BFX - Bahrain Financial Exchange

Gold, Silver, Platinum and Palladium are commonly referred to as Precious Metals.

Gold is considered predominantly an investment asset with demand in the form of bars, coins and jewelry contributing to over 79% of the total demand. Other uses for Gold include dentistry and electronics and investments such as ETFs. Silver, and to a larger extent, Platinum and Palladium are used more frequently in industrial applications.

The supply of precious metals mostly depends on the global mine output. Since 2007, China has surpassed South Africa and has emerged as the largest producer of gold in the world. Mine production from China has increased to over 300 tonnes per annum. Nevertheless, South Africa still has the largest (below ground) reserves of Gold (13% of the global reserves). The recycled (scrap) Gold is also a major source of supply, with Turkey having the largest share of the global Gold scrap supply market. India is the largest consumer of Gold jewelry followed by China, USA, Saudi Arabia and Turkey.

Over 50% of the total demand for silver is for industrial applications (including photography, electronic equipments, etc.) with jewelry and silverware (24%), investment demand (14%) and coins (9%) contributing to most of the other demand drivers. Over 78% of the global silver supply is dependent on mine output. Silver is usually produced as a by-product in the process of mining base metals. Peru is the largest producer of silver, followed by Mexico, Australia and China.

The most important price driver for Platinum and Palladium is their use for making catalytic converters for automobiles.

London, Zurich and New York have evolved as some of the most important global markets for trading in Gold. Demand for physical Gold has been increasing in Asia in the last couple of decades. India, China (especially Hong Kong) and Singapore have become major centres for Gold trading. The Middle-East region has also become a major centre for bullion trading. With Saudi Arabia, UAE, Turkey and Egypt contributing to over 16% of the global Gold jewelry demand, the Middle-East region is expected to contribute significantly to the growth in Gold consumption. Among major Gold consuming countries, Saudi Arabia has one of the largest per capita consumption (3.50 grams per capita) of Gold. Bahrain (situated in close proximity to Saudi Arabia) has evolved as an international financial centre for market participants to hedge against commodity price risk.

In this perspective, the BFX has launched the Gold futures contracts to facilitate market participants in the MENA region and other parts of the world to mitigate risk due to volatility of bullion prices. The BFX Gold futures are available for trading in the contract size of 32 troy ounces. The contract shall be quoted in US dollars and cents per troy ounce. The BFX Gold futures contracts would be aligned with the prices in the international reference markets, so as to provide a uniform price risk management strategy for market participants. The final settlement price is based on the equivalent futures contracts traded in the New York markets. The trading hours are aligned with the peak period (for active trading) in Asia, Europe and the US markets.

For more information on the BFX Gold Futures product booklet, please click here

For more information on the BFX Gold Futures contract specifications, please click here

The global currency market (commonly referred to as the Foreign Exchange markets or the FX markets) is the largest asset class in the world in terms of value of transactions. The average daily turnover across all FX markets worldwide increased to USD 4.15 trillion in 2010, as compared to USD 3.40 trillion in 2007. The spot market transactions (USD 1.49 trillion), outright forwards (USD 0.475 trillion) and FX swaps (USD 1.765 trillion) constitute over 93% (USD 3.73 trillion) of the global FX markets' average daily turnover (Source: BIS).

The FX markets can be broadly classified into the Over-the-Counter markets (OTC) and the exchange markets. The OTC market refers to the cash, spot, forward contracts, swaps and other financial instruments (derivatives such as options, currency swaps, etc.) that are customised and transacted directly between two or more counterparties (outside the exchange environment). Alternatively, currency futures contracts are traded on exchange platforms, such as the BFX. The BFX Clearing and Depository Corporation (BCDC) ensures the outstanding profits and losses (referred to as the mark-to-market profits and losses or MTM) are settled on the following business day (T+1 day basis). Novation reduces the risk of default for the market participants. The price discovery in an electronic exchange trading platform is more effective, thereby providing efficient risk management for market participants. Exchange markets also provide a smaller futures contract lot-size enabling the micro, small and medium scale enterprises to mitigate currency price risk.

According to a report published by the Futures Industry Association (Mar 2011), the growth rate of the currency futures and options trading on the leading global exchange markets has increased by 142% in 2010 (2.40 billion contracts) as compared to the same period in 2009 (0.99 billion contracts). The increasing volatility in the FX markets since 2008, due to the global economic recession, has resulted in greater risk for market participants. Exchange markets provide an ideal platform for risk mitigation.

In the initial phase, the BFX is scheduled to launch the futures contracts on the Euro US dollar (EURUSD) currency pair. The Euro versus the US dollar futures contracts is the largest traded currency futures contract in the world (in terms of the value of transactions). The Euro is the second most traded currency in the world after the US dollar and is the common currency of the Euro zone region. The EURUSD is the barometer for the indication of the strength of the US dollar and has a huge impact on the value of global commodity prices. When the EURUSD exchange rate decreases, it implies that the Euro has depreciated and the US dollar has appreciated, and vice versa when the EURUSD exchange rate increases. With the Euro zone countries contributing to one-fifth (over USD 12 trillion) of the global GDP, the Euro currency has gained recognition in terms of acceptance for international trade. Increasing volatility in the EURUSD exchange rate has necessitated exporters, importers and banks to hedge against currency risk using futures contracts, where the transaction costs are much lower as compared to the OTC markets.

The BFX EURUSD currency futures contract has a lot size of EUR 25,000 and is quoted in US dollars and cents per one Euro. The final settlement price is based on EURUSD futures contracts trading in Chicago, USA. 

