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Indian Market Regulator Approves Diamond Futures Trading

The Securities & Exchange Board of India (SEBI), the Indian stock market regulator, has approved in principle, the launching of a diamond futures contract on the Indian Commodity Exchange (ICEX). Actual trading however, will only begin after the ICEX attains the mandatory net worth of ₹100 crore ($14.7 million) and complies with a slew of other directions and conditions.

The ICEX capitalisation is currently at half the required level, but chief executive Sanjit Prasad says existing shareholders — Reliance Capital, Indiabulls and Akhil Gupta — will capitalise the exchange to the necessary ₹100 crore level by March this year and trading will begin subsequently.

The exchange had sought permission to trade diamond futures in May last year and Prasad says it now has 50 diamond-dealing members, including 20 Sightholders. According to him, mock trading sessions that were conducted saw participation from around 100 people. Prasad says that active trading will turn diamonds, which have never become a financial instrument, into investment products.

ICEX has tied up with the De Beers-owned International Institute of Diamond Grading & Research (IIDGR) for the grading and packing of the diamonds to be used in the futures contracts.

The diamonds being offered for trading are H-VS2 stones in sizes of 1, 0.5 and 0.3 carat. The minimum trading lot per monthly contract is 0.01 carat. This means that a trader can place a 5 percent margin on the cost of the stone to trade a 0.01 carat share. Physical delivery will be in Surat, where the bulk of diamond cutting and polishing happens and where the Indian branch of the IIDGR is located.

The SEBI permission to the ICEX paves the way for other exchanges like the MCX, the country’s largest metals and energy futures trader and the NCDEX, which leads in agricultural product futures, to add diamonds to their portfolios of gold, silver, crude oil, base metals, sugar, edible oils, and spice futures. The ICEX had to suspend trading in 2014, when its capitalisation fell below the ₹100 crore ($14.7 million) level.

Diamond futures contract have not succeeded anywhere in the world to date, with a lack of standardisation and a lack of pricing transparency being quoted as the main reasons.

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