchases.

ThetransactioncycleshouldnotbemorethanT+3whereTisthetradingday,andthenexttwodaysallowthedepositorytodeterminethenetobligationsofallparties(clearing)andcommunicate same to deliverywarehouses and the settlement banks to enable settlement(payment)onthelastday.

5.10 DerivedvalueinusingthemarketProducersandprocessors/enduserswillnotusetheexchangeiftheydonotseethevalueindoingso.Forinstance,farmerscanselldirectlytomanufacturersandotherusersandwillbewilling to use the exchange only if they see value in doing so. Manufactures too will onlypatronize themarket if there is a clear benefit to them in doing so. Developing a thrivingcommodityecosystemwill therefore, require introducingpolicies andmeasures,whichwillensuretheattractivenessandcompetitivenessofthecommodityexchange.

5.11 PhysicalinfrastructureCommoditiesaremovedfromfarmgatestowarehousesandsometimesfromonewarehousetoanother(forexampleinthecaseofexportproduce,fromonewarehouseinonelocationtothe port warehouse). Where there is poor infrastructure such as roads, in quality andnetwork, it would adversely affect the transportation of commodities from one location toanother,asalongertimeisspentfreightingatahighercost.It isalsolikelytoaffectqualityandpriceofthecommoditiesastheygettodestination.

Inadditiontopoor infrastructure, insomemarkets,highway insecurity, illegalandmultiplelevies are major concerns in shipment of commodities. In many African countries, railtransportation is inefficient with practically no freight trains and virtual reliance on roadfreight services. The quality of the haulage vehicles often falls short of expectations with

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frequent breakdowns along the way, owing in part, to poor infrastructure and quality ofvehicles used. A good network of roads and efficient transportation system,would betterfacilitate themovement and delivery of commodities, reduce cost to participants and helpmaintainquality fromone location toanother.Goodquality infrastructurecanreducepost-harvestlossesandimproveincomeandlivingstandardoffarmers.

Furthermore,goodinfrastructurewilleaseaccesstomarketandthecommodityexchangebythe farming community and strengthen participation. An efficient infrastructure can alsoattractinvestmentintothehaulagebusiness,consequentlyimprovingbothqualityandcostoffreighting. Information and communications infrastructure is important for connectivity ofthe market; linking participants such as farmers, traders/brokers, merchants, andproducers/enduserswhilefosteringspeedyandtransparenttrades.ICTserviceinthemarketshouldbeefficientforthemarkettoderivethedesiredbenefit.

In discussing physical infrastructure, the importance of warehouses cannot be over-estimated.Warehousesshouldbewellmanaged,secureandofreasonablequality.Ifcarefullythought-out,warehousescanbecomeanimportantcenterforlocalcommunities,astheyarelikelytohaveelectricpowerandaccesstotheinternet.Theycantherefore,becomethesourceof crop prices and a center where farmers go for education and reliable input such asfertilizers.

5.12 CollateralManagementCollateralManagement services are specialized controlmechanismsdesigned to ensure thequality of commodities stored in exchange accredited warehouses and assure lenders thenecessary security (collateral) in the structuring of transactional finance. As a service,collateral management also offers lenders the opportunity of monitoring the utilization ofloansonrealtimebasis.ACollateralManageractsasathirdpartyholderofinventoriesdepositedbyasupplierwhoisfinancedbyalendinginstitutionorforcommoditiestobetradedonarecognizedexchange,inastoragefacility(e.g.warehouse)ownedorcontrolledbytheCollateralmanager.TheLegalandphysicalcontrolofsuchawarehouse(whereitisnotownedandoperatedbythe Collateral Manager) is retained by the Collateral Manager who is given such by theoriginalowner/operatorofthefacilityunderanenablingLeaseAgreementasrequiredintheCollateral Management agreement. Collateral management activities are further discussedunderthesectioncaptioned“CommodityExchangeParticipants”.5.13 Logistics

A vital element in the commodity exchange architecture is warehousing. Warehouses areacceptablestoragefacilitiesforcommoditiesparticularly,agriculturalproducts.Commoditiesarestoredtopreservequality,giveassuranceonquantity,forsafekeeping,toensuredelivery

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and facilitate trading in warehouse receipts, among others. The warehouses must meetstandardssetbytheExchangeandshouldexistinsufficientnumberandindifferentlocationsforthesmoothdeliveryandoveralloperationof thecommoditiesmarket.Thewarehousingsystemfostersaccesstocreditandfinancialinclusion,asfarmersareabletoborrowagainstcommodities in thewarehouses.Warehouses arenothomogenous, as theyhave to suit thecharacteristicsofcommoditiesforstorage.

Thewarehousesshouldbelicensedbytheexchangeandperiodicallyauditedtoensurethatthe commodities are actually present in the right quality and quantity specified. It is notnecessaryfortheexchangetoownthewarehousesbutitmustbeabletorelyonthequalityand quantity of goods in them. There are several models for warehouse ownership andmanagementbutthefranchisemodel(asoperatedinpartsofKenya)hasitsattractions.

5.14 OrganizingSmallHolderFarmerstoImproveSupplySideTheNigeriaagriculturalproducespaceisdominatedbysmallholderfarmerswhosepercapitaproductionisverylowandmarginallyabovesubsistence.Thisbringstothefore,theneedforthesefarmerstobeorganizedintocooperatives,whichwouldbuildacriticalmassneededtopromote trading activities on the exchange and improve their living standards. However,organizingfarmersintocooperativesinNigeriasometimesrequiresincentivessuchascreditfacilities, farm inputs and access to markets to get them on - board. The CBN has beensuccessful in organizing farmers into cooperative in order to participate in the AnchorBorrowers Scheme partly because the scheme provides farmers operating under it withinputs,extensionservices, capacitybuilding, loan facilities incashandkindetc.Commodityexchanges are not likely to be able to provide such incentives in order to organizecooperativesandareindeednotsetuptodoso.However,thecommodityexchangesandtheSEC can facilitate these services to farmers by playing an advocacy role to get relevantgovernmentagencies,banksandotherinstitutionstoassistwithsuchservices.Theycanalsoelicitthestategovernmentstobackthemupthroughbankguaranteetofarmers.

5.15 CapacityBuildingandPublicAwarenessAcommodityexchangeisanewconceptinNigeria.IfweconsiderthelowlevelofliteracyinNigeriaandtheage-longpracticeofunorganizedspotandrudimentarycommoditiestradingin the agricultural sector, the SEC andExchangeswill have to do a lot to create awarenessamong farmers and the uninformed Nigerian Public. A structured public enlightenmentblueprintshouldbejointlydevelopedbytheSEC,theExchangesaselectedoperator.

The programme should include workshops, seminars, road shows, town hall meetings,production of pamphlets, media briefing etc. with specific timelines for implementation. Itshould also cover all stakeholder groups including farmers, commodity merchants andoperators, processors, financial institutions, warehouse operators, commodity grading and

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inspectionagenciesandother stakeholders.CAMMICshouldengage thegovernmenton theimplementationoftherecommendationsaffectingthegovernmentandgenerallytoenlightengovernment on the importance of the exchange in national development. A starting pointshouldbeastakeholderforum.

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6.0 COMMODITYEXCHANGEPARTICIPANTSParticipantsinacommodityexchangeincludebrokers,dealers,broker-dealers,andclearingmembers. These classes of participants may be licensed to trade on their own accountsand/or on behalf of their clients (farmers, cooperatives, commodity merchants, exporters,agro processing companies, etc.) depending on their membership category. The clearingmembersareresponsibleforclearingalltradesontheexchange.ApartfromtheparticipantsthatareregisteredbytheExchangeandtheregulatoryauthoritysuchasSECinNigeria,thereareparticipants that arenotmembersof the exchangebut rendervery important ancillaryservicessuchasWarehouseOperatorsandCollateralManagementCompanies,Banks,logisticcompanies,etc.

Inviewofthelowproductionpercapitaintheagriculturalsector,buildingacriticalmassfortradingontheexchangemaybeachallengeifeffortsarenotmadetoorganizefarmersintocooperatives. As said earlier in this report, farmers’ cooperative development is still veryweakinNigeriaandfarmersaremostlyattractedtoformcooperativesifitisapreconditionforthemtogainaccesstoparticularbenefitssuchasinputs,loanfacilities,extensionservices,linkagetothemarket(off-takers)etc.

