Diamond derivatives draw concern after Antwerp talks

Worries have been raised in the diamond industry about plans aimed at creating a derivatives market in the gems, which were aired in Antwerp last week.

Two separate initiatives are now under way to create a derivatives market in diamonds. One group, organised by London-based diamond pricing provider Polished Prices, has begun work on an over-the-counter derivatives contract. Emma Muller, a director at the firm, said the group would put all its efforts towards coming to a consensus on contract specifications in the coming months. It will be sponsored by the Antwerp World Diamond Centre and assisted by law firm Allen & Overy, who will represent the International Swaps and Derivatives Association.

Polished Prices predicts finalised documentation could be published within a year. In a statement, the company said that though a “considerable lack of understanding exists about the concept of derivatives in the diamond trade”, the derivatives “are inevitable”.

The group appears to be moving towards a cash-settled OTC product linked to the indexes maintained by Polished Prices and distributed on the Reuters and Bloomberg trading platforms. Although physically deliverable contracts have not been ruled out, they are likely to take much longer to develop.

Meanwhile, New York-based diamond brokerage and rival pricing provider Rapaport Group is working on an exchange-traded derivatives product. Its founder, Martin Rapaport, said the firm is commencing monthly internet auctions on one-carat diamonds in September, which will gradually be extended to cover other stones. It will publish an index from the auction outcomes, which will form the basis for a cash-settled futures contract.

Rapaport revealed the brokerage had applied to the Commodities Futures Trading Commission to become an authorised exchange for the new products. But he admitted the diamond industry was “terrified to see the financial community look at them like a lion looks at a lamb”.

The Antwerp-based International Diamond Manufacturers’ Association has expressed “grave concern” at both ideas. It said derivatives would inject volatility into the diamond market, although it did not explain how. It also questioned the benefits of diamond-based financial products to prospective investors.

Financial interest in the gems is growing. Lausanne-based Diapason Commodities Management plans to list an exchange-traded diamond fund on the London Stock Exchange next week. 'Diamond Circle Capital' plans to raise $400 million to invest in individual stones with a market value above $1 million each. Mumbai-based ICICI Bank, which is working with the Polished Prices taskforce, claimed last week that a futures market in diamonds could be worth $150 billion-$200 billion a year, based on the precedent of gold trading in India.