Interview with Director General of Far East Fish Exchange CJSC, Sergey LELYUKHIN

E-trade opens numerous possibilities for fishermen

Sergey LELYUKHIN, Director General of Far East Fish Exchange CJSC

On May 29 the trading floor of Far East Fish Exchange held the first auction for sale of fish and sea products. Its participants positively estimated this experience: after an hour of bidding buyers who won the auction got signed contracts and guarantees for procurement of first-class fish products, and the seller – financial assets, including for preparation for the coming fishing season. Sergey LELYUKHIN, Director General of Far East Fish Exchange CJSC, told correspondent of Fishnews about process of the trading, issues that auction organizers faced in practice and possibilities an-trading floor for fish products can provide to market participants in the perspective.

- Sergey Egorovich, the previous biddings were claimed to be the first auction for sale of fish products at Far East Fish Exchange (FFE). However, last year some trade operations with fish and sea products were already performed at your trading?

-First of all I would like to note that from June Far East Fish Exchange CJSC was renamed into Far East Auction Fish House JSC. We are called to familiarize market players with the new name, that is why for the sake of readers’ convenience let us talk about FFE.

In 2014 we held test stock biddings with fish products indeed. During this time we performed serious work by studying gained experience and needs of market participants and came to the conclusion that at this stage auction trade can be of great interest for the Russian fishing community.

- And what is the difference?

- The point is that not all market participants understand specificity of stock trading yet. It certainly requires more complicated organization and bigger number of participants (both sellers and buyers). Nevertheless, stock trading with catches and their derivative products, e-form of such trade in particular, has a lot of advantages.

The advantages are as follows. All trading at multi-commodity exchanges is carried out at a commodities market and terminal market. So, the main advantage of exchange trading is an opportunity to make transactions with futures contracts at the terminal market. It enables fishermen to sell products that are not caught yet, by receiving working assets in a form of real money before beginning of the fishing season (without paying interests to banks, creditors etc.), and by insuring against price risks: changes of market price for these products, exchange rate fluctuation etc.

As for the commodities market, it is more reasonable to use exchange to sale goods, manufacture of which does not depend on a seasonal factor and is in demand among distribution networks. This category includes, for example, canned fish, portioned roe etc.

At the same time by today most share of fish products at the market is presented by frozen fish (gutted, head on and headed) – such products considerably depends on a seasonal factor. In the height of fishing activity the market is at once flooded with a big amount fish, quality of which, by the way, considerably varies depending on time and area of fishing, and terms of production. It is obvious that a fisherman is interested in selling these products as soon and profitable as possible. And in this case, despite of all the advantages of stock trading, auction serves the most appropriate form.

Both readymade products and products that will be manufactured by a particular term in the future can be sold at auction biddings. This is a so-called delayed delivery. For example, a term of fish product delivery before September 1, 2015, was discussed at the auction held on May 29.

However, in case of auction trading a seller has no insurance against price changes by a moment of delivery. While in case of stock trading, even if the good has been sold at a minimal price and by the moment of delivery its market cost considerably increased, these price losses will be compensated for at the expense of variation margin.

By the way, even in spite of the existing risks the client of the previous auction trading – Koryakmoreproduct LLC – was pleased with the price and already planned the next trading.

- Why did you start with this very company?

- Koryakmoreproduct is a famous Kamchatka enterprise, a popular brand and a quality product. It is no coincidence that last year its roe won the contest called “the Best Delicacy in Russia 2014”. Moreover, this company has enough assets to reliably incur its liabilities.

- But anyway, a seller puts up for tender only part of its future catch, which minimizes buyers’ risks?

- Exactly. We keep a check that volume of products put up for auction trading does not exceed 50% of average production volume of the company. It also helps to reduce risks of non-performance of contract terms.

- Now let us assess the previous bidding from buyers’ point of view – what is their profit?

- I will give an example from the previous auction: lot “humpback salmon gutted, HON (gutted, HON), first-grade” was sold at the point of 71.3 rubles per kg, and lot “humpback salmon HG” – 73.5 rubles per kg. If we compare them with prices that have formed at the market today, we will see that there is a 4-fold markup. Real gain of our buyers will be seen later, when the first lots of humpback salmon from fishing season-2015 will be put on the market. But, according to my estimates, market price for this humpback salmon will be 15% higher at minimum..

