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ECX… An Idea Whose Time

Has Come

There is nothing so powerful as an idea whose time has come…

Victor Hugo

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Why ECX?

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POOR QUALITYVOLATILE PRICES

HIGH CONTRACT DEFAULT

UNRELIABLE TRADING PARTNERS

POOR INFORMATIONUNREGULATED ACTORS

UNCOORDINATED MARKETS

UNRELIABLE SUPPLY

HIGH COSTS, HIGH RISKS

Because there was a problem….

What was needed.. A Market Solution Commitment to free market

principles A more reliable way to connect

buyers and sellers in our market An efficient way to discover market

prices A way to level the playing field by

providing market information to all A means to empower the farmer A way to incentivize better quality A way to eliminate contract risk

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The ECX Solution

What is an Exchange?

A neutral trading system that reliably and efficiently connects buyers and sellers

A means of setting and enforcing the “Rules of the Game” so that all actors can participate fairly and transparently

A service to the market: a 3rd party that takes on the risk from both sides of the trade

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ECX…An idea whose time has come

As Ethiopia is poised to transform its agrarian economy, so too must Ethiopia’s marketing system take the country into the new Millennium.

It is time to enter the modern age of globally connected trading systems, relying on technology and know how, while tailored to Ethiopia’s realities and conditions.

It is time to forge a new partnership between the private and the public in the new arena created by market liberalization.

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The Vision

The vision driving the Ethiopia Commodity Exchange (ECX) is to revolutionize Ethiopian agriculture through a dynamic, efficient, and orderly marketing system that serves all.

The Exchange concept is not new

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Why Ethiopia gains

Commercialization of smallholder agriculture is core pillar of poverty reduction strategy

Need to capitalize on gains of recent rapid economic growth (past 5 years)

Large domestic market, 2nd largest maize producer in Africa

Rapid export growth in key commodities

A better functioning domestic market is key to sustaining and scaling up growth

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Impact on smallholder farmers?

Power and participation Farmers are better able to negotiate prices given market transparency

Quality Farmers are able to get market premium for value added to the product (post-harvest handling)

Market access: Farmers are not restricted or captive to local market, can access national market

Risk management Farmers can lock in prices through futures contracts

Planning Farmers can use futures prices for planting decisions

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Current agricultural market structure in Ethiopia

SMALLHOLDER (SS) 95%

STATE FARM (SF) COMMERCIAL (CF)

CONSUMERS: DOMESTIC

RETAILERS

WHOLESALERS (DEFICIT)

BROKERS

WHOLESALERS (SURPLUS)

RURAL ASSEMBLERS

COOPS EGTE

EXPORTERS

PROCESSORS

FOOD AID AGENCIES

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Structure with Exchange

SMALLHOLDERS

STATE FARM COMMERCIAL (CF)

CONSUMERS: DOMESTIC

RETAILERS

WHOLESALERS (DEFICIT)

COMMODITY EXCHANGE

WHOLESALERS (SURPLUS)

ASSEMBLERS COOPS

EXPORTERS PROCESSORS FOOD AID AGENCIES

EGTE

An Ethiopian Exchange for Ethiopia

Technical design started in 2006: Based on extensive global best practices

review and analysis Engaged in extensive stakeholder

consultation and buy-in Building a tailored solution, not a cut-and-

paste model Committed to continuous learning and

flexibility15

What is ECX?

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ECX is a marketplace that serves all market actors

The ECX marketplace brings order, integrity, transparency, and efficiency to the market

How does ECX bring order?

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Through an organized trading platformThrough formal rules and proceduresThrough standardized contracts and

standardized productsThrough a system of Membership based

participationThrough monitoring and enforcement of

compliance to the rules Through managing risks to the market

How does ECX bring integrity?

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Through grading and certification of the quality and quantity of products traded

Through warehouse receipting of commodities traded

Through enforcing fair competition and ethical business conduct

Through clearing all payments between buyers to sellers

How does ECX bring transparency?

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Through a system of industry-accepted product grades and standards

Through rapid and reliable dissemination of market information to all actors

Through enforcing disclosure and audit reporting requirements for its Members

How does ECX bring efficiency?

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Through use of information technology to automate the End-to-End system from warehousing to trading to clearing and settlement of payments to delivery of commodity

Through a centralized trading platform offering low-cost service to all market users

ECX…A broad market platform Member certification and management Quality standard setting and certification of

domestic coffees Electronic warehouse receipting and Central

Depository Inventory management (and inventory

financing facilitation) Open-outcry and electronic trading in spot,

forwards, futures delivery contracts Clearinghouse (central counterparty) Market data dissemination 22

ECX…A flexible market platform

Able to accommodate large and small market actors through small lot sizes and different classes of membership

Able to accommodate origins and diversity of coffees through large number of highly differentiated contracts

Able to accommodate local specificities in market with internally developed IT system that is continuously in design

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ECX…A powerful market solution Highly professional grading system Efficient daily trading of hundreds of

commodity class-grade combinations Zero contract, payment, delivery default Clearing of payments within hours to the

seller Transmission of market data in seconds

around the country and world

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WAREHOUSE GOODS RECEIVING (QUALITY AND QUANTITY CERTIFICATION)

