Move over, commodity futures in bullion, metals and crude oil. . .  Soon, you will see the birth of the hottest commodity futures in the world -- diamond derivatives!

A clutch of bankers, diamond and exchange experts are meeting in Belgium this week to create derivative contracts linked to diamond prices globally.

Experts said the potential market for the contracts could be as high as $200 billion.

Interestingly, one of the major movers for the diamond derivatices is India's ICICI Bank [Get Quote], which is one of the promoters of the National Commodity and Derivatives Exchange.

Representatives of Dutch financial-services company ABN Amro Holding NV; ICICI Bank Ltd and the Chicago Board of Trade met in the world's hottest diamond destination in Belgium's Antwerp discussing about diamond-derivative contracts.

"The first conclusion is that derivatives are absolutely inevitable," Charles Wyndham, founder of diamond information provider PolishedPrices.com said. He added that it may take up to a year to start offering contracts.

PolishedPrices is a fast-growing independent benchmark for diamond prices and indices. Its price mechanism is unique in basing it on actual transactions. In 2002, it developed a weighting mechanism that allows a platform for other players to create derivatives.

Polishedprices.com is one of two organizations looking into diamond derivative contracts globally. The other firm, Rapaport Group, a New York-based provider of diamond prices, has already sought approval from the US Commodity Futures Trading Commission to start the world's first diamond-futures contracts in September.

The meeting said that diamond derivative contracts would give buyers of diamonds and investors the possibility of buying the gems at fixed prices in the future, enabling speculation on forward price movements.

Last month, in a joint effort to increase price transparency in diamond prices, ABN AMRO, ICICI Bank and Leumi Bank had met with Bloomberg and PolishedPrices to discuss the development of diamond derivatives.

During the meeting, it was agreed that derivatives for diamonds are necessary in the face of increased price volatility.

Experts say derivatives will allow diamond companies to reduce their risks through some sort of contract and price mechanism by being able to hedge their diamond portfolio.

But though there is unanimity about the use of diamond indices as a directional bet for diamond and non-diamond industry players or for structuring products in investment portfolios, there are still doubts about physical contracts.

For instance, traders will have different ideas for what their perfect underlying stone or basket is for hedging purposes, so any contract can only provide a proxy hedge for them.

One of the main reasons for the lack of derivatives in the diamond industry has been the absence of an acceptable price mechanism or spot price market.

ICICI Bank UK, the European subsidiary of ICICI Bank has said that it would like to continue discussions with PolishedPrices and NCDEX for exploring possibilities in derivatives.

The concept of diamond derivatives has come a long way from failed attempts in the early 1980's, when a totally introverted and opaque industry tried to jump onto the band wagon.