Cooperativeshaveotherbenefits forexchange.TheycanbeusedtogatherKYCinformationon smallholder farmerswhomay not have bank accounts or other forms of identification.Cooperativescouldalsobeusedtoaggregatetradevolumethatindividualfarmersmaynotbeabletoprovide

6.1 RolesandResponsibilitiesofParticipantsSecuritiesandExchangeCommission

1. Registersandregulatescommodityexchanges;2. Registersandregulatesintermediariesinthecommoditiesexchanges;3. Registersallcontractstradedoncommodityexchanges;4. Conductssurveillanceoncommoditiestradingtoensureorderlytradingandprevent

marketabuse;5. Investigatesandsanctionsallmarketmalpractice;6. Ensuresalevelplayingfieldformarketparticipants;7. Spearheadsthedevelopmentofcommoditiesmarket;8. Protectsmarketparticipants;and9. Developsadequateregulatoryframeworkforregulationofcommoditiesmarket

ProposedWarehouseRegulator

BasedonthebillbeforetheNationalAssembly, ifpassed into law, theproposedwarehouseregulatorwillperformthefollowingfunctions:

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1. Registerandregulateallwarehousesandwarehouseoperators/collateralmanagers;2. Establishminimumstandardsforwarehouses;3. Inspectwarehousestoensurecompliancewithstandards;and4. MaintainadatabaseofallwarehousesinNigeria

However, for exchange relatedwarehouses, both the SEC and the exchanges should retainoversightoftheiractivities.Inotherwords,theyshouldremainunderthepurviewoftheSECandtheexchangesandnottheproposedwarehouseregulator.ThisisbecausetheactivitiesofsuchwarehousesarerelatedtothecommodityexchangesthatareregulatedbytheSEC.

CommoditiesExchanges

1. Provideorganizedmarketplacefortradingincommodities;2. Developcriteriaforadmissionofmembersofanexchange;3. Superviseactivitiesofmembersandotherparticipantslicensedbytheexchange;4. Licensewarehouseswhosereceiptsaretradedontheexchange;5. Supervise the operation of an electronic WRS in order to track available stocks of

commodities;6. Consider the operation of a Warehouse Receipts Guarantee scheme to provide

immediate funding (loans) to farmers who deposit their produce in registeredwarehouses;

7. Ensureadequatearrangementforlogistics,clearingandsettlement;8. Develop a robust risk management framework which will ensure that

contractsarehonoredandsettled;9. Ensuretransparencyandequalaccesstomarketinformation;10. Maintain a fund to compensate investors who suffered loss from the failure of a

commodityoperator;and11. Engage in market development activities such as creating awareness and investor

education.TradeGroups(Associations,Cooperativesetc.)

1. Developcodeofconductformembers;2. Sanctionmembersforviolations;3. Promotetheinterestoftheirmembers;and4. Engagewithregulatorsandotherstakeholderstodevelopanddeepentheiractivities

andthemarket;ClearingandSettlementInstitutions

1. Provideinfrastructureforefficientclearingandsettlement;2. Keeprecordofelectronicwarehousereceipts;3. Ensureseamlessandefficientsettlement;and4. Developefficientandeffectiveriskmanagementmechanisms

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Hedgers,SpeculatorsandArbitrageurs

1. Fosterliquidityinthemarket;2. Providestabilitytothemarket;3. Promotepricediscovery;4. Hedgersavoidriskbyusingderivativecontractstomitigatepricevolatility;5. Speculatorstakeriskbyspeculatingoncommodityprices;6. Arbitrageurstakeadvantageofdifferentpricesofthesamecommodityintwodifferent

marketstoprofit.Farmers

No agricultural commodity exchange can operatewithout a strong and productive farmingpopulation.Farmersaremajormarketparticipantsinthattheyhelptostrengthenthesupplyside for continuous trading activities on an exchange. Apart from working with inputproviders either individually or as a group in the commodity value chain, farmers workcloselywithcommoditywarehouseoperators(collateralmangers)andcommoditybrokerstoguaranteeeffective storageof theirproduce.Theycanalso takepositionon thecommodityexchangetoprofit.

FarmersnolongerplayapassiveroleinthecommodityvaluechainparticularlyincountrieswithhugecommercialfarmingpopulationssuchaslikeChina,India,Malaysia,SingaporeandSouth Africa. Their importance is further buttressed by the fact that in some countries,farmers and financial institutions jointly promoted commodity exchanges. There are alsocountrieswherefarmersowncommoditywarehouses(fieldwarehouses).Thesewarehousesaresometimesleasedtocommodityexchangeaccreditedcollateralmangersforuse.

Processors

Agro-processing and other commodity processing companies are usually the end-users ofcommoditiestradedontheexchange.Thesecompaniesrelyonthestructureoftheexchangeto source their commodity requirementswithouthaving togo through the rigorsofbuyingfrom farmers directly or through agents and commoditymerchants. In the absence of anactivecommodityexchangesomeprocessingcompaniesengageincontractfarmingthroughtheout-growers’schemeinwhichquantityandpricearemutuallyagreedinadvance(atthetime of signing the contract) of harvest. Although this guarantees market and price forfarmersandthecommodityforprocessors,avirileandactivecommodityexchange,providesamoreefficient,transparentandreliableplatformforbothbuyersandsellers.

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CommodityMerchants

Merchantsseekandreceiveordersfortradesontheexchange.ThisishoweverisdifferentinNigeria,perhapsduetothenascentnatureofthemarket,astradersandmerchantsoperateby playing the role of aggregators and arbitrageurs. They buy from multiple smallholderfarmersinperiodsoflowprices,storingandeventuallysellingtolargeinstitutionalbuyersathigherpricesintimesofrelativescarcity.Thetradersandmerchants,dependingonthetimethat the commodities are sold to off-takers, usually incur storage costs. The activities oftradersandmerchantsinthemarkethelptomitigatetheriskoffarmersholdingcommoditiesfor longperiod.Thismeans that farmerscanget immediatevalue for theirproduceat farmgatewithoutnecessarilyhavingtobearthecostoftransportationorstorage.

In this system, the middle-man (trader/merchants) get the potentially reward of a higherprices in return for taking the riskofholdingon to the commodity (storing)overaperiod.Whilethemerchantcantakeadvantageofseasonalfluctuationsinprice,smallholderfarmersoften cannot. Besides, smallholder farmers usually receive low price and get no additionalmoney if the price rises substantially. As descried by FinComEco, modern commoditiesexchangescanhelptheindividualsmallholderfarmers/cooperativesby:

• Publishingcroppriceswidelysothatfarmersbecomemuchmoreawareofprice/timeopportunities;and

• Implementing a warehouse receipts guarantee scheme which means that thefarmers/cooperativescangetthemajorityoftheircashwhenproduceisdepositedandthewarehouseandalso,potentially,anadditionalamountifthepricerises.

The ideal roleof tradersandmerchants is tobuyor sell commodities throughanexchangewithoutnecessarily takingpositionsonthecommodities itself. Inotherwords, tradersandmerchantswill ideally bemembers of the exchange, taking advantage ofmis-pricing in themarket tomaximize their returns.Also, through theirbeingmembersof theexchange, theywouldhavedirectaccesstothetradingplatformandbeabletotransacttrades.TheAFEXismoving towards thisdirectionas itnowunder itsnewplatformpermit institutions tohavedirectaccesstoittradingplatformforproprietarytradesonly.

CommodityBrokers

The termbroker is used to describe a licensed agentwho represents clients to sell or buycommodities on the exchange. He is the face of the market being the one who interfacesbetween the Exchange and the investing public. Commodity brokers have access to thetradingplatform,thustheyserveaspointofentryintothemarketforprospectiveinvestors.Manyof these investorsdonothavesufficientknowledgeof theworkingsof themarketorpossesstherequisitetrainingfortransactingontheexchange.

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Abrokeractsasanintermediarybetweenbuyersandsellersinthecommodityexchange.Hedoesnotactasprincipalandsodonottakepositiononthecommoditiesbeingboughtorsold.As a middleman between buyers and sellers, the broker plays a vital role in enhancingliquidityanddisseminatingmarketinformation.

Acommoditybrokerhasafiduciaryresponsibilitytoprotecttheinterestofhisclientsandassuch cannot engage in trades or offer financial advice that benefits him financially at thedetrimentofhis clients.Commoditybrokersare integral to the structureof the commodityexchange as they form the bridge between users and the exchange. They enable clients tomaximizetheirreturnsthroughthevariousservicestheyoffersuchasresearchandadvisoryservices.Abrokerhandlestradesonbehalfofhisclients;hereceivesanorderfromhisclientandpassesitthroughhisbrokeragefirms’networktotheflooroftheexchangeforexecution.However,throughtheuseoftechnology,transactionscanbeofffloorthroughremotetrading.

