Market Information Seminar 12 October 2004 Allan Thomson
Introduction Yield-X is the new interest rate exchange of the JSE: • A totally separate exchange for the trading, clearing & settling of interest rate products • Will trade a wide spectrum of interest rate products • Fulfills the need in the market for a “one-stop-yield-shop” • Encourages liquidity in South African instruments
Background & Motivation for the JSE • Since the acquisition of SAFEX in August 2001, JSE has looked to develop the derivatives market • Since 2001 single stock futures have grown from 4% - 68% of financial derivatives income - JSE can grow a market where there is need • Internationally turnover in interest rate products exceeds equity and derivative turnover, but not so in South Africa • Lack of liquidity of interest rate products listed on SAFEX was fully investigated • Key market players approached the JSE to introduce new products and grow the market
How? Following the success of the JSE equities and futures trading systems, it was decided to trade both interest rate derivatives and spot bonds: • electronically, with automated trade matching of firm orders, • through a central order book, with • anonymous trading and settlement assurance, with • easy access, resulting in • clear transparency of price and depth of market, leading to • efficient price discovery, thereby • creating an honest market with a high level of integrity, • a central counterparty to all trades, • multilateral netting for all products
Trading of Spot Bonds • Initially, was not the JSE’s intention to get involved with Spot Bonds • Demand to value the Derivative against true market price of underlying security • Initially, JSE will only trade Spot Bonds where there is a Derivative that is traded on-exchange • The consequence of increased trade on derivatives is increased liquidity in spot bonds The drive for trading of spot bonds, true price discovery of underlying securities
Products The following products will be tradable on Yield-X: • • j-Carries: Buy-sell back transactions j-Rods: RODI swaps against 3 -month JIBAR j-Swaps: Bond look-alike swaps j-Notes: futures on notional swaps j-FRAs: Forward Rate Agreement j-Options: Options on futures j-Futures: Futures on bonds j-Bonds: Spot and forward bonds (secondary listing of spot bonds on which the JSE currently has futures)
Systems design considerations Matching Derivatives NEW SAFEMS Clearing Members Trade for margin Yield-X Spot trades Matching STRATE Settlement agents
Infrastructure considerations • Utilise existing structures, including systems and processes as much as possible • Minimise system changes • Settle spot trades through existing infrastructures, STRATE(UNEXcor) and CSDPs • Risk manage Spot Bonds through current clearing structures, SAFCOM and Clearing Members • Guarantee settlement of spot bonds, driven by pre- and post-trade anonymity • JSE will install software on all bond traders desks to enable electronic trading The start of a consultative, re-iterative process with participants, including STRATE, CSDPs, and Clearing Members
Membership requirements Yield-X calls for a separate membership category requiring: • One JSE right • Connectivity • A formal membership agreement to be submitted • Compliance officer • Settlement officer • A sponsoring clearing member • R 200 000 capital for non-client broking members • R 400 000 capital for client-broking members No costs to the clients for the first six months in order to encourage market participation
Target market • Existing market participants on the buy and sell side - fund managers, banks, corporate treasuries, intermediaries • New participants – smaller financial institutions, BEE players, retail investors • Retail investor would look to j-Swaps and j-Notes to swap variable rates for fixed rates • Local and global players encouraged
Benefits • Multi-lateral netting across all yield traded products • Achieves one risk position for spot and derivatives • No need for ISDA agreements • One central counter-party (i. e. SAFCOM is buyer and seller to all trades) • New and improved risk management model – Calm Methodology • Applies spot margining only when risk exists • Margin ensures guaranteed settlement and minimizes risk • Amount of margin required is not that inhibitive • Utilises securities lending, buy/sell backs to prevent failed trades • Achieves T+3 settlement of spot trades
Timelines 15 November 2004 Systems up Early 2005 Market Go-Live Software rollout Testing Test Training Regulatory Approval
Questions
Calm Results Assumptions: Positions as at 13 -Aug-2004 Yield curve and bond yields as at same date Settlement day is 18 -Aug-2004 Margining valuations for 16 -Aug-2004 Margins calculated as the one-trading-day Value-at-Risk (VAR) of the position at 99. 95% confidence level "On the one day in 2000 when things are really bad, just how bad are they likely to be? "
Physical bonds • (NB: settlement margins are ignored. Once a deal has been irrevocably committed to, it falls out of the risk position. )
Forward bonds
Carries
Compound spot positions
Positions with futures
Positions with j-Swaps
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