I will explain what it means. Even if a buyer used not its own but borrowed funds at 25% per annum (a standard interest rate), than it will have to pay to the bank 4.2% for 2 months (before a moment it will receive the good purchased). If market price for humpback salmon by this moment will be 15% higher, it means that our buyer will earn 10% profit at minimum, plus further markup in case of fish resale.

Thus, from economic point of view, transactions made at our exchange will, undoubtedly, be profitable.

- Does it mean that in fact future market price is being formed at e-auctions held today?

- That’s it. Already today we indicate future price, at which both buyers and sellers can orient, regardless of the fact whether they participated in our trading or not. This is a very important tool for preventing price explosion.

Moreover, we think that auction (or stock) e-trading with fish products will cause general decrease in retail prices in the future. Today one of the main tasks set by the President and Government of Russia is decrease in prices for fish products. These issues are discussed at different trading floors, and ideas, up to price-fixing, are proposed. But, sorry, we have market economy in our country, and if we set fixed prices, it will certainly lead to deficit, formation of black market etc. So why use these measures, if there is a mechanism that can solve a task of price decrease without any painful innovations?

- Is it possible to procure fish products for governmental needs via e-commodities exchanges?

- The issue of fishermen participation in government procurements via an exchange has been raised several times. This topic, among others, was discussed in the Russian Federal Fisheries Agency (at the meeting chaired by Vasily Sokolov dated March 4); we discussed this perspective with the head of All-Russia Association of Fishery Enterprises, Entrepreneurs and Exporters (AAFEE), Aleksandr Fomin. I can say for sure that fishing community is definitely interested in it.

Implementation of auction trading is a powerful anticorruption mechanism, helping to avoid exclude preliminary arrangements, “kickbacks” etc. Since in this case a winner is actually determined judging by only one criterion – a person offering the highest price wins. Biddings, to which all manufacturers of fish products can be admitted, are held in real time, and final price is seen to all the participants.

According to the Russian Law, in order to obtain accreditation for conduct of government procurements, a trading floor must have an exchange license or a trade system license. Saint Petersburg Exchange JSC (SPE) has such license, there is also a specialized trading floor for conduct of trade operations with fish products. Trade at this floor is performed by SPE in cooperation with Far Easr Fish Exchange, which is an official representative of Saint Petersburg Exchange in the fisheries industry. The problem is that the Government should give formal permission to interested authorities to make an agreement with us.

We have prepared a corresponding proposal following results of the meeting of the Russian Federal Fisheries Agency held in March, sent it to the Economics and Investments Administration of the Federal Agency, but still got no answer.

- Have preparation for the bidding revealed any additional questions or bottle necks requiring further work?

- Conduct of auctions in Russia is strictly regulated by the Civil Code. Moreover, any auction presupposes development of strictly fixed rules and their exact observance. Rules of conduct of auctions for sale of aquatic bioresources were developed together with Saint Petersburg Exchange and the first clients of the bidding.

Special attention was paid to contracts for the participants. We faced the problem that typical contracts, under which fish products are usually supplied, do not always satisfy buyers. Specialists of Far East Fish Exchange acted as intermediaries for coordination of contract terms between the seller and potential buyers, and the problem was solved. Additional provisions were added to the document, including providing guarantees for terms of product delivery. Since it is known that the first red fish supplied in August is always more expensive than that which will appear at the market in September-October. Our contract fixes strict delivery terms and provides for sanctions in case of their violation.

Thus, a buyer gets a guarantee that it will receive the first fish and, due to it, additional economic profit. This is another benefit of e-auctions.

But after the rules are worked out, they are to be observed. And not only sanctions, but independent judges, are to be used here. Imagine, for example, that someone decided to make a long book and win the auction in the last moment, - what to do in a situation when every split second counts? Even this issue shall cause no arguments at an e-exchange, since role of a judge is played by the informational system, which works absolutely detachedly.

- Did you have to face any difficulties when holding the first auction?

- Like all other pioneers, we learn and find drawbacks that shall be eliminated in the future.