Qualitiesofagoodbrokerinclude;

• Availabilityandaccessibilitytoclientsatalltimes;• Perfectknowledgeoffinancialmarkets;• Goodunderstandingofclients’needsandobjectives;• Respectfortheconfidentialityoftheirclients’transactions.• Efficiencyofoperationsandhighvalueaddedservices;and• Strictadherencetoguidelinesandregulation.CommodityDealers

Dealers are licensed commodity operators who buy and sell commodities for their ownaccount.Unlikethebrokerwhoisanagentoftheclient,thedealerrepresentshimself,tradingforhimself. Adealer is inotherwords, aproprietary trader and can stabilizeorupset themarketthroughhisactivities.

In the Nigerian commodities trading context, dealers can be large institutions such asinvestmenthousesthathavethecapacitytoholdlargevolumesofcommoditiesandcanfulfillownordersinthemarketinordertokeepthemarketliquid.

Therolesofdealersinacommoditiesmarketinclude;

• Participatesinthemarketasaprincipal;• Createsliquidityinthemarket;and• Createsinvestmentopportunitiesforinvestorsinthemarket

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MarketMakers

Marketmakersarelicensedparticipantsinthecommoditiesmarketwhostandsreadytobuyand sell tradable instruments on the exchange and by so doing provide liquidity for theinstrumentsandinvariablythemarketasawhole.Theyprofitfromthespreadbetweenthebidandaskprice.TheInvestmentsandSecuritiesActs(ISA)2007definesamarketmakeras:

“anyspecialistpermittedtoactasadealer,anydealeracting in thecapacityofblockpositioner, and any dealer who with respect to a security, holds himself out (by enteringquotations in an inter-dealer communications systemorotherwise) asbeingwilling tobuyandsellsuchsecurityforhisownaccountoraregularcontinuousbasis”

CollateralManagers

Collateralmanagers are integral to theoperationsof a robust commodity exchangeas theyprovide the facility for the storage of the commodities being tradedon the exchange. Theyalso serve as a proxy for the guarantee of quality and quantity of commodities. A licensedcollateral manager provides warehousing services for clients who wish to store theircommoditiesforaperiod.

Normally, collateral managers carry out grading and weighing of commodities at thewarehouse based on globally acceptable standards. In the commodity exchange context,collateralmanagerscontract toadhere to thestandardofqualitysetupby theexchangeastheywish their storedproduce tobe traded.Theyensure that standardsaremetand issuecertificatesforgoodsreceivedatthewarehouse.

Byproviding this service, theyhelp tomitigatepost-harvest losses andpromote food security.Warehousing is the backbone of commoditiestradingsincethegoodshavetobeinconditionsspecifiedinthecontractfordelivery.

Therolesofacollateralmanagerincludebutarenotlimitedtothefollowing;

• Provide storage services for clients who wish to store their commodities at thewarehouse;

• Ensurethequalityandquantityofcommoditiesdepositedintothewarehouse;• Administeranywarehousereceiptsguaranteeschemewhichmaybeinforce;• Maintainaccurateandproperrecordsofcommoditiesdepositedinthewarehousesuchas

the name and address of the depositor, the date of receipt of the commodities, thequantityandqualitydeposited.ThismayincludeenteringandupdatingrecordsonaWRS

• Keepthewarehouseanditsenvironsinanexcellentstatethatmeetregulatoryandglobalstandardsand;

Warehousingiskeytothesuccessfuloperationofacommoditiesexchange

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• Adhere and comply with strict guidelines and regulations including those set by theExchange.

Banks

Banksplayanintegralpartinthecommoditytradebusiness.Theyfulfilanumberofessentialroles on which the commodity market depends. These activities include trading incommodities, serving as counterparty in derivative transactions and creating tradableinstruments.Forinstance,banksplayamajorroleinthesupplyofforeignexchangecontracts,whichareuseashedginginstrumentsbyproducersandprocessors.

Banksareneededandimportantinfinancingfarmersandsmallandmediumentrepreneursalthough this is still a challenge in Nigeria as they tilt more to the financing of largeagribusinesses.Bankscangenerallyplayanimportantroleinthefinancingofinputs(suchasseedsandfertilizers),production(suchasmachineryandequipment)andmarketing(suchasprocessing,packagingandtransportation).

Banksarealsoessential inproviding financetoentities like logisticscompanies,warehousedevelopers,assayers,marketersandexportersalongthecommoditiesvaluechain.Agricultureentailsasequenceofinterlinkedactivitiesinachainthatstartsfromlandclearingandsupplyofseedsandfertilizerstohouseholddiningtablesandrequiresbankfundingalongtheway.

LogisticCompanies

Logistics companies play an important role in the movement of commodities from onelocationtoanotherforinstancefromfarmgatetothewarehouseorfromonewarehousetoanotherortomarket.Itcouldalsofromonewarehousetoprocessororexporter.Thehaulageand shipping services they provide, mustmeet standards set by the commodity exchange.Apart from haulage services, logistics services also involve warehousing and distributionservices.

InsuranceCompanies

Risks are an inevitable part of the commodities business. Companies, merchants, banks,commodities exchange operators, logistics companies, warehouse operators etc all have todealwithawiderangeofriskswhichhavetobemanaged.Riskcanarisefromcounterpartiesdefault,theft,lossduetofire,flood,andaccidentsamongothers.Oneofthewaysofmitigatingrisk isby taking insurancecover. Insurancecompanies thereforeplayan important role inthecommoditiesecosystem.

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7.0 ORGANIZINGSMALLHOLDERFARMERSINTOCOOPERATIVES

Farmer cooperatives contribute to vibrant rural economies, and offer opportunity for afarmer-focusedandcompetitiveagriculturalbusiness. Farmer cooperativesareownedandcontrolled by farmers for themutual benefit ofmembers. Inmany economies, smallholderfarmers constitute the bulk of the farming population. Cooperatives give farmers theopportunities to collectively enhance their income, strengthen their bargaining power andgainaccesstocreditandfarminputs.Throughcooperatives,theyareabletotakeadvantageof currentmarket opportunities, including value-addedprocessing, riskmitigation systems,technicalassistanceandotherservices.

Membership requirements to join cooperativesareusuallynot stringent toensure thatanyinterested persons or groups with similar objectives is able to join and benefit from theservicesprovidedbythecooperatives.

Aco-operativesocietyisrunontheprincipleof‘onemanonevote’.Allmembershaveasayinthe affairs of the enterprise thus, affluentmembers cannotdominate themanagement. Theliability of the members in a cooperative society is limited to the extent of their capitalcontribution and cannot be personally held liable for the debts of the cooperative. Thecooperativeisalsoaseparatelegalentitydistinctfromitsmemberswhileitsoperationsarenotaffectedbythedeath,insanityorinsolvencyofitsmembers.

Co-operativesocietiesare formedonthebasisofselfandmutualhelp.Therefore,memberscontribute their efforts to promote the common welfare. They operate in a limitedgeographical area and thus tend to exhibit strong attachment to and interest in thecooperative.

Warehouse receipt systemwas successfully developed in some African countries includingKenya, Rwanda, Ethiopia and Malawi because of the existence of strong cooperativestructures,whicharesupportedbygovernment. Bankscanimprovelendingtosmallholderfarmers,byrequiringthatsuchborrowersdosothroughcooperativestheybelongtoasthecooperativecanattesttocertainfactaboutthem.Indeed,thecooperativecanbeusedtoverifysome Know – your – Customer (KYC) information. The produce of the farmers can besubsequently sold on the commodity exchanges, which would provide transparent priceinformation. Byrequiringmembershipofacooperativetobeeligible for loan,defaultriskscanreducewhilefarmingactivitiescanincrease.

One of the ways in which commodity exchanges can thrive in Nigeria and meaningfullyaddress the in agro-produce marketing, is for the exchanges and SEC to collaborate withrelevant government agencies to effectively organize farmers into cooperatives. This willrequireaclearstrategy tobedeveloped.Partof this strategyshould includeenlightenment

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and the provision of some incentives to encourage farmers to form the cooperatives. Theincentivescanbeinformofinputprovisionatadiscountandaccesstofreeadvisoryservices,which can be organized by the exchanges and other stakeholders. Additionally, mentoringservices can be developed between cooperatives and industry participants. The presentintervention by government and donor agencies such as GiZ, UK-DFID, USAID, IITA inorganizing farmers into cooperatives, if sustained, will go a long way in building a strongpillarofsupportforcommodityexchangesandstrengthenthesupplyside.TheExchangesandtheSECshouldreachouttotheseagencies.

