NZX quietly scores big derivatives triumph

19:05, Apr 25 2013

The NZX's dairy derivatives market has quietly scored a huge win over its peers with international commodity traders flocking to the platform instead of equivalents in Germany, London and the United States.

The news emerged after the securities market operator earlier this week announced it would be moving the market's opening time from 8am to 2am, effectively creating a 14-hour trading day.

That means commodity traders in Europe can place orders in New Zealand before the end of their business day, and the NZX Dairy Futures market will be open during the main US trading session.

Head of derivatives Kathryn Jaggard said the platform had quickly established itself as one of the most liquid dairy derivatives market in the world, with trading volumes four times higher than equivalent contracts on the London Futures Exchange and Germany's Eurex.

In fact, only one other contract, a US domestic dairy security on the Chicago Mercantile Exchange, traded with more liquidity in the world.

"I get a little evangelical - this is an amazing opportunity to access a core hub for physical trading, as well as a hub for risk management and financial product trading," Jaggard said.


"All of the other exchanges are impressed with where we are in terms of building volume."

It's a major win for the NZX, which launched the platform in 2010 amid the most quiet of starts - it took a full three days before the first contract was debuted.

Since then activity has exploded, with 40,000 lots traded to date and no sign of momentum slowing either.

"Liquidity in a derivatives market builds from a small base, unlike an IPO (initial public offering) which has high levels of demand and limited supply," Jaggard explained.

"Derivatives build slowly from the first two participants and it takes time to mature."

The biggest driver behind the take-up has been the wild swings in dairy prices over the past five years, prompting dairy traders and major food companies to look for ways of hedging their exposure to this volatility.

The upside for dairy farmers using the exchange is they can lock in a price for future supply, giving them further certainty in their operations.

Jaggard conceded participation on the platform was dominated by international players, but said NZX was working to boost local activity.

She said one of the benefits of the NZX offer was that all trades on the exchange were cleared. That eliminated the counter party risk seen with over-the-counter derivatives, where one party can just pull out of a contract with repercussions.

The investment and success in the dairy platform also gave the NZX scope to expand into other commodity markets.

Jaggard said beef and lamb contracts were being considered, and the NZX was just assessing market demand.

The firm was keen on expanding market participation in Asia, where the bulk of New Zealand's dairy exports are consumed.