The Stock Exchange of Thailand (SET) is preparing to study a proof of concept to establish a commodities exchange in the Eastern Economic Corridor (EEC), aiming to increase market competitiveness through tax privileges and lower funding costs in the free trade zone.
Thailand is a leading exporter for many agricultural products, including rubber, rice, cassava and sugar, but has no commodity reference price index and faces impediments in terms of tax incentives and product delivery, said SET president Pakorn Peetathawatchai.
This has resulted in manufacturers and bullion traders to trade on leading commodity exchanges in Asia, such as the Shanghai Futures Exchange, the Singapore Commodity Exchange, and the Tokyo Commodity Exchange.
In 1999, the Agricultural Futures Exchange of Thailand (AFET) was founded. Trade volume in agricultural products was relatively thin and failed to cover the operating costs of the bourse.
In early 2016, the AFET was completely integrated into the Thailand Futures Exchange to address the low trade volume and develop a single, fully integrated entity for trading, clearing, settlement and depository services for derivatives products.
The bourse is considering how Thailand's financial and capital markets can add value to the economy and help manufacturers with lower funding costs as the EEC is expected to become a leading manufacturing base for the real sector, said Mr Pakorn.
While the real sector can obtain funds through bank loans, bonds and equities, this will not be sufficient for the S-curve industries as small companies and startups have difficulty accessing these funding sources, he said.
"If the commodities and derivatives market can be set up in the free trade zone and receive tax privileges and be deregulated, the domestic derivatives market could compete with others in the region as we expect trade costs to reduce and the process of physical delivery to become easier and more efficient," said Mr Pakorn.
"We do not need to set up a headquarters at the free trade zone. There could be a virtual [trading] platform, with physical delivery and a vault located in the EEC."
The EEC has well-equipped infrastructure to facilitate the trade and delivery of commodities such as an airport, deep-sea ports and industrial estates, he said.
This concept will need time to materialise as the bourse has to present a prototype to clients and assess demand as well as discuss setting up the commodities exchange with relevant authorities, said Mr Pakorn.
Gold futures trading can be settled in cash or physical delivery, with security and transport forming a crucial part of the latter, said Mr Pakorn.
While Brink's Security Thailand has a service to deliver and store precious metals, all their branches are located outside the special economic zone. The SET could partner with the company for physical gold delivery and security, but branches will have to be set up in the EEC, he said.
Despite having many renowned bullion traders in the country, bullion and futures trade is more active on the offshore markets because Thailand does not have tax incentives, said Mr Pakorn, adding that an incentive could be promoted within the EEC for bullion and futures trade.
For agricultural futures, Thailand is one of the biggest exporters of cassava, but the commodity is not listed on the domestic derivative exchange. Listing this commodity to be traded on the commodities exchange could shore up its attractiveness and volume, he said.
Separately, the SET is also studying a proof of concept to set up a digital asset exchange and a prototype product is expected to be unveiled in the second half, said Mr Pakorn.
Apart from studying regulated digital exchanges in Germany and Switzerland, the SET plans to build up a system for digital asset trade including tokenisation, smart contracts, Know Your Customer verification, exchange functions and custodians, he said.
"Tokenisation has more credibility than initial coin offerings as the underlying asset has references and a background story. If a smart contract can be regulated in the future, this would help with market trust," said Mr Pakorn.