Investment products and financial instruments for Diamonds were always almost non-existent. However, after its initial rejection in 1982 by New York Commodities Exchange, Martin Rapaport of Rapaport Group is striving to introduce a Futures and Derivatives platform for Diamonds and is planning for a late 2016 – early 2017 launch. Though several people have tried to introduce a diamond-backed futures market since past 3 decades, it has not been able to successfully fructify due to several reasons.
First, any commodity futures market needs an efficient and transparent spot-cash market as a prerequisite, which is sadly missing in case of diamonds. PreFunds ISE Diamonds/ Gemstone ETF (Exchange Traded Fund) was launched in November 2012 but had to be shut down in January 2014 due to lack of investor interest. Last year though, Novel Asset Management launched their 2nd fund for investment in diamonds. Since 1992, Rapaport Group also has a diamond trading network – RapNet and a diamond price index – RapNet Diamond Index (RAPI). However, these still does not substitute an integrated spot-cash market as in the case of other precious gems and assets commodities like Gold.
Fortunately, the world’s first fully electronic spot commodity exchange for diamonds – Singapore Diamond Investment Exchange Pte Ltd (SDiX), a new marketplace for diamond trade that will enable Investors and traders to deal in diamonds at real-time transactional wholesale prices, is all set to go live in September this year.
Besides, Rapaport also plans to launch a diamond exchange – RAPX, which would offer clearing services through Rapaport Clearing House and include inspection and quality verification services and will show both bid prices (maximum price a buyer wants to pay for a diamond) and ask prices (lowest price a seller is willing to receive for the diamond). Also being planned to launch as early as September, RAPX hopes to improve market liquidity and bring “… about systematic, transparent competition”.
Apart from a spot-exchange for diamonds, Rapaport lists 4 important things pertinent to create a diamond futures and derivatives market.
1) Quality assurance: GIA-graded diamonds that meet Rapaport specification A3 or better standards will be traded on RAPX to achieve Quality assurance.
2) Transparent pricing: By having both bid and ask spot-market prices, RAPX plans to improve price transparency for diamonds. But, as Paul Zimnisky correctly points out, diamonds lack fungibility and standardization due to innumerable permutations and combinations of diamond’s 4Cs and other characteristics, resulting in any standard pricing for diamonds extremely difficult.
3) Low Transaction costs: RAPX plans to have low transaction costs of 1% for institutions and HNI investors and direct access to dealer markets.
4) Liquidity: Through RAPX and regular diamond tenders/ auctions in New York, Israel and Hong Kong, Rapaport plans to bring liquidity in the market. Though considering the current grim liquidity and financial scenario in the diamond industry, whether these steps are adequate to improve liquidity in the market can be easily challenged.
Though, meeting all the prerequisites and surpassing related challenges may prove to be difficult, diamonds when viewed as commodity and investment, futures and derivatives market for diamonds purports to help the industry and trade and reduce risks from the existing risky long position scenario of diamond trade. While the idea and intention behind a Diamond Futures market is appreciative, its practicality at this point may meet several obstacles, but is nevertheless indeed a good step forward for the diamond industry.