Yield-X will trade a wide spectrum of interest rate products, with a strong focus on derivatives which have been developed in line with international market trends. Globally, exchange traded interest rate derivatives are the biggest component of derivative exchanges' turnover, yet in South Africa they make up less than 0.04%.
Yield-X will be the JSE's fourth electronic clearing and settlement platform, alongside equities, financial futures and agricultural products. At the heart of the Yield-X exchange will be an anonymous central order book, allowing for trading via a single platform with automated trade matching and guaranteed settlement. As an anonymous, automated exchange, Yield-X will enable proper price discovery for interest rate products.
Russell Loubser, Chief Executive of the JSE, says: "Yield-X is an exciting new offering from the JSE and is intended to grow the South African interest rate market in line with international markets. It will offer ease of access, ease of use, and cost effectiveness in an environment with a high level of transparency."
The development of Yield-X has involved establishing a new JSE membership class, as well as a new trading platform, rule-book and risk management system. An investment of R5 million has been spent on the new platform. The trading platform will be complete mid-November and Yield-X software will be installed on traders' desks nationwide prior to the go-live date.
The products initially on offer on Yield-X have either been adapted from successful international products or specially developed to meet local market demand. Derivatives products will include j-Carries (buy-sell back transactions), j-Rods (swaps against 3 month JIBAR), j-Swaps (bond look-alike swaps), j-Notes (futures on notional swaps), j-Options (options on futures), j-FRA's (forward rate agreements), j-Futures (futures on bonds). A limited number of spot bonds will be secondary listed on the exchange to support the value of the corresponding derivatives.
Yield-X will service large institutional investors, banks, corporate treasuries and intermediaries, as well as smaller financial institutions and retail investors who until now may have been excluded from the interest rate market owing to the substantial capital requirements.
"Yield-X brings a range of new products to the market and encourages new entrants. For the banks and other major players in the interest rate market, Yield-X will be an efficient and well regulated exchange. And for smaller players, Yield-X will be attractive as they'll be able to trade without a large balance sheet, having to put up only the margin requirement reflecting their net position," says Loubser.
Allan Thomson, the JSE's Director of Equities and Derivatives Trading, says the JSE was approached by market participants who were keen to see a more liquid and diverse exchange traded interest rate offering in South Africa. "During these discussions it became clear that developing new interest rate products in a piecemeal fashion through SAFEX was not the solution. There was a market need for a separate dedicated platform for the trading, clearing and settling of all interest rate products."
One of the major benefits of Yield-X is the elimination of bi-lateral counter-party risk. The JSE, through the clearing-house SAFCOM, acts as the effective counter-party and will guarantee all trades with risk management being assured by a new margining methodology. Yield-X will offer a comprehensive "cradle to grave" audit trail and will operate in a fully regulated environment overseen by the JSE and the Financial Services Board (FSB).
Thomson says the JSE has been consulting with the FSB since late 2003, and that Yield-X is on target to go live early next year, subject to final regulatory approval.
