Yield-X Begins Trading In Currency Futures
The JSE's interest rate exchange, Yield-X, today opened trading in Dollar/Rand Currency Futures. Initially the trading of the Dollar/Rand near middle and far contracts will be listed for trading, with the Sterling/Rand and Euro/Rand contacts to follow in the near future. The near dated contract listed is the Sept 07 contract. The two current market makers, Standard Bank and Investec will be making prices in the near and middle contracts. Prices made in the far contract will be available on demand.
The 18th of June marks a very important day for the South African Financial markets. For the first time, individuals will be allowed to trade in the currency derivatives market through a local, regulated exchange. Individuals may also trade over and above their two million Rand foreign allowance. In other words no limits are applicable to individuals with regards to trading in currency futures.
Currency futures are derivative contracts which allow investors to trade the underlying exchange rate for a period of time in the future. Currency futures offer numerous benefits; they allow individuals to hedge against currency risk and to take a view on the movement of the underlying exchange rate. Currency futures also allow individuals to diversify their local and foreign assets.
The JSE's currency futures contracts have been developed by the JSE in direct response to market requests for such a product to be traded on a regulated exchange. It is anticipated that this product may have a slow start but that liquidity will increase substantially in the near future.
According to Warren Geers, Senior Manager of Yield-X at the JSE, "Currency Futures are bringing offshore markets closer to home this means positive growth for our economy. They will also provide a successful mechanism to ensure that the development of the South African financial markets occurs in a safe and controlled way."
The JSE has worked with the South African Reserve Bank (SARB) and National Treasury (NT) for the dispensation of currency futures. In Trevor Manuels budget speech he stated that permitting the JSE to establish a rand futures market will: "further develop South Africa's financial markets and increase liquidity in the currency market."
Currency futures are Rand denominated and cash settled. Currency futures contracts result in a zero sum game for every buyer there is a seller and the profits of the winner equal the losses of the loser. The SARB has approved three market makers who have been granted dispensation to hedge their currency future trades in the relevant markets. These transactions may have an impact, although the initial impact will be reversed when currency futures and hedge transactions are closed out. Authorised dealers currently, actively trade in both spot and forward markets - currency future trading will merely add volumes to the amount of hedging transactions already being carried out.
Given the direct and apparent link between currency and interest rates, currency futures have been listed on Yield-X. The Yield-X system also has the ability to do pre-trade approval as opposed to post-trade checking, common to each of the other three JSE markets. Given the sensitivity of currency trading, this system capability was imperative in order to restrict the currency derivative trading to those qualified participants only. This was a requirement stipulated by NT and SARB.
"We have worked very closely Standard Bank and Investec in creating this product. And now, in partnership with these market makers, trading in CF's has become a reality for the South African market," concluded Geers.
The qualifying audience for currency futures includes:
Individuals and foreigners with no limits;
Pension funds and long term insurance companies subject to their 15 % foreign allocation allowance;
Asset managers and registered Collective Investment Schemes subject to their 25 % foreign allocation allowance
All corporate entities, trusts, close corporations are prohibited from trading unless they have a valid exchange control approval from the South African Reserve Bank.
In order to trade currency futures, the following procedures need to be in place for all members/brokers, traders and individuals or clients:
MEMBERS
* Broking participants are required to become registered and approved Yield-X members
* A membership application will need to be completed and returned to the JSE
* The JSE secretarial services division will advise what documentation needs to be completed, as some documentation is not required if the participant is already a member of one of the existing JSE markets
* As of June 2007, no membership fees or annual membership fees are required
* Members are required to have a registered and sponsoring Yield-X clearing member
Members are not permitted to trade in their proprietary accountproprietary account
TRADERS
* Traders are required to become registered and approved on Yield-X as a currency futures trader
* An officer registration form must be completed and returned to the JSE
* Traders on the equity derivative market or the JSE equity market (with RPE exams completed) will not be required to write any exams in order to trade currency futures
* Current Yield-X traders can automatically trade in currency futures
* All current currency traders with a long history in the market will not be required to write any exams
* JSE approved Yield-X officers need to have the correct Yield-X software loaded on to their personal computers by a Yield-X employee
* The Yield-X software allows for both on-screen and off-screen trading
* Training will be provided by the Yield-X employee installing the software
* The training provided clearly shows traders how to conduct on-screen trades and out off-screen trades
* The Yield-X software can be integrated into members back-office systems
* A relevant API document can be obtained from Yield-X
* The Yield-X system prevents traders from trading for non-qualified clients
* The system pre-approves all traders as well as prevents allocations to non-qualified client accounts
CLIENTS
* Clients will need to open an account with a registered Yield-X member
* Clients will be required to sign a client agreement with the member
* The client agreement specifies all the clients details
* Clients will be required to post initial margin with the member
* Initial margin is posted with the clearing member who then filters the money to Safcom, the JSEs clearing and settlement agent
* Initial margin eliminates any counterparty risk for every trade
* Clients will be required to pay variation margin to the member should currency future prices move against their favour
* Clients will receive variation margin when currency future prices move in their favour
* Clients are advised that they can make, but also lose, money when trading currency futures
* A list of registered Yield-X members can be found on the Yield-X website at www.yieldx.co.za.
To find out more about becoming a Yield-X member, trader or client, please contact Yield-X on [email protected]
Please also note that at 8:11 am 18th of June the first currency future trade was made:
50 $/R Sept 07 contracts equivalent to ($50.000 @ R7.18)
