Bond Exchange of South Africa

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Bond Exchange of South Africa
North African Emerging Capital Markets Cairo,
Egypt Of bonds the Bond Exchange 30/3/04
01/4/04 Tom Lawless
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TOPICS FOR DISCUSSION

• BRIEF HISTORICAL JOURNEY OF BESA
• OUR REGULATORY STRUCTURE
• CHARACTERISTICS OF AN EFFICIENT MARKET
• BONDS vs. EQUITY MARKETS
• DIFFERENCES AND SIMILARITIES
• KEY STRUCTURAL ISSUES FOR GROWTH OF BOND MARKETS
• LESSONS WE HAVE LEARNT
• PRACTICAL POINTS FOR YOUR CONSIDERATION IN
  DEVELOPING A BOND MARKET

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BESA BRIEF HISTORICAL JOURNEY

• 1987 Stals / Jacobs report
• 1989 Bond Market Association (BMA) formed
• 1995 Electronic settlement implemented
• 1996 Bond Exchange licensed
• 1997 T3 rolling settlement G30 compliance
• 1998 Primary dealer structure for
  auctioning of government bonds

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BESA BRIEF HISTORICAL JOURNEY

• 1999 BESA starts ATS project (BATS)
• 2000 BATS implemented
• Total Return Index (TRI) implemented
• Risk management project started
• 2001 Big increase in corporate bonds listed
• Restructuring recommendation approved

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BESA BRIEF HISTORICAL JOURNEY

• 2002 Restructuring proposal approved
• More corporate bonds listed
• Including- 3 Securitisation issues (Credit
  cards, motor vehicles, commercial bank
  loan book)
• 2003 Commercial paper of banks issued

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MAJOR FEATURES OF SA MARKET

• Primarily a government bond market gt90 turnover
• Electronic net settlement T3 (rolling)
• Guaranteed by settlement banks on settlement
  commitment
• Meets G30 guidelines
• Counterparty risk between participants
• Period between trade (T) and settlement
  commitment by settlement banks

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MAJOR FEATURES OF SA MARKET

• Very high turnover velocity (/ - 10 of market
  cap / day)
• Very efficient, liquid (concentrated in few
  bonds)
• Huge buy / sell back (Repo) activity
• No defaults experienced no claims on Guarantee
  Fund

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MAJOR FEATURES OF SA MARKET

• Floor closed in October 1998
• Inter-dealer broker screens Garban (ICAP),
  Tullet Tokyo, Prebon Yamane - (matched
  principal name give up)
• Telephone
• Automated trading system (BATS) is not used by
  members
• Only used for trade reporting
• To be replaced by new trade capture system and
  price dissemination system in 2004

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SETTLEMENT

• Electronic settlement since 1995
• Outsourced to UNEXcor (Licensed clearing
  settlement system owned by custodian banks)
• Central Scrip Depository (CSD)
• 4 Settlement Agents (Custodian banks)
• Daily settlement processes 2 separate runs
• Net rolling T3 (since 1997)
• Gross T0 (Same day trades)
• BESA - settlement supervisors
• - settlement fines

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SA Bond Turnover (Total Nominal Traded)
1989-2003
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SA Bond Turnover (Total Trades)
1995 to 2003
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SPOT REPO (Nominal Traded - Trillion)
1992 - 2003
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Bond Market Turnover (Billion Rand Nominal
Traded)
1995-2003
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SPOT REPO (Nominal Traded - Trillion)
1998 -2003
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Nominal Outstanding by major issuer Groupings
DECEMBER 2003
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Total Bond Market Turnover Breakdown by Major
Issuers (Nominal Traded) 1989-2003
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REGULATORY FRAMEWORK MARKET STRUCTURE
Pension Funds Act Unit Trust Control Act
Financial Markets Control Act Stock Exchanges
Control Act
Banks Act
Insurance Act
Minister of Finance
Registrar of Banks (Bank Supervision)
Registrar of Financial Institutions (FSB)
Banks
Insurance Companies
Fund Management companies
Securities trading firms
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CHARACTERISTICS OF AN EFFICIENT MARKET

• Timely and accurate information is available
• Market has to be liquid
• The transaction costs must be low in relation to
  the value of the trade
• The prices rapidly adjust to new information
• All transactions and costs are transparent and
  are disclosed
• The market has integrity
• There is surveillance in the market