7.1 AdvantagesoffarmercooperativeSocietyCo-operative societies can boostagricultural production and improve the welfare of ruralcommunities. As representatives of farmers, they can serve as a link between themgovernmentandotherthirdparties.Toenhancethecooperativesystem,governmentandtheprivate sector could grant various incentives such as improved seeds, fertilizers, etc. tosmallholderfarmers.

1. EliminationofmiddlemenCooperative societies ensure that farmers get true value for their produce by reducing theexcessiveprofitearnedbyintermediariesinthesupplyofcommoditiesbystrengtheningtheirbargainingpowerbasedon increasedvolumesandaccessto information.Theexchangecansupportthismovebymakingavailablepriceswidely,particularlyastextmessagestomobilephones. Co-operative societies have contributed significantly by providing farmers with amoreviablealternativetomoneylenders.

2. ReducesoperationalcostAscooperativesocietiesarerunbytheirmembers,whooftenarenotpaidfortheirservices,as a result the costof operation is reduced to aminimum.Cooperative societies encouragesavings and thrift habit among their members. They provide loans only for productivepurposesandserveasamechanismforconflictresolutionandadvocacyfortheirmembers.Cooperative societies benefit from economies of scale by pooling volumes from theirmembers.

3. Employmentopportunities.Cooperativeshelp tocreateemploymentopportunitiesbyenhancing thewell-beingof theirmembers,whichleadstogrowthandexpansionanddemandforadditionalfarmlabour.

4. SocialbenefitThe cooperative society creates among itsmembers a spirit of sacrifice, tolerance and self-help.Theenvironmentcreatedbythecooperativescanthus,beveryhelpfulforthesocialand

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economicprogressofthesociety.Thebenefitsincludeeducationasmembersofcooperativesoftenshareknowledgeandeducationwiththeattendantmultipliereffect.

8.0 RECOMMENDATIONS FOR THE DEVELOPMENT OF ATHRIVINGCOMMODITYTRADINGECOSYSTEMINNIGERIA

Ourrecommendationsare:8.1 GoodenablingbusinessenvironmentThe business environment in the agricultural and solid mineral sectors should beattractive enough to encourage participation across the value chain. This means thatconstraints to the development of the sectors should be regularly assessed by relevantGovernment agencies and effortsmade to remove identified constraints. In addition toremovingexisting impediments,newpolicieswithpotential to facilitateagriculturalandsolidmineraldevelopmentshouldbeperiodicallyintroduced.

Without a viable agricultural sector, thepotentialofthecommodityexchangewouldbe limited.While agricultural commoditiesare more feasible to introduce for tradingon the exchanges at this stage of marketdevelopment due to the available volumeand relative development of the sector,solid mineral should also be brought intothe Exchanges as the sector develops andtradablevolumeiscreated.

Introductionofthesolidmineralsshouldbeinthemediumtolongterm.Inreadinessforthat,we recommend that SEC and the exchanges should engage the FederalMinistry ofMinesandSteelDevelopmenttobepartoftheeffortsandroadmaptorevivethesector.PeriodicengagementoftheMinistryandStakeholdersisfundamental.Suchcollaborativeefforts will also help identify which commodities would be more practical and makebusinesssensetoformthenucleusofinitialsolidmineralstobebroughtin.Itcouldalsohelptobetterorganizethesector.

Recommendation:

IntroduceagriculturalcommoditiestoExchangetradingfirstfollowedgraduallybymineraltrading.

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The private sector, for purposes ofoperational efficiency and being better inmanaging business, should drive thedevelopment of the commodity exchangesin Nigeria while the government shouldprovide the enabling environment in formof policies and infrastructure, for theexchangestooperateandthrive.

Governmentdirectownershipofexchangesshouldnotbeencouraged,asithasnotbeenofbenefittotheNCXmorethantenyearsafteritsoperation.Forinstance,theNCX,whichisgovernmentownedandtheolderofthetwocommodityexchangesinthecountry,hasbeen inactivewithnotradescurrently.Ontheotherhand,AFEX,which isprivatesectorowned, conducts trades, is more dynamic and business oriented. The inactivity of NCXdespite its potential, no doubt, informed the planned investment by the NigerianSovereignInvestmentAuthority(NSIA)intheexchange.TheNSIA,agovernmentagency,is expected to restructure the exchange for growth and competitiveness. Hopefully, theNSIAwoulddivestitsholdingstotheprivatesectoratsomepointinthefuture,whenthedesiredobjectiveshavebeenachieved.

We acknowledge that in a number of African countries, such as Ethiopia and Uganda,government was central to the set- up of commodity exchanges with significantinvestment. However, many commodity exchanges have been private sector promotedwith government non-ownership support. Development partners can and have indeedplayedmajorsupportingrolesintheestablishmentandgrowthofcommodityexchangesand their technical assistance couldbe solicitedon specificneedsof theexchanges.Theenablingenvironmentshouldincludethefollowing:

a. Macroeconomic policy – Government should ensure that its macroeconomicpolicies are good and stable; promoting private sector investment. The policiesshouldbeconsistently favourable to thedevelopmentof theagriculturalandsolidmineral sectors. While a commodities exchange can promote the growth of theagricultural sector, if appropriate agricultural policies are non-existent, it wouldstunt the development of the sector and the commodity exchanges, as well. Forinstance,ahigh interest rateregimewill impedeagriculture financingparticularlybysmallholderfarmerswhowouldbeunabletoaccesscredit.Similarly, instabilityin the foreign exchange market and high foreign exchange rates will impact theabilitytoimportvitalfarmimplementsandevenifsuchimplementsareimported,they would be out of reach to farmers, and so too would be the impact of highimportdutiesonsuchimplements.

Recommendation:

Commodityexchangedevelopmentshouldbedrivenbytheprivatesectorasacommercialventure

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Similarly,ahighrateofinflationcoulddiscouragenewprivateinvestmentascostofproductionincreasesandindustries,includingagribusinesses,takeacautiousviewonexpansion. Inflationaffectscost, includinginputcostto industry,andcorporateplanning. Sound agribusiness and agricultural policies and stable investmentclimate could accelerate the growth of the sector and increase the demand andsupplyforagro-commodities.Although some efforts have been made towards improving the macroeconomicenvironment, Nigeria still lags behind countries like Ethiopia,Malaysia and SouthAfricaasshowninthefigurebelow;

Figure10.GlobalCompetitivenessofNigeria:SelectedIndicators

Thegovernmentbudgetarypolicyshouldalsogiveadequatefocustothedevelopmentoftheagriculturalsector,moresoasthecountryseekstodiversifytheeconomyawayfromtheoilsector. Public expenditure in agriculture is still low, as thepercentage of annual budgetaryallocation toagriculturewas less than2%in the5-yearsended2016.This figure fallsmuchbelow the 10 percent recommended by the African Union (AU)Malabo declaration, whichexpectsmembercountriestoallocateatleast10%oftheirbudgettoagriculture.Without strong state governments’ involvement in agricultural development, FederalGovernments’effortswillcometonaught.Everystateisrichinagricultureandstatesshouldalso commit to theMalabo declaration given the potential of the sector to reduce the high

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youth unemployment and spur growth. Youth unemployment ratewas given as 33.1% forages 15-24 and 20.2% for those aged 25-34 in third quarter 2017, according to NationalBureauofStatistics(NBS).Werecognizedthatsomestateshavemadeimpressiveprogressinagriculturebutallthestatesneedtotrulycommittothedevelopmentofthesector.Every state shoulddevelop a ten - year agriculturemasterplan,which should set the roadmap for agricultural development or indeed agricultural revolution, and should takecognizance of the National Agriculture roadmap in doing so. Appropriate incentivesframeworkandinitiativesforagriculturalsectorgrowtharealsodesirableforthegrowthofthesectoraswellasforcommodityexchanges.TherehavebeenseveralagriculturalsectorinitiativesinNigeria,manyofwhichhavebeenledbytheCentralBankandtheFederalMinistryofAgricultureandRuralDevelopment(FMARD).Notable initiatives include the CBN Anchor Borrowers’ Programme, launched in 2015, theNigeria Incentive – BasedRisk Sharing Agricultural lending (NIRSAL) and theMicro, SmallandMediumEnterprise(MSME)Fund.OthersaretheCommercialAgriculturalCreditScheme(CACS)andFundforAgriculturalFinanceinNigeria(FAFIN).These schemes have recorded various levels of success although challenges still exist. TheNigerianAgriculturalPromotionPolicy(2016-2020)setstheroadmapforthedevelopmentof thesector.Besides,oneof thestrategicprioritiesof theNigerianEconomicRecoveryandGrowthPlan(ERGP)istoachieveagricultureandfoodsecuritythroughthetransformationoftheagriculturalsector.Iftheseprogrammesareimplementedeffectively,theagriculturalsectorwillplaythedesiredroleintheeconomyandpromoteathrivingcommoditiesmarketandexchange.Unliketheagriculturalsector,whichhasovertheyearsreceivedsomegovernmentattention,thesolidmineralsectorhasbeenlargelyneglectedandhadonlyreceivedsomeprominencesince1999;yetthecountryisrichinsolidmineralsofalltypesandwithagriculturehasthepotentialtodiversifytheeconomyawayfromoil. Thegovernmenthasalsolaunchedaroadmapforthedevelopmentoftheminingindustry.

