THE PRAs and exchanges

Question 1

What are commodity benchmarks based on?

Answer 1

PRA assessments or the settlement prices of futures contracts listed on the exchanges

Question 2

Which exchanges work with PRAs?

Answer 2

CME group and ICE (intercontinental exchange)

Question 3

Which other exchanges have relationships with PRAs?

Answer 3

DME (Dubai Mercantile Exchange), SGX (singapore exchange) EUREX, NASDAQ exchanges, London metals exchange (LME)

Question 4

What is the traditional model of an exchange/PRA relationship?

Answer 4

An exchange would license a PRA assessment in order to use them as the settlement price3s for cash settled derivatives

Question 5

What is the relationship in New Markets?

Answer 5

The exchange would decide whether to develop its own physically developed product or license a PRA pricing

Question 6

Why would a PRA approach an exchange?

Answer 6

to suggest a new product based on feedback from customers who wished to manage their physical commodity risk through derivatives

Question 7

Are the major commodity benchmarks listed on exchanges?

Answer 7

Yes

Question 8

What do economic commentators reference when saying a price?

Answer 8

a few dozen major exchange listed future prices. not the thousands of commodity prices produced by PRAs every day.

Question 9

Why are exchange prices so well known, but no one knows what a PRA is?

Answer 9

Exchanges want their contracts to be accessible to attract hedgers and speculators to trade their products. (Delayed data is v. available, not up to date micro second data)
PRA business models rely on controlling the usage of their data.

Question 10

When would an exchange listed commodity derivative contract fail?

Answer 10

If it only attracted 10 customers - exchanges need high volumes to compensate for the low trading and data fees.

Question 11

Why would a PRA be fine with ten subscribers in a niche market?

Answer 11

They could get $25,000 per subscription annually, prepared by one analyst.

Question 12

What is a key difference between commodity benchmarks produced by exchanges and PRAS?

Answer 12

with the exception of ICE Brent crude oil contract, all the major global commodity benchmarks listed on the exchange are physically settled

Question 13

What does physical settlements mean?

Answer 13

at the end of the first listed trading period (when the contract can no longer be traded) customers holding long positions (buyers) receive a delivery of the actual commodity from those customers holding short position (sellers)

Question 14

What is considered the gold standard of price discovery?

Answer 14

physically settled commodity futures - they are regulated, openly accessible and there can be no discrepancy between the value of the financial instrument and of the underlying commodity since at expiry the futures position becomes and actual commodity at delivery.

Question 15

Why do exchanges want physically delivered contracts?

Answer 15

There are plenty of examples of exchanges losing their key contracts to a rival but it is rare for it to be a physical contract. - they’re difficult, costly but of huge long lasting value if succesful.

Question 16

what could some restrictions to the physical delivery?

Answer 16

physical location, restrictions in the form of infrastructure bottlenecks, 1 or 2 market participants dominate loading infrastructure (elevators, warehouses, loading ports) Russian ports which are always iced, Indian ports affected by monsoons.

Question 17

How do exchanges view physical contracts?

Answer 17

very costly to launch, can’t enforce jurisdiction in some countries, chance of success is low. Not many attract trade more than a few months after launch.

Question 18

what are some other drawbacks of physical contracts for exchanges?

Answer 18

it requires exchange officials to reach agreements with market participants and infrastructure providers who won’t want to change existing

Question 19

What is the outcome of PRAs being faced with all these costs establishing physical delivery contracts?

Answer 19

they prefer to launch cash settled contracts

Question 20

what is cash settled contract?

Answer 20

at the end of the prompt trading period, participants don’t hand over physical commodities but instead hand over money depending on how their position has performed relative to an index

Question 21

what are the positives of cash settled contracts?

Answer 21

don’t require costly investment in facilities supervision - its simpler and more cost effective

Question 22

what do cash settlement exchange contracts need?

Answer 22

exchanges need to obtain a final settlement price that all traders will accept as the final position as how their positions have peformed and who owes what to whom - HENCE the PRA.