First moves on diamond derivatives

UK-based diamond market data provider Polished Prices, with New York-based news service Bloomberg and three international banks, has published a discussion paper on developing a market for diamond derivatives.

The paper suggests diamond derivatives could either be listed on exchanges or traded over-the-counter, with daily price fixings imitating those for gold or for Libor. It raises the possibility of both tradable indexes and physically deliverable contracts, but indicates that an element of cash settlement would be required with any diamond contract. Encouraging more-focused debate on the makeup of any underlying benchmark, it specifically proposes a basket with a value around $3,000.

The paper's authors said they hoped to begin a debate about the merits of creating diamond derivatives. Successfully fostering such a market would enable hedging and provide greater price transparency according to the paper, but it also acknowledged industry concerns about damaging the “diamond brand”. It was co-authored by ABN Amro, Tel Aviv-based Bank Leumi, Mumbai-based ICICI Bank and Bloomberg.

Polished Prices partnered with the Reuters and Bloomberg trading platforms to provide wholesale polished diamond prices and indexes in 2004. They are not currently tradable, but the firm has since been promoting the development of derivatives based on them. Emma Muller, a director, said increased price volatility and severe margin pressure were making the industry look more seriously at the prospect of diamond derivatives.

Johannesburg-based De Beers, which controls much of the global market in rough diamonds through its Diamond Trading Company, said it was not involved in the initiative and would not comment on it. Muller said Polished Prices’ paper had drawn technical and more general interest from the industry, although dialogue was still at an early stage.