MARKET DATA PROCESSING

DATA CENTER

MARKET SURVEILLANCE

CENTRAL DEPOSITORY OF WAREHOUSE RECEIPTS

CLEARING AND SETTLEMENT

TRADE ORDER MATCHING AND RECONCILIATION

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MEMBERSHIP MANAGEMENT

Integrated ECX Technology Solution

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How it works

Farmer, cooperative, or trader brings product to Exchange-operated warehouse

The warehouse draws samples and issues a Product Certificate and Warehouse Receipt

Buyer instructs broker to post bid

Seller instructs broker to post offer

ECX Trading Floor

Order Matching

• Market information transmission

• Clearing and settlement

• Market surveillance• Risk management• Member database• Disaster recovery• Data center

ECX Back Office

Buyer deposits funds into settlement account in Exchange partner bank

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The Liability Chain

Seller of product

Warehouse:Product certification Warehouse receipt

Bank:Fund transfer

Buyer of product

Clearing and settlement

MEMBER

Order

MEMBER

Order

fundsreceipt

Trading System:Order Matching

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Beyond agriculture: From a sack of grain to a sack of money

Finance Information Technology

Legal Infrastructure

Warehouses=Banks Power the system

Self-regulatory

Electronic trade

PRODUCT

Who owns and manages ECX?

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ECX has a unique institutional set-up

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ECX is a non-profit autonomous commercial enterprise (company) established by its own law, that can only reinvest its profits in its scaling up and innovation (no dividends to investors).

ECX is a demutualized Public-Private undertaking in that Government owned entity (initially) but Private Members permanently own Membership

seats Jointly govern ECX through a joint Board of

Directors

ECX management

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By law, ECX management is separate from either its ownership or its membership

ECX is managed as an independent and autonomous entity

ECX has a professional management that reports to the Board of Directors

An ECX Management Transition Plan enables internationally recruited professionals to manage and build national capacity for the first three years

ECX Management Team Chief Executive Officer: Eleni Gabre-Madhin Chief Information Officer: Solomon Edossa (formerly Accenture) Chief Business Operations Officer: Aman Adinew (formerly DHL,

Northwest Airlines) Chief Compliance Officer: Yohannes Assefa (formerly Washington

securities lawyer) Chief Market Data Officer: Ahadu Woubshet (formerly Fannie Mae) Chief Clearing and Settlement Officer: Keith Thomas (formerly

BACS) Chief Risk Officer: Kadri Alfah (formerly London Financial Exchange Chief Finance Officer: Yonas Berhe (formerly Wells Fargo) Senior Manager, Business Development: Ben Aschenaki (formerly

Merrill Lynch) Senior Manager, Trading Operations: Bharat Kulkarni (formerly

MCX India) 32

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COMMODITY EXCHANGE AUTHORITY

Laws and Regulations

Market Information

Arbitration Tribunal

Trading System

Exchange Warehouses

Grade certification

Warehouse receipt

Exchange Clearing Banks

Clearing and Settlement

National Exchange Actors Association

EXCHANGE MEMBERS

The ECX “Eco-System”Policy and Strategy

MINISTRY

ECX….Looking Back on A Year of Challenges and Triumphs

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“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain of its success, than to take the lead in the introduction of a new order of things” Machiavelli

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Challenges

Transition from old to new systems: need for continuous learning, communication, adjustment, fine-tuning.

Global commodity and financial crises Domestic economy concerns: severe

inflation, production shortfalls, chemical crisis (coffee)

Coffee crisis Maintaining neutrality and system

integrity36

A word on coffee crisis

Coffee is life Coffee crisis not related to ECX

weather, foreign exchange, Japan, credit crunch, weak exports, regulatory crackdown

Coffee crisis related to ECX system burden at warehouse, specialty

market concerns, market learning and adjustment

The worst is behind us37

Early Achievements on the ground

496 Trading Members (99% private) 12% participation by smallholder cooperatives

(>250,000 farmers) 7 partner banks integrated into first ever

electronic national payment system US$ 300 million trade (coffee, sesame, beans,

wheat, maize) without single default Real time price transmission (2-4 seconds) Improved quality impact on exports Improved returns to farmers Intangibles: attitudes, transparency, HOPE

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What the Future Holds

More commodities, more services Grains (sesame, beans, teff) Specialty coffee direct trade SMS/IVR market data system Warehouse receipt financing (w/IFC) Online trading Futures/forwards contracts

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Finally, ECX is creating new growth opportunities and spillover impacts

Technology: mobile telephony, satellite radio, IT services

Financial sector: new financial products tailored to small market players

Services: Transport Packaging/Sacking Logistics Quality Certification, Member licensing Insurance Academic: information analysis, research

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Aweke TeshomeFarmer, member of Wedera Union (Farmers Union)

“Now we are members of the ECX and are happy that big volume sales can take place in a risk free environment. Additionally, as a result of our involvement with the ECX our knowledge regarding the concept of grading has increased and our resolve to produce quality products has strengthened.

We are so happy to have a market which is transparent and risk free.”

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The future is here…YICHALAL !!

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WWW.ECX.COM.ET+251 -11- 554- 7001

Eleni.Gabre-Madhin@ecx.com.et