b. Improvedinfrastructure–Infrastructuraldevelopmentashighlightedearlierisveryimportant in agricultural and solid mineral development and a well-functioningcommoditiesmarket. Improvement of existing roads anddevelopment of new roadsare important to the investment and development of the agricultural value chain asthey link farmers to the markets. In addition, they reduce post-harvest losses andfacilitate the movement of people and goods including agricultural input at lowertransportation cost. Improved rural infrastructure can potentially expose ruralfarmerstofertilizersandbetterfarmingtechnologytherebyraisingproductivity.Transportationisanimportantcomponentoftheecosystemasgoodsaremovedfromone location to another as per the commodity contract. The current inefficienttransportationsystemsometimesresultsindeteriorationofqualityofcommoditiesintransit.Extraeffortshavebeen takenby theexchanges tomitigate theeffectofpoortransportation system,which increases the cost of transactions. Such efforts include

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establishing personal relationships with logistics companies and sometimes owningtrucks.Otherinfrastructuresuchaswell-functioningirrigationfacilities,watersupply,power and warehouses are vital to the development of the commodity tradingecosystem.The solidmineral sector is also heavily dependent on infrastructure. Efforts shouldthus, be invigorated by both the federal and state governments to prioritizeinfrastructure development and the provision of security on roads and highways astheseareveryimportanttothemovementofpeopleandgoodsincludingagriculturalproduce. The provision of efficient and good network of infrastructure can havesignificantmultipliereffectontheeconomyandthecommodityexchanges.Unfortunately, the country still lags far behind other countries in the state ofinfrastructure.Forinstance,ofthe137countriesintheWorldEconomicForum(WEF)Competitiveness Report, Nigeria ranked 131in overall infrastructure. Comparatively,Kenyawas56andIndia46whileSouthAfricawas72andMalaysia21.Onthestateofroadsandelectricity,Nigeriaranked127and136respectively.Thesefiguresbuttressthe urgency for the improvement of the nation’s infrastructure to drive growth,supporttheagriculturalandcommoditiesmarkettobecomegloballycompetitive.Onthe improvement of logistical services for the commodities market, we recommendthat the SEC and the exchanges should engage key transporters with the view toeducatingthemontheopportunitiesincommoditiestransportationservices.

c. ReviewofLandUseAct–TheNigerianLandUseAct1978hascontinuedtobeseenasanobstacletothedevelopmentoftheagriculturalsector.ThisisbecausetheActplacesonstategovernors,theauthorityoveralllandintheirstateswiththeexceptionoflandownedbytheFederalgovernmentanditsagencies.Astategovernorbyinferencehasthe prerogative to allocate land as he desires. Therefore, land registration andownership,evidencedbyCertificateofOccupancy(CofO)issubjecttotheconsentofstategovernors.Thisrequirementveststoomuchpowerononeperson,whichcanbeabused.TheprocessofobtainingaCofOiscumbersome,longandcostlyinmoststatesandcanbesubjecttopoliticalconsiderationsandcancellationevenwhenaCofOisproperlyobtained. Besides, states governors are oftenbusy onmatters of state andmaynotdevote adequate time to landmatters,whichmay lead to delays. For these reasons,landisnoteasilytransferablefromonepartytoanotherundertheLandUseActandthereforeacquiringlandforagriculture,includingbysmallholderfarmers,ismetwithunnecessarychallenges.StakeholdershavelongraisedconcernabouttheeffectoftheLand Use Act on the ease of doing business in the country and development of theindustrialsector.Effortsshouldtherefore,bevigorouslymadetoamendtheAct,whichisapartoftheConstitutionandwhich,hasperhapsmadeitsamendmentdifficult.Forexpediency,werecommendthatstategovernorsdelegatethisfunction(issuanceofCof O’s) and receive periodic feedbacks from the relevant office or department.

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CAMMIC should engage governors through the Governors Forum to discuss on howbest this canbe achieved.Wealso suggest thatFSS2020 shouldbe co-opted to joinCAMMICgiventhediscussionsitishavingwithsomegovernorsontheLandUseAct.

d. Accesstofinance–Improvingagriculturalproductionrequiresfundstoacquirefarminputs/implements, increase the capacity of farmers and capacity across the valuechain.Improvedaccesstofinancewillalsoensurethatfarmersundertakepost-harvestactivitiesmoreefficiently,accessmarkets,and improveagriculturalpractices,amongothers. Unfortunately, it is a big challenge for farmers, in particular, smallholderfarmers, to access capital for increased output. This is in spite of the fact thatagriculturecontributesalmost30%torealGDPandisamajoremployerof labourinthe country.There is supplygap for somecommoditiesnecessitating importof suchcommodities tohelpbridge thegap.Thecountry’spopulation is large, furthergivingcredencetosignificantinvestmentneedsintheagriculturalsector.Thepoint is that there is inherentbusinessopportunity,whetheronasmallor largescale, in agriculture. A population of about 182 million according to the NationalPopulation Commission comprising mostly youth, further gives credence to theurgencyforprivateinvestmentandcredittotheagriculturalsector.However,aslongasaccesstofinance,despitevariouseffortsremainsachallenge,theopportunitywhichagricultureprovides,maynotbefullyrealized.It is well known that banks are reluctant to grant credit to farmers based on theperception that their repayment ability is too low. Furthermore, many smallholderfarmersmay be unable to secure third party acceptable guarantees /guarantor. Thelack of adequate information on borrowers and their activities could also be amilitatingfactoragainstaccesstofinance.Similarly,theloanrequirements,procedureanddocumentationmaybechallenging forsmallholder farmers,manyofwhommaybeuneducated.Manycommercialbanksarealsonot focusedonsmallholder farmerswhoareseenassmallandrural,withnoassetstobeusedascollateral.Manybanksdonot bother to build agriculture related capacity or desk having little interest in thesector owing to the risk perception. Banks are preponderantly urban players withmore subdued presence in the rural areas. The relative unfamiliaritywith the ruralareaperhapsaccountsforthelackofinterestinagriculturalfinancing.OtherorganizationsandindividualexchangesinAfricaaremakingstrenuouseffortstoimprove the ease of supply of sensiblewarehousedeposits loan guarantee schemes.ACEexchangeinMalawihasimplementedschemeswhicharesimpleandeffectivebutwhichcurrentlyrequiredonorsupport.The efforts by the CBN to de-risk the agricultural sector which is in line with itsdevelopmentalroleareinresponsetothepoorfinancingofagriculturebybanks.The

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micro finance banks are designed to be better positioned to finance smallholderfarmers than commercial banks because of the less rigorous requirements by theseinstitutionsandthefocusonprovisionofcredittotheunderbankedandMSMEs.At double digit interest rates, it will be impossible for the farming community toborrow.Thevarious initiativesof theCBNcannotcovereveryone in thecommunity.Therefore,theabilityofthefarmingcommunitytoalsoseekandreceivefundingfrombanksatlowinterestratesiscrucial.Asattheendofthe4thQuarter2016onlyabout3%ofbanks’loansandadvanceswenttoagricultureasagainst39%eachtoservicesandindustry.Again,lookingattheWEFCompetitivenessReport,Nigeriaranked130ineaseofaccesstoloancomparedto58in Kenya and 35 in India and 21 in Malaysia. On affordability of financial servicesNigeriawas129outof137countries.

Figure11–SectoralDistributionofCommercialBanksLoansandAdvances(Q42016)ItwillbeimpossibletogrowtheagriculturesectorandMSMEswithouttheabilitytoaccessfinance.GovernmentagenciessuchastheBankofAgriculture(BOA)shouldberestructured to be more effective in executing its core mandate. The restructuringshouldincluderecapitalizationandifpossible,theprivatesectorshouldbegivensomeequityholdingsinthebankforthepurposeofpromotingefficiency.Itisjointlyownedby theCBNandFMFbut supervisedbyFMARD.This complexownership/oversightmayimpactonitsoperations.

