This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 23 - 29, 2016.
Singapore Diamond Investment Exchange is the world’s first commodity exchange for physically settled diamonds. It is aimed at providing a more transparent and liquid way for investors to trade in the precious stones. CEO Linus Koh explains how.
Diamonds may be a girl’s best friend, but they have not been the darling of investors. For a long time, those who want to trade in these precious stones have been limited to wholesale dealers or jewellery shops.
But now, with the Singapore Diamond Investment Exchange (SDiX), investors can trade in these gemstones in a more efficient and transparent manner.
The SDiX, which was launched on May 5, is the world’s first commodity exchange for physically settled diamonds. It is aimed at creating a new marketplace for the global diamond trade.
SDiX CEO Linus Koh says the introduction of commodity exchange technology to the diamond market has allowed this platform to create a true price discovery mechanism and provide increased transparency and liquidity. “Diamonds have not been acknowledged as an investment vehicle for a number of reasons.
Financial assets need live benchmark pricing from fair and transparent price discovery, adequate liquidity and a degree of product standardisation that allows efficient risk assessment for trading and investment decision-making,” he adds.
Koh says the diamond market currently relies on the Rapaport Price List for its benchmark pricing. It does not provide transaction prices but price indications based on the group’s opinion of high cash asking prices for diamonds that meet specific criteria. However, the weekly report may not be accurate as time passes, making it a challenge for traders and dealers to correctly price their stones, he adds.
Meanwhile, investments such as buying a diamond mine or loose diamonds from jewellery shops come with their own set of challenges. For instance, the high cost of managing a diamond mine could eat into the investor’s returns. As for the buyers of loose diamonds, they have limited options when it comes to selling them for a profit.
“Most people who buy loose diamonds from jewellery shops are not really buying them as an investment, given the few options that currently exist for monetising them in the future. They often have to sell them back to the jewellery shops at a deep discount,” Koh points out.
Hence, SDiX was set up to provide a fair, orderly and transparent marketplace for sellers and buyers to trade in polished diamonds at market prices driven by real-time transactional data. Koh says the exchange will add transparency and liquidity to the diamond market, allowing the precious stones to be included in the financial markets for the first time.
“The exchange provides transparency on live pricing as well as liquidity. This allows investors to monetise their diamond holdings easily — effectively recognising diamonds as a store of value that can be encashed without fuss. All transactions are settled in T+3 days. As a result, we are optimistic that diamonds can finally be acknowledged as a valid investment product and as an asset class,” he says.
SDiX is based in Singapore for several reasons, says Koh. “The city state has been building its position as a global hub for financial services and commodities trading. It is underpinned by a world-class, business-friendly regulatory environment.” Another reason, he adds in jest, is that most of the founding members live there.
Koh was previously chief financial officer at the Singapore Exchange (SGX), where he headed the products and services division, listed new derivative products and brought SGX from a floor trading environment to an electronic trading one. He has more than 25 years’ experience in leadership roles in capital markets and investment banking at Citibank, UBS and Deutsche Bank, where he served as chief operating officer for global foreign exchange.
Meanwhile, SDiX founder and executive chairman Alain Vandenborre is a serial entrepreneur and private investor with 25 years of experience. He has held a number of senior positions in the private equity and venture capital industry, including chairman of the Asia-Pacific Venture Capital Private Equity Association.
While Vandenborre and Koh do not have prior experience in the diamond industry, the latter says SDiX has the right team of experts and aims to provide the best platform in terms of price discovery for diamonds.
“Investors have the assurance that we are not just a bunch of entrepreneurs and exchange specialists working independently. We have been collaborating with leading ‘diamantaires’ — experts in the diamond industry. They know everything about diamonds. We have also worked with leading diamond wholesale suppliers and physical traders,” he says.
SDiX is backed by global investors such as Vertex Venture Holdings, one of the longest operating venture capital firms in Asia and a wholly-owned subsidiary of Temasek Holdings (the Singapore government’s investment company). Its early investors included renowned investor Jim Rogers, UOB Group chairman Hsieh Fu Hua, Alibaba co-founder Sun Tongyu and Chinese top angel investor Cai Wensheng.
The exchange is totally independent from the diamond market as it operates in accordance with existing global stock and commodity market regulations, says Koh. It is a self-regulating marketplace that has adopted principles similar to Singapore’s Securities and Futures Act as well as Commodity Trading Act.
“While we are regulation-ready, in that our Exchange Rules are consistent with what is required under the Singapore Securities and Futures Act and Commodity Trading Act, SDiX is currently not required to be licensed under Singapore’s regulatory regime as it only deals in diamonds on a spot physical basis and only allows access to accredited investors as defined under the Exchange Rules,” he says.
“We are not creating a new set of standards in the world of diamonds. We are only providing a more efficient way of trading the stones.”
All diamonds listed on the exchange are certified and verified by the Gemological Institute of America (GIA) and International Institute of Diamond Grading & Research (IIDGR), established by the De Beers Group to determine their grade and quality.
GIA is a non-profit gem research institute dedicated to providing education in gemology and jewellery arts. It is considered the world’s most trusted name in diamond grading and gemstone identification. The De Beers Group is an international diamond company that also provides grading services through IIDGR.
Better pricing and higher liquidity
Trading loose diamonds on SDiX gives investors the benefits of lower pricing and higher liquidity as they are traded based on price-time priority, just like any other exchange, says Koh.
“In addition to creating a trading environment for the buying and selling of fungible, standardised diamond baskets, SDiX also offers trading in single stones. It is important to know that you are always able to access the GIA certificates that belong to the specific diamonds, so you know exactly what stones you are buying,” he says.
SDiX takes pride in being able to provide investors with diamonds at wholesale prices. According to Koh, the discounts it gives depend on market dynamics and the prevailing market rate.
“We have just seen a case where a retail jeweller quoted a price that was a 20% discount to the one on the Rapaport Price List. But the price on our exchange was 40% lower,” he says. “The market will eventually recognise SDiX’s transparent live prices as the wholesale benchmark reference prices for investment-grade diamonds.” He declines to comment on the trading prices and says the trading data and volumes will only be disclosed when the first quarter of trading has been completed.
Another benefit the exchange provides investors is the option of withdrawing their diamonds from its vaults or continuing to leave them there. “The custody fees to store diamonds in our secure vaults are negligible when compared to gold or other commodities because of their efficient size. The storage cost for gold is typically more than 50 times that of diamonds. It will be much more efficient to continue storing the diamonds in the vault than withdrawing and depositing them in a private bank’s safe deposit box as the fee will be much higher,” says Koh, adding that a small fee will be charged upon withdrawal depending on where the diamonds are shipped to.
Investors can withdraw their diamonds from secure vaults in the free trade zones of the network such as Singapore, Bangkok, Hong Kong and London. Alternatively, upon withdrawal, they can arrange delivery to major cities around the world. Costs will depend on the exact shipping arrangements and cover insurance. Also, depending on the location of the withdrawals, local Goods and Services Tax (GST), if any, will apply. However, there is no GST for diamond purchases made on SDiX if the diamonds remain in its vaults.
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