CSE’s futures market may transform financial system

Bangladesh is on the cusp of a major shift in its financial sector as the Chittagong Stock Exchange (CSE) prepares to introduce the country's first exchange-traded, cash-settled derivatives platform. Backed by the Bangladesh Securities and Exchange Commission (BSEC) under the Commodity Exchange Rules, the initiative will roll out futures contracts on gold, cotton, and crude oil within a regulated framework. These contracts will be cash-settled and cleared through a central counterparty, aiming to improve transparency, efficiency, and access for a broad range of market participants.

Gold, with deep cultural and investment significance across South Asia, plays an outsized role in Bangladesh's informal market. Although official imports stand at just Tk 45 crore annually, the Bangladesh Jewellers Association (Bajus) estimates actual demand at 20 to 40 tonnes, worth $3 to $6 billion. Yet the market has lacked legal and digital avenues for hedging or speculation. Gold futures will offer jewellers, investors, and traders a long-awaited tool to manage price volatility without needing physical delivery. This move will strengthen market integrity and support financial inclusion.

I recommend that CSE introduce USD/BDT futures, which would address a critical gap in managing currency risk. The interbank foreign exchange market is thin, with daily turnover averaging only $20 to $40 million, mostly short-term swaps. Annual volumes are estimated at just $5 to $10 billion. Regulatory constraints and limited retail participation make it hard for businesses and investors to hedge exposures. USD/BDT futures, cash-settled in local currency and traded onshore, would offer a compliant and efficient way to manage foreign exchange risks.

CSE could further consider DSEX 30 Index futures to strengthen the capital market infrastructure. The absence of short-selling and hedging options limits risk management strategies, deters institutional activity, and pushes retail investors towards volatile small caps. Index futures tracking the top 30 Dhaka Stock Exchange companies would allow both retail and institutional players to hedge, arbitrage, and engage in market-making, deepening market activity and promoting stability.

CSE's derivatives platform is being developed in partnership with India's Multi Commodity Exchange (MCX), under a 2022 agreement endorsed by BSEC. The initial offering includes futures on gold, cotton, and crude oil, with plans to expand into agriculture and energy contracts. The goal is to encourage transparent price discovery, provide hedging tools, and widen participation by removing the need for physical delivery or warehousing.

A key pillar of this initiative is the clearing infrastructure. While CSE initially considered acting as its own clearinghouse, global practice advises against it due to systemic risks. Instead, Central Counterparty Bangladesh Limited (CCBL), a licensed entity set up in 2019, will fulfil this role. CCBL will novate trades, manage initial and variation margins, and facilitate settlement through the central bank's RTGS system and designated banks. A default fund and layered loss mechanisms are in place to contain systemic shocks.

Preparations are underway, including final regulatory approvals, upgrades to CCBL systems, alignment with BSEC and Bangladesh Bank protocols, and pilot testing with selected participants.

The launch of gold futures and the proposed introduction of USD/BDT and index derivatives will mark a milestone for Bangladesh's financial sector. By aligning with global standards and offering modern risk management tools, this initiative is set to enhance resilience, broaden participation, and support the development of a modern and inclusive financial ecosystem.

The writer is senior director of Lion City Advisory Limited