Archive for the 'Derivatives' Category

JSE adds derivatives: grain specific to silos and more silver and platinum futures

South Africa’s JSE Ltd (www.jse.co.za) continues to expand its commodity derivatives range. It has added silver and platinum “quanto futures” to its existing gold, copper and Brent crude quanto futures launched earlier this year. It is also helping develop the South African grain market by allowing Safex silo receipts to complete a futures contract, so that producers and buyers can trade grain with a bid or offered premium depending on location, for instance if a buyer wants grain in a particular location.
The JSE has partnered with Rand Merchant Bank, which is the initial market maker. The commodities are referenced as part of the JSE’s existing licensing agreement with the CME Group.

Commodity gain, without currency pain
According to a JSE press release on 1 Nov, a quanto future is a derivative instrument which, on the JSE, is a ZAR-denominated commodity investment product which delivers the same payoff as a pure USD-denominated commodity investment. This lets investors gain exposure to the foreign underlying commodity without being exposed to the USD-ZAR exchange rate. It simplifies decisions and allows investors to focus only on the returns of the underlying commodity.
Chris Sturgess, Director of the JSE’s Commodities Division, says: “We have seen keen interest expressed in the new Quanto Futures we offer and by adding silver and platinum to the product offering, we continue to provide derivative market participates with opportunities to easily access the international commodities markets.”

Growing grain markets
Trading in grain silo receipts to settle grain futures contracts is likely to benefit both producers and buyers, according to another JSE press release. Producers can negotiate a better price for stock in the specific silo represented in the receipt by placing an “offer” onto the system for a premium over and above the Safex price. Buyers such as millers and processors will benefit through access to bid at all registered delivery points at a premium per ton, regardless of whether or not physical grain is on offer. Buyers will be able to bid for preferred delivery locations. Previously no bids were permitted without available stock on offer.
There are more than 200 registered delivery points. The silo owner continues to guarantee the quality and quantity of the physical stock on the Safex silo receipt. However, the JSE guarantees the cash-flow process and settlement, so there is no risk of counterparty default. Settlement will take place over a 2-day cycle, meaning a trade is settled the next business day after trade, eliminating the delayed payments generally associated with cash market transactions.
The price when making physical delivery is a function of Safex’s mark-to-market price on the day, less the location differential (indicative transport cost) to the registered delivery point. With this new functionality the value of grain at each delivery point can be negotiated transparently between buyer and seller and included in the final settlement price.
The JSE says it offers a first-world trading environment, with world-class technology, surveillance and settlement, in an emerging market context. It is among the world’s top 20 largest equities exchanges by market capitalisation.

BaDEx getting ready to launch as Zambia’s second securities exchange

A new securities exchange in Lusaka (Zambia) is installing tried-and-tested bond and derivative trading software and says it will be ready to launch operations next month, May 2012. BaDEx has trading platforms that include spot and derivative trading in bonds, currency, commodities (such as derivatives on metals and silo certificates on the spot market) and a variety of other derivatives including agricultural commodities, precious metals, equity and energy.

There is also a central scrip depository system (CSD) with a separate core management, risk solution, surveillance and settlement systems and platforms. The CSD will apparently link to CSDs in South Africa, Europe and the US and with the central Bank of Zambia’s real-time gross settlement system.

BaDEx, also known as Bond and Derivatives Exchange, reports that it was licensed by Zambia’s Securities and Exchange Commission on 1 January 2012 and the licence covers all securities under the Securities Act – bonds, equity, derivatives and commodities. It has signed a contract effective 12 March with South Africa’s STT (www.sttsoftware.co.za, which has also provided the JSE’s  bond trading software for many years), for STT to immediately deploy trading, clearing, settlement and surveillance systems, and systems for auctioning government securities that will be suitable for the central bank, among others.

Dominic Kabanje, CEO of BaDEx, told AfricanCapitalMarketsNews that the exchange is a public-liability company owned by “banks, pension funds and private companies including the major securities dealers in Zambia”. He says they started with 6 local stockbroking members (approach stockbrokers Madison Asset, Integral Initiatives, Intermarket Securities, Laurence Paul Investment Services, Pangaea Renaissance, African Alliance Securities for more information) but are also looking for remote members, working with a South African merchant bank.

Mr Kabanje said they are now doing primary listings. BaDEx will start secondary trading using an online, Internet-based platform when the systems go live and are also seeking to partner with an international clearing house. In a press release he said they had been excited for 18 months: “We are glad to have finally concluded and signed the contract with our software systems vendors. STT applications have been tried and tested in the South African financial markets at the Johannesburg Stock Exchange (JSE), who have used this software for the past 18 years.

“We are currently setting up a network of domestic and foreign-based settlement banks, local and remote foreign members and dealers, institutional underwriters, a clearing house as well as primary panels of domestic, regional and international investors. We plan to link up all willing domestic and regional banks, institutional investors, pension funds, treasury departments, the local central bank, the government debt management office and the local member brokers to our system by providing interfaces and online access to our platforms.

