Bottom-up design of a gas futures market in East Asia: Lessons from the Dojima rice exchange

The natural gas market in East Asia remains fragmented without a functioning benchmark price to duly reflect the dynamics of demand and supply forces in the region. A functional regional gas futures market, which is highly dependent on the presence of well-developed physical spot trading, is yet to be established. Since the intra-regional pipeline connection is largely non-existent in East Asia, it is the LNG spot cargo trading that is likely to become the basis for the regional gas futures market. This paper offers a novel approach to understanding the development of such a market by analyzing the experience of a different commodity market - the Dojima Rice Exchange (DRE) - and identifying potentially transferrable lessons in the market design and the role of government regulations. Based on the case study analysis, implications for the development of natural gas trading hubs in East Asia are offered and an LNG futures exchange design is put forward.