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Figure 12 - Commercial Banks Credit Loans and Advances to selected sectors(20072016)

Figure13.GlobalCompetitivenessofNigeria:SelectedIndicators

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8.2 DevelopmentofWarehousesAn investorwillbewilling to trade commodityon theexchange ifhe is assured that thecommodity will be available whenever he wishes to exercise his secured right. Animportantrequirementingivingsuchassuranceisthedependabilityofthewarehouse3inwhich the commodity isheld.Toensuredependability,warehouses for storingexchangetraded commodities must satisfy standard conditions to hold and keep the quality ofspecified commodities and be licensed by the Exchanges, registered by the SEC andcontrolled4byaparty(collateralmanager)independentofeitherthesellerorbuyerofthecommodity.Thecollateralmanagerensuresthequalityandquantityofgoodsstoredinthewarehouse. A well-developed warehousing system would foster the development ofwarehousereceipttrading.

Table9.LikelyOperatingModelsforWarehousingS/N OPERATION WAREHOUSE

RECEIPTOPERATOR(ISSUANCE)

DEPOSITORY COMMENTS

3Includesstores,silosandotherstoragefacilities4Thisreferstothesecurityandthemanagementofthewarehouseandthecommodityinit

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1 Exchange Exchange Exchange Thismayberequiredformarketdevelopmentinthe short term after which the Exchange maychoosetohandoveroperationofwarehousestoalicensed 3rd party.Ownershipandoperationsof thewarehouse lieswith the exchange at this point as such, theexchange guarantees quality and quantity ofcommoditystored.Theexchangealsoactsasthedepository and carries out the clearing andsettlement function.Thismayalsobetherecommendedapproachfora market like Nigeria's at the initial stagealthough itportendsa riskof conflictof interestsince everything is centered around theexchange.

2 IndependentWarehouseOperator

Exchange Exchange / Thirdparty

The warehouse operator must be licensed toperform this function for commodities stored inanexchangeaccreditedwarehouse.Theexchangeissues receipts on the commodities stored andserves as a central counterparty when thosereceiptsaretraded.Thismodelisalsofunctionalattheinitialstageofexchangedevelopment.

3 IndependentWarehouseOperator

IndependentWarehouseOperator

Exchange / Thirdparty

The Independent warehouse operator needs tomeet minimum requirements as set by theExchangeandmustbe licensedto issuereceipts.TheExchangeora licensed thirdpartyacts asacentral counterparty in this case. This model isnot recommended as conflict of interest mayariseifthewarehouseoperatorhascommoditiesstored in the warehouse on which he issuesreceipts.

4 Exchange CollateralManager ThirdParty The Collateral manager confirms quality andquantity (as received by the exchange) of thecommodities in the warehouse and issues awarehouse receipt. A third party licensed as adepository holds the warehouse receipts indematerialized form.Thismodelcanbeadoptedastheexchangegainsmaturity.

5 IndependentWarehouseOperator

Exchange Exchange/ ThirdParty

Thewarehouseoperatorensuresthequalityandquantity of the commodities stored in thewarehouse whilst the Exchange issueswarehouse receipts. The Exchange or a licensedthird party can serve as a central counterparty.Thismodelisnotrecommendedastheexchangeassumesliabilityforcommoditiesforwhichithasnocontrolsinceitissuesthewarehousereceipt.

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6 IndependentWarehouseOperator

CollateralManager Exchange/ ThirdParty

Collateral manager confirms the quality andquantity of the commodities in the warehousebefore issuing a receipt. This is also arecommendedmodelofoperationtoadopt.

7 CollateralManager

CollateralManager Exchange/ ThirdParty

There is no conflict of interest in this casebecausethecollateralmanagerdoesnotownthecommoditiesinthewarehouse.However, this model is expensive as collateralmanagersare inhighdemandand their servicesdonotcomecheap.Itissuggestedthatthiscouldbe adopted at the advanced stages ofdevelopment.

8 EndUser EndUser Exchange/ ThirdParty

There is conflict of interest in this case if thecommoditiesstoredinthewarehousebelongstotheendusere.g.processors.However,allowingtheendusertoissuereceiptson his own commodity deposits gives room forfalsificationofreceiptsandencouragesfraud.

a. WarehouseReceipts -TheWarehouse receipt is a document of title or promissory

security issuedbyacollateralmanagertoasupplierdetailingaspecificquantityandgradeofcommoditystoredinaspecifiedwarehousebythesupplierwhilenotingtheinterestofalenderorfinancier.Theseasonalnatureofagriculturalproductionandabsenceofafunctionalwarehousereceipt system may make all the year round trading activities impossible oncommodity exchanges as commodity off-takers like agro processing companies,commoditymerchantsandexporterswouldhavemoppedupalmost60% to70%oftheavailableproduceimmediatelyaftertheperiodwhencommoditypricesareatrockbottom. A functional warehouse receipt system will be required to smoothencommodityavailabilitythroughouttheyearfortradingonthecommodityexchanges.ThewarehousereceiptbilliswiththeNationalAssembly.ThisshouldbealowhangingfruitfortheSEC.ItshouldasamatterofpriorityengagetheNationalAssemblyonthepassageofthebillintolawasstatedearlier.

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8.3 GradingandCertificationGrading and certification are critical for enshrining standards and for the integrity ofcommodities traded. Grading and certification are therefore core to the operations ofcommodity exchanges. The grading and certification function of the exchanges ensuresqualitytocommoditiestradedinthemarketandpromotestrustandconfidence.Inotherwords,usingtheexchangewillpreventtradinginsubstandardproduceincludingexportcommodities that pass through the exchange. Indeed, the recent experience with theprohibitionofsomeexportproducefromNigeriacouldhavebeenavoidedifsubjectedtothestandardsofacommodityexchange.

As the agency responsible for establishing and approving standards in Nigeria, the SONshould collaborate more closely with the SEC, the exchanges and other stakeholders todevelop standards for the commodities traded over the exchange. The exchanges asregulatory agencies guided by international standards,must adopt international gradingandcertificationstandards.ThereistheneedtoengagewithSONtoreviewandexposestandardstostakeholdersforimplementation.In this regard, a standing committee should be set up comprising SON, the SEC, theexchanges and relevant stakeholders to periodically review existing standards to meetinternational best practices.We should also seek certification for collateralmanagementandpartnerwithdevelopmentpartnerstowardsthisend.

8.4 ProvisionofImprovedExtensionServicesProvisionofhighqualityfarminputsatmoreaffordablepricetosmallholderfarmerswillsignificantly reduce their burden and boost production. Establishment of more seedscentersacrosstheFederationforbetteraccesstoimprovedseedsbysmallholderfarmersis important.It isnotsufficienttoprovidetheinputsbuteducatingthemonappropriateuse of the inputs such as fertilizers and pesticides are also vital. Cooperatives could beeffectively used for input distribution and as incentive to organize smallholder farmersinto cooperatives. Efforts should be made by government at all levels to ensure thatsmallholder farmers have access to inputs in good time. Government agencies and theprivatesectorshouldbeencouragedtoinvestinmechanizedfarmimplementstoservicethe needs of smallholder farmers in clusters. Such implements should be available forleasebythefarmersduringfarmingseasonataffordablerates.Toencourageinvestmentin such implements, the government can incentivize private sector players throughprovisionoftaxbreaks,accesstoagricultureandMSMEfunds,etc.

8.5 IntroductionofFlagshipCommoditiesThe Federal Government should designate one or two high value commodities such ascocoa,goldandcottonasflagshipcommoditiesandincentivizetradingofthecommodities

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ontheexchangeswhenforexportratherthanmandatetradingofsuchcommoditiesontheexchangeas inEthiopia.For instance,tradingofcoffeeforexport isdonemandatorilyontheECXinEthiopia.Incentivizingtradingofflagshipexportontheexchangewillincreasequality and volume traded aswell as ensure international visibility for the commoditiesand indeed, the country. This should in turn increase foreign exchange earnings andencouragemoreproductioninsuchcommodities.WeareoftheviewsthatNigeriashouldlearn the lessonsof theexperienceofECXandnotmandateas it led to thecreationofalarge blackmarket in specialist coffee exports. However,wemust acknowledge that thepolicyledtosignificantincreaseincoffeeexport.

8.6 StrategicpurchasesthroughtheexchangesGovernmentshouldasamatterofpolicy,procuregrains intothestrategicgrainsreservethrough the exchanges and mandate all of its agencies such as NEMA to procure theirgrainsthroughthecommodityexchanges.Thiswillensurequality,pricetransparency,andfosterthedevelopmentoftheexchanges.InternationalagenciesoperatinginNigeriasuchas the World Food Programme (WFP) should be encouraged to buy their agriculturalcommodityrequirementsthroughtheExchangesasisdoneinEthiopia.