ПThe first issue is lot size. If we have placed an advertisement indicating lot size, we cannot change it during the trading. At the previous auction we faced a problem that lots sizes were too big for many potential participants. Not all the companies are ready to buy 100-180 tons of fish products. We got applications for 20 tons and less and had to refuse from these biddings. We have taken this issue into account and will declare more differentiated initial lot sizes for the coming auction that will take place on June 17, 2015. We have not found optimum correlation yet, but I think it will be correct to orient to all market segments – small, medium and big business.

We had similar problem in relation to spacing of price change during the trading. Too big spacing pushes some buyers away and results in less active competition during the trading. This problem will also be settled by the next trading.

The next issue is software. We work at e-trading floor of the eldest in Russia Saint Petersburg Exchange. Access to the bidding is available via website of SPE and requires no installation of a special program on participant’s computer – you just need to have an access to the Internet. Users assess the existing auction program as simple and intuitive, besides that there is a detailed manual for it. Yet it is obvious that even experienced PC users may have some difficulties when they master a new program. We think that course for participants of e-auctions, especially for newcomers, will help to solve related problems, where they are given all necessary explanations and a chance to participate in test trading

In order to help out participants to easily trade on May 29, we organized a test auction for them on the eve. Undoubtedly, it used conditional lots and prices, but a principle of e-auction trading was preserved, that is why future buyers were overwhelmed with real passion.

- We would like to know about financial side of the issue: how much it will cost for a client and buyer to participate in the trading, and what documents will they need?

- According to auction rules, a client, i.e. seller, pays no money. It just shall provide us with information about its company and products put up for tender (all the data is checked, including with the participation of specialists from an independent laboratory, if necessary). After that, if we come to a conclusion that the company is a responsible market participant, who is able to be liable for possible financial risks, we offer it to get acquainted with rules of the trading. We aim for this document to become uniform for all fishing companies that will participate in the auction, but, if necessary, as agreed with a client, we can amend these rules – here we first of all rely upon interests of the fishing community, but at the same time take into account consumers’ interests.

As for buying companies: they pay a registration fee in the amount of 5,000 rubles to participate in the auction. By results of the auction a winner pays auction fee, which is 0.5% of final lot price.

Moreover, a company that wants to participate in trading for particular lots, pays a refundable deposit for each lot – 2.5% of initial lot price. This money is chargeable in favor of the client of the trading, and after ending of the trading buying companies that have not won in trading for the lot get this deposit back within 3 days.

To participate in an auction a company needs the following documents:

- a statement of intent to participate in the trading;

- an agreement for participation in the auction;

- an extract from the Uniform State Register of Legal Entities (certified by a tax inspection);

- a copy of the Articles of Association and copy of the Order of Appointment of Director General (or the Minutes of Appointment), certified by the company.

At first, scanned copies of these documents can be sent to us together with an application for participation in the trading. We send them to Saint Petersburg, and then (in accordance with the official power-of-attorney of Saint-Petersburg Exchange JSC) check originals of the documents.

From participants’ point of view, the registration procedure, as compared to the exchange trading, is quite simple.

After accreditation a participant shall enter the application to the system: for this purpose it enters the website of SPE with its login and password, selects necessary lots from the list and prepares an application. Only after that it shall pay the refundable deposit and the registration fee.

The most important thing is to observe a term of application, which is specified in the trading advertisement. If a company failed to submit required documents in time, it will not be admitted to the trading even if all the deposits and interests will be paid.

I emphasize that the deposit for lots shall be paid within two banking days before the auction starts. The point is that companies got used to the golden business rule – “pay on the last day”. But in this case I recommend you to pay on the last but one day in order not to miss a chance to participate in the auction and, possibly, to make the most profitable transaction for you.

When preparing for the first auction, we managed to cover not the whole specter of fish product consumers. But we sent letters with invitations to different companies and administrations and get feedback now – people from various regions of Russia contact us and want to participate in the next trading, both as buyers and clients. I think this is a very good tendency, since the more companies can present their goods at e-auctions, the wider specter of fish products will be at our market and the sooner positive price changes will be seen.

СSvetlana VASILYEVA, Fishnews – «Open Branch»

June 2015