According to filings with the US Commodity Futures Trading Commission (CFTC), US-based Seed CX (short for Seed Commodities eXchange) has filed an application to become a Swap Execution Facility (SEF) under the name Seed SEF LLC where it aims to act as an institutional trading platform for hemp-related commodity derivatives contracts, among other tradable instruments.
The filings – accepted early February and still pending by the CFTC – were signed by the company’s president Brian Liston whose background includes investigating market efficiency of Asian exchanges and optimal portfolio construction techniques for risky assets, and who achieved an impressive 5.0 GPA from Massachusetts Institute of Technology (MIT) in his Master of Finance under the guidance of former CFTC Chief Economist Andrei Kirilenko, according to information on his company website.
Seed CX’s site describes that there are idiosyncratic risks in unique underserved markets (such as hemp), and how its goal is to use financial engineering tools to create financial security in such marketplaces.
The expected financial trading products include weather derivatives and industrial hemp swaps, options and forwards, and which the company aims to transact after regulatory approval.
Backers and leadership: consortium of investors and GMEX stake
Regarding Mr. Liston’s background, it appears he has probably the best set of credentials you could look for in someone tasked with leading an effort like this. Seed CX is aiming to “become the first trading platform for hemp” (as it retweeted from one of its followers ), and along with the other nine people on the SeedCX team including the two co-founders.
— KYHIA (@KentuckyHIA) February 17, 2016
The Seed CX platform technology is powered by GMEX Technologies based in the UK. FortuneZ obtained comments from their group CEO regarding the news – including about their 20% stake – as part of the deal to support Seed CX, as described in detail further below.
A Fortune magazine article highlighted the first round of funding that Seed CX secured for $3.42 million as a convertible note, announced yesterday, and how while many of the 50 investors backing the effort had not made their names public yet, several did take the spotlight including individuals from Struck Capital, 500 Startups, iAngels, Charlie O’Donnell from Brooklyn Bridge Ventures, Ron Geffner, David Adler, Christopher Lee, Darren Herman, Tom Sosnoff, and Julien Codorniou.
Seed CX co-founder and CEO Edward Woodford told Fortune: “The perception of cannabis – sometimes it widens peoples’ eyes and sometimes it narrows them,” and added, “In Silicon Valley, it is a real turnoff.”
Hemp market could also attract scalpers and speculators
However, traders may not be so turned off and may find ample opportunity in hemp trading – as with Bitcoin or any newly emerging illiquid market, inefficiencies abound, and initially exploiting such price anomalies or liquidity squeezes tends to help improve future price and market improvements as subsequent mechanisms are developed to optimize the pricing and trading infrastructure from such re-occurrences. This cyclical process makes markets correct themselves as they grow, while minimizing the chance for future price discrepancies.
Moreover, the driving purpose behind the establishment of a futures or derivatives market is to transfer risk away from hedgers to speculators, or for speculators to be able to take the risks that hedgers (suppliers and users) are looking to avoid (for example, when a speculator is on the other side of a trade with a hedger, where the hedger has no risk on the trade because they own the underlying as well – whereas the speculator has a naked position and has risk).
Mr. Woodford said in a company statement regarding the news: “We are excited to have developed the world’s first industrial hemp derivative. We have worked closely with hemp farmers and processors throughout the US, who want access to important hedging tools to protect this growing agricultural commodity.”
Before paving the way for hemp, at least initially, in its filing with the CFTC as an SEF, in response to Core Principle 3 regarding “swaps not readily susceptible to manipulation”, SEED SEF provided the example how a singled legged fixed or floating weather swap that is cash settled based on the San Joaquin Valley Water Supply Index (WSI) which is designed to measure water flows at 8 key intersection points in the river system and is published by the California Department of Water Resources (WSI Swap), proposed to meet Core principle 3, according to the regulatory filing. The ability for an SEF to have a central limit order book and related mechanisms provides potential advantages structurally.
The Fortune article cited a number of trading platforms that provided commitments to support the Seed CX effort, including GMEX Technologies (mentioned above), that also released a press release regarding the news, and which is providing platform technology related services to Seed CX in return for a 20% option stake and a board (observer) position.