For more information on the BFX EURUSD Futures product booklet, please click here

For more information on the BFX EURUSD Futures contract specifications, please click here

Fossil fuels contribute to over 88% of the global energy consumption requirements, out of which, Crude Oil has a share of over 37%, the other major fossil fuels being Natural Gas (27.69%) and Coal (20.07%). Other sources of energy account for the remaining 14.72% by nuclear energy, hydroelectricity and renewable.

Political and economic events have a significant impact on Crude Oil, Natural Gas and consequently the prices of distillate products. Increasing economic growth in emerging markets (especially China and other BRIC nations) led to a surge in refining capacity and energy products consumption between 2003 and 2008.

The global production and consumption trends of energy commodities impact the prices across the entire value chain of the specific energy commodity. The value chain commences with the extraction of Crude Oil or Natural Gas from the earth's crust, transportation to refineries around the world (using pipeline, ships, etc.), refining and production of distillate products and their final consumption.

Crude Oil

The supply of Crude Oil has increased from 56.08 million barrels per day in 1983 (annual production of 20.50 billion barrels) to over 86.62 million barrels per day in 2010 (annual production of 31.60 billion barrels), a compounded annual growth rate of over 1.62% per annum. The global Crude Oil prices increased from USD 10.42 per barrel in 1986 to a high of USD 147 per barrel in July 2008. The global economic recession in 2008 led to the Crude Oil prices decreasing to less than USD 34 per barrel towards the end of 2008 before rebounding to USD 95 per barrel as on Nov 2011. The Middle-East region contributes to over 30% of the global Crude Oil production and 40% of the global Crude Oil exports, but consumes only 7% of the distillate products produced in the world. The Asia-Pacific region is the largest importer of Crude Oil (38%) in the world. It predominantly depends on the Middle-East to meet its energy requirements.

Natural Gas

When the Crude Oil prices increased to over USD 147 per barrel as a result of a depreciation of the US dollar coupled with increasing demand, Natural Gas prices increased to over USD 14 per mmBtu, before the global economic recession resulted in a decrease in Natural Gas prices to as low as USD 2.51 per mmBtu by 2009. The supply of Natural Gas gradually increased, resulting in inventory levels peaking at a seven year-high, thus capping Natural Gas prices at USD 6.01 per mmBtu in the years 2009-10. As on Oct 4^th 2011, Natural Gas prices were trading at USD 3.596 per mmBtu, down from the high of USD 4.983 per mmBtu (June 9, 2011).

Natural Gas is a mixture of hydrocarbon gases. It is constituted mainly of methane, along with other gases such as ethane, propane, butane and pentane. It is a major source of global energy requirements and is the third largest contributor towards fulfilling the energy requirements of the world.  Natural Gas is colorless and odorless in nature and is highly combustible. It can be transported through pipelines or liquefied and transported by ship.

Even though the Middle-East region accounts only for 14% of the global gas production, it has the world's largest reserves of Natural Gas (of 75.80 tcm), (accounting for over 40% of the global reserves). Iran (29.61 tcm), Qatar (25.32 tcm), Saudi Arabia (8.02 tcm) and UAE (6.02 tcm) are the countries with the most reserves of Natural Gas.

Increasing need to mitigate price risk by producers and consumers of Crude Oil, Natural Gas and distillate products has necessitated the introduction of the Exchange-traded futures contracts. In this perspective, the BFX is launching futures contracts for the Natural Gas in its initial phase. The contract size is 2,500 million British thermal units (mmBtu), in line with the international reference markets. The final settlement price shall be based on the equivalent Henry Hub futures prices in the US markets.

For more information on the BFX Natural Gas Futures product booklet, please click here 

For more information on the BFX Natural Gas Futures contract specifications, please click here

The development of capital markets is critical for the evolution of a region's economy. It enables trading in financial securities (bonds and equities) to facilitate mobilisation of funds for investment. Equity markets provide the structure for corporates to divest stake in order to fund investments for exploring new business opportunities and expansion of existing capacity.

The Middle-East and North Africa (MENA) as well as the Asian markets have witnessed the fastest growth of capital markets in the world. Stock exchanges facilitate trading of shares (also referred to as the secondary market), thereby, providing liquidity to shares issued by companies (referred to as the primary market). Stock markets are the barometers of a nation's economy. When a country's economy is performing well with increasing business investments, consumption and manufacturing demand, cash liquidity, low inflation and high employment, then the profits of companies also increase resulting in the increase in the value of their shares.

A stock market index is a derived value of the price (or market capitalisation) of specific shares that are listed in the stock exchange. For example, the Dow Jones SAFE India Index represents a select group of stocks in the Indian equity markets. When these stock prices increase, the value of the index also increases, indicating the robustness of the underlying securities.

Since the stock market index is representative of a select group of securities that are listed, investors who prefer to invest in a specific sector or region can leverage using Stock Index Futures contracts as compared to investing in the underlying stock. With increasing volatility in International Securities Markets, the index futures contracts provide the facility to diversify a portfolio of investments. For example, if an investor based in Bahrain would like to obtain exposure to the Indian stock market, then instead of transferring funds to India (where regulatory restrictions may need to be adhered to), he or she can invest in the Dow Jones SAFE India Index futures to be listed on the BFX. With a lot size of five, the investor can obtain exposure up to five times the index value by buying or selling one futures contract on the underlying index.

Similarly, the Dow Jones MENA (Middle East North Africa) ex-SA(Saudi Arabia) Index enables investors to obtain exposure to the MENA region's economy. With a lot size of twenty, this index can be leveraged by investors who would like to diversify their portfolio with an exposure to the MENA region.

According to the Futures Industry Association (FIA), the volume (number) of Equity Index Futures contracts traded in the world was 3.64 billion during the period between January and June 2010. This was a 15.98% increase over the corresponding period in the previous calendar year 2009, when 3.13 billion contracts were traded. The growth in the futures market on equity indices is indicative of the global investors' preferences for diversifying portfolio risk.