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BOND MARKETS vs EQUITY MARKETS
DIFFERENCES

• EQUITIES
• Brokers are dominant players
• Strong retail presence
• Corporates Generally vanilla issues
• 4. Exchange traded
• 5. ATS systems (exchange driven and run) few
  floors left
• 6. Central single point of price discovery in
  ATS
• 7. Centralised risk management (Trade with
  impunity)

• BONDS
• Banks are dominant players
• Weak retail presence
• Government / Utilities / Municipals / Corporate
  Issuers Many variations of issues
• Predominantly OTC market
• Largely telephones / IDB screens
• Multiple points of price discovery
• Bi-lateral risk management seldom centralised
  (Big vs Small)

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BOND MARKETS EQUITY MARKETS
SIMILARITIES
Both regulated Bonds Bank Supervision and /
or market regulator (even if OTC) Equities
Exchange as SRO under own legislation Common
Membership Banks in bonds Subsidiaries as
brokers in equities Banks in money markets and
Forex Settlements Can be settled by same entity
(bonds, equities, money markets, OTC)
(Ignoring competitive monopolistic issues)
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BOND MARKETS vs EQUITY MARKETS
DIFFERENCE / SIMILARITIES

• So what you might ask ?
• I will attempt to answer this in the last topic
  heading
• points for your consideration

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KEY ISSUES FOR GROWTH OF BOND MARKETS
WILLING AND ABLE PARTICIPANTS THAT CAN BE
INNOVATIVE AND CAN MAKE MONEY

• Sound monetary and fiscal framework
• Will and commitment of central government to
  develop markets
• Effective, appropriate and harmonised financial
  market legislation and regulations
• Money markets are a starting point asset /
  liability matching / mismatches
• Role of pension fund legislation
• prescribed investments promote but could also
  distort
• Do not force a structure onto a market

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LESSONS WE HAVE LEARNT

• Authorities and participants need a common
  objective
• Talk / talk and decide
• Leadership comes from both!
• Do not force a market structure on participants
  recipe for disaster
• Remember bonds and equity markets are different
  but have some similarities
• Settlement is the same cash / underlying
• Corporate actions very different for equities
• Trading different trading methodologies
• Risk concepts identical - management very
  different
• One solution fits all - Does not work!
• Size does matter biggest balance sheet counts!!
• Intermediaries / speculators are important
  participants do not squeeze them out!!
• Do not re-invent the wheel

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PRACTICAL POINTS FOR YOUR CONSIDERATION

• WILLING AND ABLE PARTICIPANTS THAT CAN BE
• INNOVATIVE AND CAN MAKE MONEY
• What are objectives of your market development
• Do you need your own market? (National airlines
  analogy)
• No easy answers to this question business
  issues compared to economics
• It starts at the top
• Sound monetary and fiscal framework
• Will and commitment of central government
• Good financial market legislation and regulation
• Have few restrictions as possible your
  competitors may not have them
• Harmonise laws and regulations with region
• Money markets are a key starting point asset /
  Liability matching / mismatches

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PRACTICAL POINTS FOR YOUR CONSIDERATION

• A National Payment system is crucial for any
  market developments
• Bonds and equities are different but the
  participants may wish to use similar processes /
  structures to develop the bond markets
• Conversely they may not
• Get practical training/exposure from those who
  have done it before or do it now
• Regulators, banks, traders, Exchanges, settlement
  people
• Importing big trading systems and market
  structures from Europe may be completely
  inappropriate for you
• Is there a regional solution for settlements that
  makes sense economics of scale?

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PRACTICAL POINTS FOR YOUR CONSIDERATION

• Be practical if you do not have all the right
  things in place
• Botswana Bond Issue is a good example
• But have a plan!
• Start Small - if you cannot use / do not want to
  use regional systems
• Settlements can be run on Excel spreadsheets
• Use local banks as custodians, Central Bank
• Economies of scale
• Trading can be call auctions (2 - 3 / day)
• Appointing primary dealers is not necessarily the
  magic wand for take-off

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THANK YOU FOR YOUR ATTENTION
SEE HANDOUTS FOR SOME MARKET STATISTICS TOM
LAWLESSTEL (27 11) 215-4000 FAX (27 11)
215-4250 tomlawless_at_besa.za.com www.besa.za.com