8.7 DiscountedpaymentstofarmersoninsuranceThis is one of the programs of Nigerian Agricultural Insurance Corporation (NAIC)whereby the government subsidizes premiums paid by farmers to NAIC for agriculturalinsurance. However, this aspect of NAIC’s operations is currently facing challenges asgovernment is not able tomeet its obligations toNAIC. Government should support theliberalization of agriculture insurance by allowing private sector owned insurancecompaniesparticipateininterventionschemessuchastheCBNAnchorBorrowersScheme.This will expand insurance coverage to include more farmers and farmer cooperatives.Currently,provisionofinsurancecovertofarmersininterventionschemesisdoneonlybyNAIC.Besides, insurancecapacitygenerally inagriculture insuranceshouldbedevelopedasthereseemsnottobeenoughcapacityinagricultureinsurance. Giventheimportanceand potential of the agricultural sector to national development, the SEC should engageNAICOM and other relevant stakeholders to enhance agriculture insurance capacity andcoverinthecountry. 8.8 LogisticsIn order to ensure the security and quality of goods for delivery, the exchanges have toensure that certain requirements are met by logistics providers registered with theexchangessuchas;• Monitoringvehiclesthroughtrackingsystems;• Insuranceofgoodsintransit;• Improvedtransportationsystem;and

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• ImprovedInformationCommunicationsTechnology.8.9 IntegrationofmajorplayersinthecommoditiesexchangesExchanges should integrate the major players in the commodities value chain in theiractivities by offering themmembership on the exchange. This will enable them see thebenefits of trading on the exchange thereby supporting and deepening the market. Forinstance,majorcommoditytradersandexportersaslistedintable4canbeencouragedtocarryout their activities on the floorof the exchanges. Equally,NewNigeriaCommodityMarketing Company (NNCMC), a subsidiary of New Nigerian Development Company(NNDC) was recently establish to amongst other, engage in business of commoditiesaggregationandmarketingaswellaslinkingfarmerstomajoroff-takersinNigeria.Giventhevitalrolethecompanyislikelytoplayinthecommoditiesecosystem,theSECandtheExchangesshouldencourageittotradethecommoditiesontheexchanges

9.0 RECOMMENDATIONSANDTIMELINEFORIMPLEMENTATION

Figure14:TimelineforImplementation

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Table10.Recommendations

Phases S/N Requirements/Recommendations Actionsby

Phase11 Developapublicenlightenment/educationroadmap

forcommoditiesmarketSEC

PhaseI(Year1-2)2018-2019

Objective:Food/inputssufficiency,pricediscoveryandmarketdevelopmentMarkettype:Cash-spotCommodities:Agriculture- Maize,Sorghum,soybeans,CassavaandRice

PhaseII(Year3-4)2020-2021

Objective:Export-focuscommoditiesMarkettype:Cash-forwards/futuresCommodities:Agriculture- Cocoa,Sesame,CottonandOilPalm

PhaseIII(Year5-6)2022-2023

Objective:RiskmanagementproductsMarkettype:CashandDerivativesCommodities:Futures,swapsandoptionsinagricultureandsolidminerals

PhaseV(Year7-8)2024-2025

Objective:StrongInternationalPresenceMarkettype:CashandDerivativesCommodities:Agriculture,SolidMinerals,Energyetc.

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2 OrganizeinternationalconferenceondevelopmentofathrivingcommoditiesecosysteminNigeria(1sthalf,2018)

SEC,Relevantstakeholders

3 Encourageinvestmentinwarehousesandstoragefacilitiesbyexchanges/privatesectors

ExchangesandPrivateSectors

4 Allowexchangestoownwarehousesatthisdevelopmentalstage.

SECandExchanges

5 EncourageexistingcommoditymerchantssuchasOlamandNewNigerianCommodityMarketingCompanytoparticipateactivelyontheexchangeseitherastradersorinvestors

SECandExchanges

6 Commodityexchangestoprovidecommoditypriceinformationviainformationcenters,media,websiteandmobilephones(EthiopiaandKenyamodel)tofarmersandstakeholdersacrossthecountry

FMARDandExchanges

7 Organizefarmersintocooperativestoaggregateproduceandencouragethemtobecomemembersofexchange

CBN(FSS2020),SEC,ExchangesFMARDandrelevantstakeministries

8 PartnerwithNBSonpriceinformation NBS,SECandExchanges9 Commenceadvocacyformacroeconomicstabilityand

policieswhichwillpromotethecommoditymarket(exchangerate,interestrate,inflationrate,infrastructureetc.)

CAMMIC

10 CommenceadvocacyforamendmentoftheLandUseAct

NEC,CAMMIC,NASS,CBN(FSS2020)

11 EngagewithGovernors’forumtoencouragedelegationoflandmatterstorelevantagencies

CAMMIC,CBN(FSS2020)

12 ReviewSECrulesandregulationsrelatingtocommodityexchangesespeciallyforthespotmarket

SECandExchange

13 Developrulesoncollateralmanagement SEC

14 Licensecollateralmanagers/managementcompanies SECandExchanges

15 IntroduceElectronicWarehouseReceipt(EWRs) Exchanges

16 Governmenttopatronizetheexchangesforpurchasesinrespectofstrategicgrainreserves,emergencyfeedingprogramme,e.g.IDP;andMDAs

CAMMIC

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17 Encouragegovernmentcontractorstobuycommoditiesofacertainvolumefromcommodityexchanges

CAMMIC

18 EncourageInternationalorganizationssuchastheWorldFoodProgramme(WFP)topatronizetheexchangesforsomeoftheirrequirements

CAMMIC

19 ReviewNigerianBankruptcyLawtopromotethederivativesmarket

CAMMIC,andExchanges

20 EstablishmentofCentralCounterparty(CCP) Exchanges

21 Reviewdownwardsminimumcapitalrequirementforspotmarketparticipants

SEC

22 Introduceriskbasedcapitalrequirementforcommoditiesoperatorsfornon-spotcommoditiestraders

SEC

23 DelegateregulationofoperatorsinthespotmarkettoExchanges

SEC

24 Expeditetheenactmentofawarehousereceiptbillintolaw.Also,theSECshouldhaveregulatorypurviewoverwarehouse/storagefacilitiesforexchangetradedcommoditiesasagainsttheproposedwarehouseregulatorascontainedinthebillbeforetheNationalAssembly

CAMMIC,CBN(FSS2020),NASS

25 Developgradingandstandardizationsysteminlineinternationalbestpractices

SON,SEC,CBNandExchanges

26 IncreasethecapacityofISTtohandlecommoditiesexchangerelateddisputes

IST,SEC,Exchanges

27 DevelopacertificationsystemforcollateralmanagersinNigeriathroughcollaborationwithinternationaldevelopmentagenciesandinternationalcertificationsbodies

SEC,Exchanges

28 StrengthenthecommoditiesexchangeunitoftheSECtodischargeitfunctionseffectively

SEC

29 TheBankofAgriculture (BOA) shouldbemoremoreefficient and relevant to the Commodity tradingecosystem,whichcouldincludepartialprivatizationoftheinstitution

CAMMIC

30 Engage with transporters to enlighten them onopportunitiesavailableforhaulageofexchangetraded

Exchanges

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commodities

Phase2

1 Reviewforeclosurelawtoeliminatethechallengeofpossessionindefaultsandtherebypromoteaccesstofinance

CAMMIC,NASS

2 AmendtheLandUseAct NEC,CAMMIC,NASS,CBN(FSS2020)3 Continuousde-riskingoftheagriculturalvaluechain NAICOM,NIRSAL,NAIC,Insurance

Companies,BOA4 Designatehighvalueexportcommoditiessuchas

cocoaasflagshipproductsandincentivizetradingthroughexchanges

CAMMIC,NEC,CBN(FSS2020)

5 ExchangesshouldinstalltraceabilitysystemforNigeria’sflagshipandotherexportcommoditiesthataretradedthroughtheirplatform

Exchanges

Phase3

1 ExchangesshouldkeyintotheCustomsSingleWindowSystemtoeasetheprocessofexport

Exchanges

2 WorkwithMinistryofMinesandSteelDevelopmentandMinistryofPetroleumtointroduceenergyandsolidmineralsontheexchanges

MinistryofMinesandSteelDevelopment,MinistryofPetroleum,Exchanges

Phase4

1 Introducesolidmineralsonthecommodityexchange MinistryofMinesandSteelDevelopment,Exchanges

2 Introduceenergy,e.g.crudeoilonthecommodityexchange

MinistryofPetroleum,NNPC,CommodityExchanges

3 Attractinternationalplayerstotradeontheexchange SEC,Exchanges4 Warehousestobeindependentofacommodity

exchangeSEC

Otherrecommendations

1. FederalMinistryofAgricultureandRuralDevelopmentshouldreconsideritsreportedplantoreintroducemarketingboardsforsomespecificcommodities.Webelievethatcommodity exchangeswill be better positioned to perform the functions,which areexpectedof themarketingboard.Apart fromduplicationof functions, themarketingboards,asgovernmentagencies,are likely tobebedeviledbybureaucracyandotherchallenges. The commodities market is currently being repositioned to effectivelyservethedevelopmentneedsoftheeconomy.

