Exchange Traded Notes (ETNs)

A relatively new range of products, listed on the JSE and typically issued by registered Collective Investment Scheme Management Companies, are Exchange Traded Notes (ETNs). ETNs are senior, unsecured debt securities, issued by an underwriting bank. The issuing company has a contractual obligation to pay the holder of the JSE listed ETN security a return linked to the performance of the underlying assets, security or benchmark. This could be an interest rate, the performance of one or more shares or bonds, an index, an exchange rate or a commodity.

The benefits provided by ETNs for the investor include:

• JSE Listing – the JSE listing brings transparency, open price discovery and centralised guaranteed electronic settlement, registration and custodianship.

• Market Making – JSE Rules require the ETN issuers to always offer buying and selling prices on the market trading system for ETNs at the current fair value price of these products.

• Transparency – ETN prices are established through a transparent formula and Net Asset Value (NAV) published daily by the issuer.

• Redemption – most ETNs offer daily redemptions at NAV, which provides liquidity at all times, but also forces the issuer to hold 100% cover of their liability.

• Low Tracking Error – the issuer of the ETN guarantees the investor a return exactly the same as that of the underlying securities or assets, less expenses. This effectively limits the tracking error, purely to the Total Expense Ratio (TER) of the ETN.

Certain aspects of Exchange Traded Notes that should be considered by investors are:

· Credit Risk – as these are debt instruments, the investor takes on the credit risk of the issuer. The JSE, to date, has required that ETNs be issued only by triple A rated banks, which provides comfort.

However, should the issuer suffer a credit downgrade, this might affect the market acceptance of ETNs issued by this bank. The JSE insistence on redemption at the NAV price should mitigate this risk, as it is unlikely that the credit downgrade would affect the value of the underlying asset or benchmark.

• Regulation – Unlike Exchange Traded Funds (ETFs), which are portfolios of securities and licensed as Collective Investment Schemes, thereby falling under the direct regulation of both the FSB and JSE, Exchange Traded Notes (ETNs) do not currently qualify under the Collective Investment Scheme regulations. However, the JSE operates as the regulator for ETNs.

A number of ETN listings have occurred in late 2010/early 2011 on the JSE, bring new areas of investment exposure to investors. For instance, direct investment in physical holdings of commodities, such as all precious metals, oil and coal is now available, in rands, for the first time in spot instruments traded on the stock exchange. Another innovation is the new Africa Equity ETN, which offers investment in an index of over 170 African shares in some 29 African countries.

The following ETNs are now available on the JSE.

These ETN products can be purchased through stockbrokers or through the dedicated ETF/ETN platform http://www.etfsa.co.za/. etfSA also caters for the payment of commissions to registered FSPs who have 1:8 licenses.