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Information Seminar

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Existing market participants on the buy and sell side - fund managers, banks, corporate ... Utilises securities lending, buy/sell backs to prevent failed trades ... – PowerPoint PPT presentation

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Title: Information Seminar


1
Information Seminar 20 January 2005 Allan
Thomson
2
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

3
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 (currently
    less than 0.04 of derivative turnover)
  • Key market players approached the JSE to
    introduce new products and grow the market

4
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

5
Trading of Spot Bonds
  • Initially, was not the Yield-Xs intention to
    trade 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
  • Need mechanism for UNCONDITIONAL price
    discovery

The drive for trading of spot bonds, true price
discovery of underlying securities
6
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)

7
Systems design considerations
8
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9
Membership requirements
  • Yield-X calls for a separate membership category
    requiring
  • One JSE right
  • Connectivity
  • A formal membership agreement to be submitted
    (JSE Equity members cannont be a member
    of Yield-X)
  • Compliance officer
  • Settlement officer
  • Registered trader (passed existing SAIFM exams)
  • A sponsoring clearing member
  • R200 000 capital for non-client broking members
  • R400 000 capital for client-broking members

No costs to the clients for the first six months
in order to encourage market participation
10
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,
    agricultural sector
  • Retail investor would look to j-Swaps and j-Notes
    to swap variable rates for fixed rates
  • Local and global players encouraged

11
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 T3 settlement of spot trades

12
Timelines
November 2004
Early 2005 Market Go-Live
Software rollout
Testing
Training
Regulatory Approval
13
Questions
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