2. TheGovernmentshouldprovideenablingenvironmentandnon-ownershipsupporttotheexchangestothrivewhiletheprivatesectordrivestheexchange

3. Governmentshouldallocateat least10%of itsbudget toagriculture in linewithAUMalaburecommendation.Stategovernmentshouldbeencouragedtodothesame

4. Stategovernmentsshoulddeveloptheiragriculturalmasterplan in linewithFederalGovernment’s10-yearagriculturalmasterplan

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CONCLUSION

This reportwasput togetherdetailingroadmap todevelopingavibrantcommodity tradingecosysteminNigeria.TheCommitteediscussedsomerecommendations,whicharebelievedtobeuseful inachievingthesegoals.Wehopethatthekeystakeholders,especiallytheSEC,willfindtherecommendationsuseful.TheCommitteewillliketoappreciatethesupportandcooperation received from stakeholders consulted in the process of putting the reporttogether.TheCommitteewishestoparticularlythankGMEXGroup,LondonandFSS2020fortheir invaluable contribution. It also wishes to express its profound appreciation to theCommission and promises its availability in the process of implementing theserecommendationsaswellasinfutureandrelatedassignments.

10.0APPENDICESAppendixA

CommitteeMembersTheCommitteehasthefollowingmembers:

1. DaisyEkineh–(DSEAdvisoryServices) Chairperson2. AyodejiBalogun(AFEX) Member3. BensonLawal(NCX) Member4. AkinAkintunde(MidianConsult) Member

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5. EmmanuelEtaderhi(FMDQ) Member6. EbelechukwuEnedah(CMSA) Member7. AliyuAbdulhameed(NIRSAL) Member8. AgamaEmomotimi(SEC) Member9. AfolabiOlowookere(SEC) Member10. AdaAkonobi Member11. UsmanMohammed-Secretary12. ShamsudeenTukur-Secretary13. OjiugoC.Eze Secretary

Specialappreciationgoes to theunder listedmemberswhose invaluablecontributionmadethisworkpossible:

1. Sam–Ukoh,Ukoh(AFEX)2. AkinyinkaAkintunde(AFEX)3. FarhatKunmi–Olayiwola(AFEX)4. EzekielDavou(NCX)5. AbiodunOladotun(NCX)Methodology

TheTCcommencedworkinJuly2017andobservedthatafewreportshadbeenwrittenonreviving the commodities trading market in Nigeria. However, no concrete actions weretakenontherecommendationsofthereports.TheCommitteereviewedsomeofthereportswiththeobjectiveofincorporatingaspects,whichitconsideredusefultoitswork.

Specifically,theTChelditsinauguralmeetingonJuly12th,2017andextensivelydeliberatedon the termsof reference andmethodology for the assignment. Four sub-committeeswereconsequentlyconstitutedtoexamineandreportonthefollowingareas:

OverviewofCommoditiesExchanges–(byAFEX,NCX&SEC)

i. History and development of commodity exchanges in Nigeria and selectedcountries;

ii. Currentstateofthecommodityexchangemarketandchallengesiii. DeterminingtheidealcommoditiestradingecosystemforNigeria;iv. Identifyingmarketparticipantsandotherkeyplayers;v. Organisingsmallholderfarmersasacriticalpartoftheecosystem;vi. Infrastructureandtechnologycriticalfortheecosystem;vii. Markettypes–spot,forwardsandfutures;andviii. Clearingandsettlementmechanism

WarehousingandStandards–(byMidianConsult)

i. Warehousing

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ii. Standardsandqualityiii. Grading

LiquidityIssues–(byNIRSAL&AFEX)

i. Keyissuesinliquiditycreationii. Organisingsmallholderfarmersforeaseoffinancing(accesstocredit)iii. The role of CBN and banks in addressing high interest rates on commercial

loansiv. ExperiencesfromotherjurisdictionssuchasEastAfrica

LegalandRegulatoryFramework–(CMSA&FMDQ)

i. ReviewoftheISA2007andSECRulesandRegulationsoncommodityexchanges.The sub-Committee presented its report to the Committee on September 13th 2017. TheCommitteehadseveralothermeetingsthereafter.

AppendixBCurrentSECRegistrationRequirementforCommoditiesExchange(Refertotherules)

(1) ApplicationforregistrationassecuritiesexchangeshallbefiledonFormSEC5as providedinscheduleIIItotheserulesandregulationsandshallbeaccompaniedby:-

(a) Copyofthecertificateofincorporationcertifiedbythecompanysecretary.

(b) 2copiesoftheMemorandumandArticlesofAssociationandamendments(ifany)certifiedbytheCorporateAffairsCommission;

(c) Latestcopyofauditedaccountsorstatementofaffairssignedbyitsauditorsandmanagementaccountsthatarenotmorethanthirty(30)daysoldasattimeoffilingwiththeCommission;

(d) 2copiesofexistingorproposedby-lawsorrules,codeofconduct,codeofdealing,etc.,whicharereferredtoas“rulesoftheexchange”;

(e) 2copiesofthelistingrequirementsoftheexchange;

(f) SwornundertakingtopromptlyfurnishtheCommissionwithcopiesofany amendmentstotherulesoftheexchangeandthelistingrequirements;

(g) Informationrelatingtomarketfacilitiesincluding—

(i) Tradingfloors/facilities;

(ii) Quotationboard;

(iii) Informationboard/tickertape;

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(h) Detailedinformationaboutthetradingsystemtobeadopted;

(i)Informationastoitsorganizationincludingstructureandprofileofmembersofitscouncil/boardaswellasrulesandprocedures

(j) Instructionandinspectionmanualofmember’sactivities;

(k) detailedinformationaboutthepromotersandprincipalofficersoftheexchange;

(l) SwornundertakingtokeepsuchrecordsandrendersuchreturnsasmaybespecifiedbytheCommissionfromtimetotime;

(m) SwornundertakingtocomplywithandtoenforcecompliancebyitsmemberswiththeprovisionsoftheActandtheserulesandregulations;

(n) Anapplicationforregistrationofatleastthree(3)principalofficersoftheexchangeonFormS.E.C.2;

(o) Minimumpaid-upcapitalrequirementofN500million;

(p) AnyotherdocumentrequiredbytheCommissionfromtimetotimefortheprotectionofinvestors.

AppendixCCollateralManagementServicesCollateral management services shall cover all services relating to professional storage ofgoodsinawarehousefromarrivalofgoodstotheauthorizedrelease.Theseservicescanbesummarizedasfollows.

(a) InspectionServices(Quantity,Qualityetc.)• Inspectionandapprovalofwarehouse

• Pre-operationalservices–duediligence,verifications,agreements,insurancesetc

• Inspection/stockmanagementagreement

• Supervisionofarrivaloftrucksatthecontrolledwarehouse.

• Supervisionofweighingpriortostorage

• Samplinganddeterminationofquality.

• Supervisionofdischargeandsegregationofsoundanddamagedcommodities.

• Tallyatthetimeofentryintothewarehouse.

• Reporting

• Etc.

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(b) CollateralManagementServices:• Allpartiesmeeting&draftingofSequenceofevents

• Allocationofresponsibilities.

• Pre-operationalservices.

• Collateralmanagementagreement.

• Supervisionofreceiptofcommoditiesintothewarehouse.

• Supervisionofweighingpriortostorage

• SamplingandQualitytesting

• Checkingstackingofacceptedgoodsinsidethewarehouse

• Keeping the goods under the Collateral Managers custody for the duration of theagreement

• IssuingWarehouseReceiptCertificates(warrants)

• Stockcontrol

• Receiving and verifying the authenticity of release instructions from theexchange.

• Authorizingandcheckingphysicalhandlingoutoperations.

• Performingtallyofgoodsattimeofdeliveryintoandex-warehouse

• Reporting

• FidelityandothertypesofInsurance

• Etc.

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• NigerianCooperativeSocietiesAct,No90,1993

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