Existing US benchmark may be flawed, but ICEΆs alternative failed to take off

Creating a new cotton futures contract took Intercontinental Exchange years of planning, multiple rounds of wrangling with cotton merchants and finally an act of US Congress — but the exchange operator has quietly pulled the plug just 18 months after its debut.

The global product was designed as an alternative to the US cotton futures contract that has been the industry benchmark for decades, but whose limitations have contributed to wild price swings.

The new product, however, failed to take off, underlining the challenge of creating new derivatives products from scratch. Despite early expressions of interest, the global contract never attracted much volume after its launch in November 2015.

The last trade took place a year ago. Late on Friday, ICE said it was delisting world cotton futures effective on Monday.

The world futures were designed so traders could buy cotton grown on farms from west Africa to Brazil for delivery to warehouses in several countries. Listing the product required an act of Congress to amend rules pertaining to how bales are graded — a legislative saga that included a temporary block by Ted Cruz, a senator from the top cotton-producing state of Texas.

Merchants had advocated for a world futures contract to overcome the constraints of the longstanding benchmark, which allows only US-grown bales to satisfy delivery obligations. When domestic supplies are tight, market squeezes and wild price moves sometimes result.

“I think the exchange responded to the strong urgings of some of the leading members of the trade, but it never made sense,” said Herman Kohlmeyer, a cotton broker in New Orleans. “And it was too complicated.”

The failure of the world cotton futures contract speaks to the difficulty of generating interest in a new derivatives market when liquidity is concentrated in another one, however flawed it might be.

The costs of entering and exiting positions in a thinly traded market can outweigh the benefits of a contract that better addresses a companyΆs risks. Without commercial traders, hedge funds and proprietary trading firms will be reluctant to dive in and provide volume.

Despite its drawbacks, the ICEΆs US cotton futures contract has registered record open interest of more than 200,000 contracts this year. ICE on Friday called the surviving contract the “global benchmark for cotton prices and risk management”.

“When a mill in Bangladesh buys cotton, they consult the ICE price,” Trabue Bland, ICE Futures US president, said at an investor event last week in reference to the US contract.

ICE said it would consult with traders about the possibility of relisting the world futures, but did not suggest that would happen. “Based on customer feedback we are reviewing the world cotton contractΆs original terms, and how we might improve its usefulness to the global cotton trade,” the exchange operator said.