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.
Currently, only accredited investors can invest on SDiX. The exchange will seek approval from the Monetary Authority of Singapore (MAS) and International Enterprise Singapore (a government agency that drives the country’s external economy and spearheads the overseas growth of Singapore-based companies) to allow other participants to come on board, including retail investors.
“We do have plans to work with IE Singapore to open the exchange to retail investors. We will also apply to MAS to be an approved exchange under the Securities and Futures Act to offer futures and options products on the platform. Some exchange-traded funds and fund companies have already approached us and we are in talks on about how they can participate on the platform,” says Koh.
“The definition of accredited investors depends on each jurisdiction. For now, we have intermediaries comprising supplier members (many of the largest wholesale suppliers of diamonds globally) and broker members (on sell and buy sides) on the exchange.”
Accredited investors, according to MAS, includes individuals whose net personal assets exceed S$2 million or whose income in the preceding 12 months was not less than S$300,000.
Koh says Malaysian accredited investors who have an account with UOB Kay Hian in Kuala Lumpur, Singapore, Jakarta, Hong Kong and Bangkok can participate in SDiX. Linear Investment Ltd in London and Richcomm Global Services in Dubai also serve as the exchange’s brokers. SDiX is in active discussions with some Malaysian brokers, but nothing has been announced yet, he adds.
In Malaysia, according to the Securities Commission, accredited investors are high-net-worth individuals with net personal assets exceeding RM3 million or the equivalent in foreign currencies.
SDiX charges broker members a small fee for each transaction — 25 basis points for diamond baskets and between 50 basis points and 2% for single stones, says Koh. Broker members may then mark up rates based on their locations. According to UOB Kay Hian’s trading portal, brokerage fees are 1% for the baskets and 1% to 1.5% for single stones.
The exchange currently operates from 2.30pm to 6.30pm to allow investors in Tokyo or London to trade, says Koh. As SDiX gains traction, it plans to extend the operating hours to accommodate trading in New York as well.
There is always a certain amount of scepticism when it comes to new types of investments as some investors have lost money in schemes that turned out to be scams. In addressing this issue, Koh assures that SDiX has taken all the necessary steps to assure investors that they can invest their money with confidence.
“Investors need to be wary of unscrupulous diamond merchants. There exists an active secondary market in GIA certificates, so unsuspecting investors risk being victims of fraud. SDiX provides a secure and trusted way to invest, with the assurance of the authenticity of the diamonds. We are also careful to ensure that financial industry best practice standards of Know Your Customer and anti-money laundering rules are enforced,” he says.
“SDiX never owns the stones. The exchange provides trade settlement at T+3, when sellers receive payment and beneficial ownership of the diamonds is transferred to buyers in a book depository. This works much like any other regulated commodities exchange.”
Koh says even if SDiX is forced to shut down operations, there are measures to ensure that creditors are not able to go after the investors’ stones in the vaults. “And if for some reason the vaults are compromised, the stones are fully insured and there will be replacement and remedies in place,” he adds.
In terms of evaluating diamonds as an investment, Koh says investors should look at diamonds the same way they look at any commodity — the supply and demand condition, the technical analysis and the bid-ask spread.
“Diamonds are in short supply. Yet demand keeps rising, largely from a rising middle class around the world who previously had no access to such investment opportunities. This augurs well for the value of diamonds, tradeable for the first time as a financial asset,” he says.
Will SDiX take away market share from the traditional jewellery market? Koh does not believe it will as it serves a different market and targets different consumers. He does not think the traditional jewellery market will be impacted by the exchange.
The origin of SDiX’s diamonds
Linus Koh, CEO of the Singapore Diamond Investment Exchange (SDiX), says about 80% of the world’s diamonds are currently cut and polished in Surat, in the Indian state of Gujarat. These stones are then bought and sold around the world in trading hubs such as the Bharat Diamond Bourse in Mumbai, Antwerp, New York, London, Tokyo, Hong Kong, the UAE and Shanghai. According to SDiX data, US$22 billion worth of physical polished diamonds are traded in these locations every year.
SDiX secures the authenticity and quality of the diamonds that will be listed on the exchange by hiring service provider Malca-Amit to facilitate the transport of the stones after they leave the hands of the suppliers to be graded and verified by the Gemological Institute of America (GIA) and the International Institute of Diamond Grading & Research. Malca-Amit’s international team of experts ensure that smooth, expedient and professional services are tailored to the specifications and needs of the global luxury goods industry and international banks.
The exchange currently operates two vaults — in Singapore and in Mumbai, India. “The stones and the laser-inscribed GIA certificates are paired and sealed in the vaults. We do not take stones off the street to ensure their quality,” says Koh.
Diamond baskets and single stones
Linus Koh, CEO of the Singapore Diamond Investment Exchange (SDiX), says there are two ways to buy diamonds from the exchange — in diamond baskets and single stones. The diamond baskets are traded on a continuous market. Buying diamond baskets is just like buying shares on the stock exchange, says Koh.
On the other hand, single stones are offered in a negotiated market where the price will be negotiated between the trader and buyer. A potential buyer can put a bid in for a particular stone, after which the trader and other buyers can negotiate the price until the bid is finalised.
“The exchange does not restrict itself to trading in diamonds that are already listed. Investors who are interested in buying particular categories of stones that have not been listed can indicate their interest through the trading system. For example, if an investor is interested in three 3-carat F colour VVS1 stones that have not been listed yet, he can indicate his interest in the order. Suppliers can respond by offering these stones from their unlisted stock, all of which are accompanied by GIA grading reports. Then, they can begin a live price negotiation. This is how price discovery is achieved,” says Koh.
While single stones have unique characteristics, diamond baskets have more stones with similar colour, clarity and weight collected together, he says. For example, a 30 pointers basket contains 10 stones, each of which weighs 0.3 to 0.39 carats; a 50 pointers basket contains six stones, each of which weighs 0.5 to 0.59 carats; and a 1 carat basket contains three stones, each of which weighs 1 to 1.25 carats. The total weight of the basket would be 3.1 carats.
When investing in diamonds, the returns and volatility are always quoted in the price per carat of the diamonds, says Koh. “The market will change. Sometimes the 30 pointers [basket] does well and sometimes the 1 carat [basket] does better. But the markets most people look at are the 1, 3 and 5 carats.”
Koh says the volatility of diamond baskets and single stones is quite similar with some variations across the board. Sometimes the 30 pointers baskets are more volatile than the 5 carats. “There is a spread relationship that will widen or narrow. For example, a better quality stone should not be priced lower than a good quality stone. When that happens, there is an arbitrage opportunity for investors to grab.”
In terms of liquidity, the baskets allow investors to seamlessly buy and sell diamonds on the exchange, just like buying and selling at the counters, says Koh. Negotiated-based single stones offer the same kind of liquidity as they can take the reference price from the baskets.
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