As a business, Liv-ex strives to make trading wine more efficient, transparent and safe. Designing, developing and rolling out new standards has been key to making this happen. In its 13 years of operation, Liv-ex has brought a number of important innovations to the fine wine market. Understandably, attention usually focuses on the more ‘visible’ aspects of this – such as the trading screens and indices. Yet, it is the work that Liv-ex has done behind the scenes and the standardisation of the terms of trade, in particular, that has proved its most important innovation.
All trade on the Liv-ex Fine Wine Exchange takes place under one of three contracts, which pertain to the physical condition of the wine, as well as the tax status, payment and delivery terms of the transaction. (See the table below for full details.)
Our main contract is the Standard in Bond (or SIB) contract. This determines that any wine traded on the platform is in excellent condition, has never left Europe, is stored in-bond and can be delivered within 14 days to a Liv-ex warehouse. There is also a Standard En Primeur contract (SEP) for wine traded prior to physical availability. More than 90% of all trade takes place under one of these two contracts.
Liv-ex also offers a bespoke “special contract” for wines that do not meet these standard terms. This can be written by either the buyer or the seller and will highlight any non-compliant condition issue (such as torn labels, or a non-original case), tax status (i.e. duty paid rather than in-bond), a minimum trade size (such as ten units rather than one) or a logistics issue (usually a delayed delivery date). This contract allows traders to offer or bid for non SIB or non SEP compliant wines on the exchange and gives potential counterparties the opportunity to understand why it is not compliant before trading the wine.
Bringing transparency and building market confidence
Prior to the establishment of Liv-ex’s contracts, transactions in the wine trade (with the possible exception of En Primeur) were impossible to compare on account of a universal lack of conformity in the terms of trade. We still see this in the auction market – where the terms of trade and fees paid are unique to each lot sold – this makes it very difficult to compare one transaction with another and makes for a very opaque market.
By contrast, every trade on Liv-ex takes place according to a standard set of condition and delivery rules, together with a transparent commission and fee structure. As a result, transaction prices on Liv-ex are truly like-for-like. A case of wine traded under an SIB or SEP contract in December 2012 is directly comparable to one traded a month, year or decade earlier. This like-for-like pricing information – which is not available anywhere else – has enabled Liv-ex to become the internationally recognised standard for fine wine pricing and led to other innovations such as its indices and “Mid-Price” methodology for mark-to-market valuations.
The Liv-ex contracts have also removed a considerable amount of uncertainty around trading wine, which is often difficult to ascertain by visiting a merchant’s website or looking at a price list. What condition will the wine be delivered in? What is acceptable condition? When will it be delivered? Is the wine in bond or duty paid? Has it made the journey to the US or Asia? When will it be paid for? All these grey areas are explicitly dealt with under the terms of the Liv-ex contracts.
By standardising the terms of trade, Liv-ex has contributed to making the fine wine market more transparent, efficient and safe, which in turn has precipitated a larger and more active market to the benefit of all participants.