Market Information Seminar

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Market Information Seminar 12 October 2004
Allan Thomson
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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

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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

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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

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Trading of Spot Bonds

• Initially, was not the JSEs 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
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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)

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Systems design considerations
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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
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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
• 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
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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

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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

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Timelines
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Questions

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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?"
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Physical bonds

• (NB settlement margins are ignored. Once a deal
  has been irrevocably committed to, it falls out
  of the risk position.)

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Forward bonds
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Carries
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Compound spot positions
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Positions with futures
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Positions with j-Swaps