Edward Woodford is Co-founder & CEO at the Seed Commodities Exchange (Seed CX), a Chicago based industrial hemp trading platform — technically termed a Swap Exchange Facility (SEF) — which was recently approved by U.S. regulators.
HT: How is the exchange going to help expand the broader hemp markets?
EW: We hope to help the hemp industry grow in a number of ways. Firstly, by allowing people to hedge risk and “lock in” income through forwards and options on our platform, it will hopefully encourage larger investments in the space. One of the key challenges for hemp participants at the moment is that they know their costs, but they are unable to accurately project future income as there are many unknowns in the price. Every person has the sense of where the price may go, but in general, very few people are willing to bet their life’s work and companies on a hunch. We largely eliminate the unknowns.
Secondly, we serve as secure, centralized platform to allow people to buy and sell. This will mean that you spend less time merchandising your products, and in a frictionless environment.
Thirdly, by placing hemp on a par with other exchange traded agricultural markets, including soybean oil and oats. We hope that it will begin to change perceptions, firmly placing hemp as an agricultural market.
HT: You raised $3.42 million from 50 investors for startup. Tell us a bit about those initial investors. What’s their mentality?
EW:We are fortunate to have raised funding from a variety of sources, many of whom are highly strategic for our business. Our investors include a number of venture capital firms, angel investors and family offices, many of whom are actively involved in agricultural and commodities trading. Our investors share our excitement in developing the infrastructure for untapped commodities, including industrial hemp.
HT: How long did the Commodities Future Trading Commission (CFTC) approval of the SEF take? When did the process begin?
EW: The process took just over 200 days from formal submission to approval. However, we were actively drafting our submission for close to six months before submission. The process is incredibly detailed, including over 2,000 pages of documentation, site visits and technical demonstrations. Taken together, the CFTC is assessing whether you are capable of operating a platform and monitoring the smooth running of your markets. Only 23 other companies in the world have a SEF license.
HT: Who can participate in the SEF? How do traders/farmers and processors get on the exchange? What qualifications do they need to have?
EW: For the forwards and options part of our business, right now we can only have ECPs – eligible contract participants as defined by U.S. law. ECPs can be farmers and processors that are using SeedCX as part of their business and they need to have $1 million in net assets.
However, we also facilitate trading to all farmers, processors and other commercial users on our “cash” market. The difference is that on this platform we cannot offer commodity options and non-hemp participants (that make the market more liquid) cannot currently trade on here.
HT: How do you see the investor side developing? Particularly among non-hemp-aligned parties, i.e. “outside-the industry” investors?
EW: There is enormous appetite among both individual and institutional traders for new products, especially ones that do not correlate with currently traded products. CTAs and other fund managers are looking for alpha and getting in during the early days of a new product can be one way of distinguishing performance. Hemp generates excitement whenever we speak with traders and speculators across the derivatives industry.
HT: Hemp seed and whole hemp plant extract; is that the full range of hemp materials intended for the exchange? What kind of “extract” — for what applications?
EW: Initially we are launching with whole hemp seed and hemp extract – CBD. Within the CBD market, we have an extract product and an isolate product. Over time, we hope to introduce further products including hemp seed meal and hemp seed oil, which also opens interesting “crush” trades i.e. a processor of hemp seed can hedge both their input (the hemp seed) and their output (the oil and meal).
HT: Are you seeing other commodities eventually on the exchange beyond hemp? What kind of criteria would you use in evaluating any other commodities for inclusion on the exchange?
EW: Yes we are. As a business, the cost of experimentation in launching new products is low and we are excited to pursue other markets that share many of the same facets that excite us about industrial hemp. We talk about “seed” commodities, markets that are just pre-inflection point due to dramatic restructuring or regulatory shifts. One of these markets is organics.
HT: Talk about SEFs vis a vis Over The Counter (OTC) markets. Why is the SEF a better option?
EW: For the most part, anybody can trade any swap OTC. But SEFs offer standard contract terms and conditions so pricing is more transparent, competitive and accessible. SEFs are many-to-many marketplaces so they are attracting the most buyers if you are selling and the most sellers when you are buying. SEFs also better assure contract performance because their rules demand timely and complete settlements and as government backed self-regulatory organizations they have the necessary authority to assure fair dealing and compliance.
A swap execution facility is an organized, regulated market for trading classic swaps, non-deliverable forwards, options and other derivative instruments. When these instruments are traded outside of a futures exchange, they are all still classified and regulated as swaps whether traded on a SEF or not.
The purpose of SEF regulation is to impose transparency and reporting on the markets and to make OTC swap trading fairer by assuring that all interested parties are provided access. SEFs are like “lite” futures exchanges, having fewer transaction rules and customer protections because all participants and their customers are “eligible contract participants” which is a means test.
Except for most instances of credit default and interest rate swap trading, it is legal for any two ECPs to trade any swap OTC – meaning away from a SEF. Any party that tries to facilitate the trading of swaps by allowing multiple buyers to interact with multiple sellers on a platform or otherwise in a marketplace must register as a SEF.
Since swaps were never traded on futures exchanges and clearinghouses are mostly captives of exchanges, in the cleared world any swap whether traded on a SEF or not may be referred to as OTC because the nomenclature predates the invention of SEFs. All swaps that are cleared are subject to the same clearing rules which are different from those for futures. “OTC clearing = swap clearing.”
HT: What does current trading look like on the Exchange?
EW: We haven’t begun trading yet. We are currently enrolling members, tightening some of our compliance and surveillance procedures and educating the public.
HT: What are the next developmental steps for the exchange? What do you see 5 and 10 years down the line?
EW: We really do believe that hemp will be a huge commodity in the United States and around the world. We think that within five years, our CBD and Edible Hemp Seed products will be well-established and we will have added fiber and other hemp based products.
Our next steps include securing our DCM license, that will allow us to trade fully cleared futures. Our focus is on creating efficient, secure highly liquid markets around hemp and other products that I mentioned above.