[05 Feb] Sicom to Launch OTC Clearing for Natural Rubber by 2Q

The Singapore Commodity Exchange Thursday announced it will launch the world's first over-the-counter clearing for physical trade in natural rubber by the second quarter of 2010.

Sicom has signed an agreement with China's Sino Rubber Electronic Trading Market to launch the OTC clearing, the exchange said in a statement.

Under the agreement, Sino Rubber will facilitate the delivery of the OTC rubber contracts that are cleared by Sicom, in China.

A Sicom executive had told Dow Jones Newswires last September an OTC clearing platform for natural rubber was being planned to prevent defaults at the time of price volatility.

Sicom's OTC launch is significant because it can reduce the probability of defaults when there is a large movement in prices, as had happened in 2008 when importers in China backed out of contracts due to a slump in the market.

Now the opposite is happening. As prices rose sharply during the second half of 2009, Thai rubber factories are canceling long-term export deals of 6-12 months, which are down by 50% on year, and insisting on spot pricing.

The OTC clearing facility for rubber will contribute to better mitigation of counterparty and settlement risks, Sicom said.

"It will definitely reduce the chances of default because the buyers and sellers will have to deposit margins with Sicom, which will then take guarantee for the execution of the physical deal," said Avtar Sandu, manager for Asian commodities with Phillip Futures.

He said the physical trades will be registered on Sicom for a clearing fee and margins deposited until the delivery is executed.

However, this is likely to push up the cost of trades beyond the usual prices, freight, insurance and packing.

"Of course there are pros and cons. The trade will be guaranteed but costs will be go up," said Sandu.

The OTC clearing service will provide participants with a larger pool of counterparties, said Jeremy Ang, Sicom's chief executive.

He said it will facilitate trading with many counterparties under a single contract.

The partnership with Sino Rubber, China's largest platform for natural rubber trading, will anchor Sicom as the pricing benchmark for physical rubber, he added.

Sicom's TSR20 rubber futures are already the benchmark for pricing Indonesia's SIR20 grade, which is in strong demand in China, Japan and the U.S.

A significant number of futures contracts are delivered each month through Sicom.