The Singapore Diamond Investment Exchange

13 May 2016

Marcus Chow

There is new sparkle in Singapore. Newly set, the Singapore Diamond Investment Exchange ("SDiX") is believed to be one of the few commodity exchanges for physically settled diamonds globally. It is built on an electronic trading platform which allows for transparent price discovery, a depository that ensures the security of diamonds and a global network of service providers that support the SDiX and its members with grading, vaulting and physical settlement. The objective of the SDiX platform is primarily to standardise global trading in diamonds as an asset class and to unlock new investment opportunities for investors around the world.

Membership

The SDiX offers membership opportunities for approved suppliers, broker members, grading labs and settlement banks. The SDiX is open to all companies that meet the requirements under the SDiX's Rules and Regulations and fulfil the application procedures. The focal points of these regulations include capital and financial requirements, trading practices, and dealing with customers.

Approved Suppliers

All approved suppliers must maintain a net capital of US$1million at all times and are permitted to conduct the following activities: (1) consign physical diamonds to SDiX for trading, (2) recall of physical diamonds consigned to but not traded on the SDIX, and (3) proprietary trading. There is several admission criteria required to be met. For instance, the applicant has to be reputable and have an established track record, have an active commercial interest in the sourcing and supply of diamonds to be traded on SDiX, and be sufficiently staffed with fit and proper personnel to ensure compliance with the SDiX Rules. The diamonds supplied must also be properly documented (e.g. source of diamonds and process of sourcing) and free of any mortgage, charge, lien, or encumbrances.

Broker Members

Singapore-based broker members holding a capital market services licence or commodity broker licence must comply with the financial requirements of either the Securities and Futures Act or the Commodity Trading Act respectively. For remote broker members, a net capital of US$1 million must be maintained at all times. Broker members are only permitted to undertake agency trades for accredited investors (individuals with not less than $2 million net personal assets or not less than S$300,000 income; or corporations with more than S$10 million net assets). Admission criteria for applicants include (1) holding relevant licenses or exempted from licensing in the jurisdiction of its operations, (2) having an established track record, (3) established a physical office in Singapore (except Remote Broker members), and (4) being sufficiently staffed with fit and proper personnel to ensure compliance with the SDiX Rules.

Other Members

The SDiX system also comprises of grading labs and settlement banks. Currently, the Gemological Institute of America (GIA) serves as the official grading lab for all diamonds listed on SDiX. An international bank has also been confirmed to provide banking services for SDiX and facilitate the cash settlement of transactions for SDiX and its members.

Trading

SDiX has implemented standard exchange based technology delivered by MarketGrid Systems, offering a matching engine that provides complete infrastructure for automated trading including execution, clearing, depository, surveillance and regulatory requirements. SDiX will employ both continuous matching and negotiated matching in its baskets and single stone products respectively. For continuous matching of baskets, the system will attempt to match an incoming order against existing orders in the order book, based on price and then time of order. For negotiated matching of single stones, a customized matching methodology is applied to the order book that is for a class of diamond, with multiple individual stones listed for sale. Trading on the SDiX is subject to the requirements and prohibitions under the SDiX Rules. Such prohibitions include conducting fictitious trades or market manipulation to influence market price, short selling of products, and cornering the market. SDiX employs a market surveillance unit that monitors the market to detect unusual trading activities and prohibited trading practices or conduct.

Depository

The SDiX Depository holds the diamonds for Members as bailee. It is also subject to certain regulations under the Depository Account Rules, which relate to issues such as keeping a book depository register, transfers of diamonds between vaults, procedures for withdrawal, insurance, and anti-money laundering measures. The Depository operates as a global network of vaulting facilities, starting in Singapore with a high security vaulting facility. Malca-Amit is currently appointed as the physical custodian in Singapore and is responsible for the operation of the vault as well as logistics and transport services. The SDiX's use of these facilities allows customers to suspend the payment of Goods and Services tax (GST) at the point of entry into Singapore. The goods can be re-exported from Singapore without any GST levied, as long as they are not removed from the facility and brought into circulation.

Conclusion

The diamond industry is currently facing some short term challenges caused by a slowdown in consumer demand as well as the proliferation of synthetic diamonds. However, over the longer term, the rapid expansion of the middle class population in China and India is expected to lead to an increase in diamond jewellery consumers, and a consequent surge in diamond demand. It will be interesting to see if SDIX will be able to harness this anticipated longer term growth. This may not be an easy feat but after all, diamonds are carbons nurtured under pressure and SDIX should have its work cut out for it.



References

  1. Barclays, Profit or Pleasure? Exploring the Motivations behind Treasure Trends. Barclays Wealth and Investment Management, 2012.
  2. Giacomo Nannicini, Joseph Tan, Diamonds: A Rising Asset Class, Singapore Diamond Investment Exchange, 2015.
  3. Auer, B. R., Schuhmacher, F., Diamonds - A precious new asset, 2013 International Review of Financial Analysis 28, at 182–189.
  4. Website of Singapore Diamond Investment Exchange Pte Ltd (https://www.sdix.sg)

Authors

Chow-Marcus

Marcus Chow

Partner
Singapore

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