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ICEX makes a comeback through futures contract in diamond

In a first of its kind, Reliance Capital-led Indian Commodity Exchange (ICEX) launched the world’s first diamond futures contract last week.

ICEX had suspended operation in 2014 due to dwindling volumes in the exchange.

Given that India is one of the largest exporters of polished diamonds, a futures contract to hedge price risks will help manufacturers, wholesalers and retailers and jewellery fabricators. Surat (Gujarat) is the hub for diamond trading operations in India.

Whether the ICEX diamond contracts will gain momentum and sustain the interest of investors remains to be seen. Factors such as spending capacity in India and China, consumer preferences, performance of current mines and global demand and supply influence the prices of diamonds.

Contract specifications

The diamond futures contract launched by ICEX will be traded Monday through Friday between 10 am and 11:30 pm. One lot is one cent (2mg) and the maximum order size is 3,000 cents (1 carat is 100 cents). It will be quoted in rupee per cent of HVS2 grade diamond.

HVS2 is one of the common grades of diamond which has minor visual inclusions (the marks and taints on the diamond) that are difficult to see under (10X) magnifications. H indicates near colourless diamond (and VS- very slightly). The diamond colours usually range from light tint to colourless (between grades K and D).

The diamond futures contract will expire on the 5th of every month. If you want to trade in the futures contract, an initial margin of 4 per cent along with extreme loss margin of 1 per cent has to be paid. A special margin may also be imposed on the buy side or sell side, or both, if the regulator or the exchange finds increased volatility in prices.

The exchange accepts graded natural untreated diamond stones without any brown, green or milky discolouration and without dark or black inclusion for delivery.

ICEX does polling for diamond prices through quotes from diamond traders, jewellers and wholesalers.

Delivery procedure

The diamond futures contract is a compulsory delivery contract.

Physical delivery, however, happens only if a trader has accumulated at least 100 e-units, where one e-unit is equivalent to one cent. For those who hold less than 100 units of the contract, the delivery will only be in electronic form.

Say, upon the expiry of contract, you have a buy position of 20 cents, you will get the delivery of the said 20 cents as e-units in your account. You can’t ask for a physical delivery unless you hold a minimum of 100 e-units (i.e., one carat).

Similarly, if a seller wishes to give delivery, the diamond has to be of weight 1 carat or above and he has to get it graded from the agency designated by the exchange (International Institute of Diamond Grading and Research). Post this, the grading report and the diamond stones will have to be deposited with the exchange accredited vault (Malca-Amit, vaulting agency).

The exchange will credit e-units to the seller’s account once the confirmation from the agency is received to the exchange.

The delivery centre is at an exchange designated vault at Surat (Gujarat). Currently, three contracts of 1 carat diamonds are available with the exchange — one expiring in November 2017, one in December 2017 and the other in January 2018.

Price movements

Globally, diamond prices have been declining over the last one year.

According to Rapaport 1 carat HVS2 index, 1 carat diamond was trading at $5,220 in September 2016 which has since declined to $4,644 per carat now.

This is mainly due to low demand from Chinese markets, one of the largest consumers next to the US. Competition in the industry and excess supply have resulted in the price decline.

However, with the demand from the Chinese market showing signs of improvement recently, prices may edge higher now, say analysts.

Prices of diamonds in the domestic market may also move up and help volumes in the newly launched futures contract.

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