"For some time, New Zealand investors have been disadvantaged by not having access to an appropriate range of New Zealand based futures and options with which to hedge their positions and minimise their investment risk," said Mark Weldon, NZX Chief Executive. "These types of investment vehicles have proved very popular amongst retail investors globally because they allow investors to purchase large amounts of upside exposure for relatively little cost and a manageable downside," said Weldon.
"We believe the deal with the SFE will provide NZX, and the local investment community, with the most cost effective access to derivative products. By entering into this relationship with the SFE, we are effectively avoiding the significant investment required to build our own market infrastructure and concurrently gaining instant access to SFE's global participant base. We would also expect, as has occurred in nearly all other markets with liquid futures and options, that liquidity in the underlying instruments will improve," said Weldon.
The deal, worth approximately AUD$1 million, gives NZX the exclusive ability to create and list a broad set of futures and options products on the Sydney Futures Exchange based on equity securities listed on NZX markets for up to 8 years. This is significantly cheaper than any buy or build option that NZX could undertake. NZX will take full responsibility for branding the new futures and options products, and for the marketing and promotion of those products under the name NZFOX. The products will clear and settle through SFE Clearing Corporation.
NZX is in discussions with the Securities Commission on a proposal for the regulation of Futures Dealers in New Zealand. NZX will be encouraging all NZX Firms to participate and trade NZFOX products. Additional liquidity is expected to be provided by existing SFE participants (including Australian market makers) who will also be eligible to trade NZFOX products in New Zealand. The SFE will remain responsible for regulating the Sydney Futures Exchange and the activities of its participants.
In conjunction with plans announced by the SFE earlier this year, the NZFOE (New Zealand Futures and Options Exchange), a subsidiary of the SFE, will cease operation in the first quarter of next year. Existing NZFOE interest rate products will list on the Sydney Futures Exchange and are not impacted by this agreement. In addition, Greg Boland, SFE Regional Manager, New Zealand, will spend the majority of his time under secondment to the NZX team in the role of Business Development Manager, NZFOX.
"Having served with the NZFOE for 14 years and with an extensive background in the New Zealand and Australian futures and options markets, Mr Boland is an invaluable addition to the market development team. With this deal, and the subsequent secondment of Greg, we are confident that we can deliver many benefits to both New Zealand investors and market participants, by offering a range of derivative products, whilst achieving a positive economic return for NZX", said Weldon.
"SFE is delighted to be working with NZX on this new initiative. The listing of equity futures and options in New Zealand brings together SFE's market operations expertise and world class technology infrastructure, with NZX's New Zealand distribution capabilities and equity market expertise. It brings a wider range of trading and risk management opportunities to New Zealand investors and enables NZX and SFE to capitalize on their unique positions at the centre of the New Zealand and Australian capital markets," said Peter Hiom, SFE General Manager - Exchange Business Development.
Specifics of the Deal:
- Term of 5 years with a 3 year right of renewal at NZX's discretion
- NZX pays an initial up front fee plus an annual maintenance fee for each year of the agreement. Total value of agreed upon terms is approximately AUD$1 million in present value.
- NZX to receive 100% of initial exchange fee revenue related to the trading of NZFOX contracts. Revenue sharing with SFE introduced if revenue exceeds a minimum level (NZD$500,000 in any one year of the agreement, with NZX retaining at least 70% of all exchange fees).
- An initial range of equity futures and options products is scheduled to list by 31 March 2004.
