The Standardization of Trading Rules
March 20, 2009 - Reduction of Counterparty Risk
- Reduction of Contracting Risk
- Trust in the Rules
- Value for Money
- Solidity of the Rules and Arbitration System
The sharp decline in spinning activity seen in many European countries where national sets of trading rules were used to suit local customs, together with the fact that the biggest cotton exporters and importers in the world are developing countries that might or might not have experience in international trade, brings to importance the need for a standardization of trading rules.
There are many reasons to justify this goal. First, there is a need for a broad understanding of the rules; producers, spinners and merchants all need to understand the rules when they enter into a transaction. In this regard, logic dictates that one set of rules is easier to become familiar with, rather than several.
We will see a reduction of the risks when entering into a transaction. We all must ask about the reality of counterparty risk; does my counterparty understand the rules and will they abide by them? The contracting risk is also a factor. For instance, buying and selling under different rules creates a risk on value differences.
All parties must trust in the rules, which can only be reached through set, standardized rules. They need to be tried and tested, and fair to all participants. Additioanlly, we are all paying for “insurance” against a default and therefore want to be paying a reasonable premium and know we are fully protected. The money we invest should provide a high value return in protection.
Finally, standardization will create a solidity of the rules and arbitration system. We all want an established arbitration system that is in a position to produce awards in a timely fashion and awards that can be enforced.
The Role of ICA
The International Cotton Association (ICA), due to the widespread use of its rules and by-laws, together with its Board of Directors representing a variety of geographical areas and segments of the industry, has been at the forefront of these efforts. Long ago, the American Cotton Shippers Association (ACSA) recognized that its members would be best protected while transacting in export markets by using ICA Rules and Arbitration. More recently, the Bremen Baumwollborse has also shown the way towards standardization without losing its prerogatives or giving up its prestigious history. There is a lot more work to be done in several directions.
Good trading practices are paramount to the success of this endeavour. Over the past few years, major progress has been made by the trade to ensure that nobody trades with defaulters, making life difficult for them to buy cotton at market prices.
The enforcement of awards is still a challenge in too many countries. There needs to be a substantial effort to improve the situation in this area, so that the consequences of not abiding by the rules becomes a punishing exercise for defaulters.
Education must also be a priority in order to raise awareness of the rules throughout the industry. Involvement of producers, traders and spinners, together with the service industry, is necessary to make sure that the rules are adapted to the reality on the ground and perceived as neutral and balanced. Cooperation with other associations will ensure that a wealth of experience is put together to achieve the goal of standardization
I have no doubt that trade participants and cotton associations share this common goal and it is in the interest of all of us to cooperate in a constructive manner. We are only as strong as the weakest link in the chain. When people accept to trade with defaulters, they undermine the work that Cotton Associations and market participants have done over the course of many years. They also place themselves in a very unsafe trading environment where there are no rules; they deal with untrustworthy people and they cannot arbitrate a dispute. Nobody who wants to be in this business for the long term can accept such dealings, but in order to have market participants adhere to good trading practices we need to make things as straightforward as possible. Adopting one set of rules has to be the answer.
“We are only as strong as the weakest link in the chain.”
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