JSE Currency Derivatives Growth Soars

Trade on the JSE’s Currency Derivatives market has soared in 2011 as investors reacted to a turbulent world economy, the low spreads that the exchange offers and an increased product offering. Both number of contracts and value traded more than doubled in the year to end-November 2011, relative to the same period in 2010. This follows consistent growth since the market was formed in 2007. The numbers are contained in the table below.

“I’m delighted with this growth, which demonstrates that the JSE is listening to clients and providing a service that is needed in the market,” says Warren Geers, General Manager of Derivatives Trading and head of the Currency Derivatives market. “The growth also indicates that investors are moving trades onto the regulated market as they are asked to improve their risk profile. On-market instruments require no foreign exchange clearance and are settled in Rands.”

Though the JSE is unable to predict future trade activity, latest Currency Derivative trading statistics do not indicate that growth will cease.

The Currency Derivatives team continues to be in close contact with members and clients, to ensure that it is responsive to changing needs. This was the context to the JSE’s May 2011 launch of any day expiry contracts and exotic Can-do structures in response to demand from several South African banks. These exotic currency structures enable investors to structure products as required, while retaining the risk management advantages of listed derivatives. Investors can negotiate the terms of an option contract, choosing the underlying asset as well as the expiry date.

“As the South African listed derivatives market develops and matures, investors are seeking more complex structures in order to hedge their specific risk profiles,” says Geers. “These exotic products are often illiquid and difficult to price – accurate data is an essential component of increasing transparency and improving confidence and liquidity in this market overall. We have access to this data through an agreement with a global company called SuperDerivatives.”

A month after the launch, Absa Capital listed the first exotic style currency Can-do option structure based on the dollar/rand exchange rate – Knock-Out Barrier Options Up-and-Out and Down-and-Out. These offer asset managers and hedge fund participants an exchange traded product similar to what has previously only been available over-the-counter (OTC).

Growth has been particularly strong since May 2011, following the restructuring of trading fees to incentivise large trades. Trade costs are levied according to a sliding scale, making it cost effective for smaller traders and encouraging large transactions which have traditionally been done with the country’s big banks.

The market offers derivatives trade in the main currency pairs of the USDollar/Rand, Euro/Rand, Pound/Rand, Australian Dollar/Rand and Japanese Yen/Rand as well as other less liquid contracts like the New Zaland/Rand and Botswana Pula/Rand contracts . Product diversification and innovation forms part of the JSE’s continued drive to grow the currency derivatives market. “The JSE realises that in order to be more competitive it needs to offer foreign exchange products that are viable alternatives to those traded over the counter,” says Geers.

South Africa’s exchange controls have been relaxed to allow a wide group of qualifying clients from trading on the Currency Derivatives market. These include South African and non resident individuals and corporates, hedge funds and resident financial service providers, as well as collective investment schemes subject to their foreign portfolio allowance. 

Source: JSE statistics