“We will also shortly join the international community of CSDs in South Africa, Europe and the United States initially to facilitate faster and smoother clearing of international securities transactions. The applications from STT and others will enable us to do this and in addition will allow us to compete internationally for bond and derivatives business”.

“I do not see any obstacles from the Zambian side for companies wishing to list. Even SA companies can list on BaDEx. We want Zambian companies to dual list on JSE and BaDEx. At BaDEx we are implementing SADC protocols on the free-trade area as well as enhancing intra-regional trade. An exchange is one such conduit for regional trade. We will, however, have to deal with the problem of exchange controls in SA.”

Michelle Janke, STT’s Managing Director, said the company was happy to reach further into SADC: “We have worked closely with the executives of BaDEx for more than a year, and the closely formed relationship will stand us in good stead over the coming months whilst we deliver all the software applications and prepare the new securities market in Zambia to go live. We hope that in due course through an ongoing cooperation between BaDEx and regional merchant banks we can assist in transforming Lusaka into a key financial hub within the SADC region. We will be there to make this happen operationally.”

Products to be traded include: corporate bonds, municipal bonds, currency futures and options, interest-rate derivatives (including swaps), equity derivatives and commodity derivatives on underlying copper, cobalt, gold, oil, wheat, soya and maize spot markets, bond derivatives market, spot bond market, spot and currency derivatives market, commodities derivatives (including metals) and the commodities spot markets (with silo certificates), agricultural derivatives market, spot equity and equity derivatives markets, precious metals derivatives market and energy derivatives market.

Kentucky wheat futures contract coming to JSE

JOHANNESBURG – The JSE (www.jse.co.za) says it will introduce its third wheat futures contract, with a cash-settled contract based on hard red winter wheat, referencing the Kansas City Board of Trade’s (www.kcbt.com) benchmark settlement prices. The new contract will be introduced on 28 March with expiry dates in July, September, and December 2012 and March 2013.
KCBT President & CEO Jeff Borchardt said: “The Kansas City Board of Trade is proud to be partnering with the Johannesburg Stock Exchange to provide their market users access to our Hard Red Winter wheat futures contract, the global benchmark for bread wheat pricing. JSE’s respected position in global commodities trade made the idea of working with JSE quite appealing. This is KCBT’s first such license agreement with an overseas exchange.”
Chris Sturgess, Director: Commodities at the JSE, commented: “We are very pleased to be working with the Kansas City Board of Trade, which celebrates its 156th anniversary this year. Not only do they have a wealth of experience, we also share their commitment to integrity and service for the market we serve. This also represents a further step toward globalizing South Africa’s commodity markets.” Hard red winter wheat is similar in type and milling quality to South African-produced wheat, which means local market participants can consider this alternative product for price-risk management purposes specific to their wheat exposure.
This is the JSE’s third wheat futures contract and the second international wheat contract, all traded on contract sizes of 50 metric tons. The JSE’s local wheat contract is its second most liquid agricultural product. The JSE listed its first international wheat contract under license from the CME Group in July 2011.
According to Sturgess: “Offering 3 wheat contracts enables traders not only the choice on which product to hedge their wheat-price risk but also through our electronic trading system the functionality to trade the spread between the various markets. This should complement volumes across all 3 product types.”
South African local traders have had access to global commodity markets since 2009, when the JSE signed the first licensing agreement with the CME Group for a corn futures contract. It currently offers contracts on corn, wheat, soybean, soybean meal and oil.
As with other foreign-referenced commodities, Rand Merchant Bank and Nedbank Capital will be market-makers, ensuring active price quoting off the liquidity of the international market. Individual investors and corporate entities are able to invest with no limits. Pension fund managers and long-term insurance funds are subject to their 25% foreign allocation limits. And asset managers and collective investment schemes will be subject to their 35% foreign allocation limits.

Why invest in or trade wheat futures?

Wheat futures provide a way for South Africans to:

  • Effectively manage the price risk with a view either on the domestic market or to more easily access the international market via the contract, which will be traded in the local currency
  • Hedge or gain exposure based on expectations of directional price, spread movement or volatility in wheat either as an outright position or versus the domestic market
  • Realise arbitrage and spread opportunities between the CBOT contract, KCBT contract and the local contract
  • More effectively evaluate both the current and future world supply and demand for wheat and the various qualities
  • Identify short- and long-term cyclical price and volatility patterns for wheat.

Full product specs can be found at: www.jse.co.za/commodities. The JSE is among the world’s top 20 largest equities exchanges in terms of market capitalisation. It is currently ranked the 20th largest exchange by the Futures Industry Association (FIA) for derivatives

British small-cap stockex PLUS-SX up for sale

PLUS Markets (www.plusmarketsgroup.com), a British-regulated investment exchange for trading the shares of small companies, has put itself up for sale on 3 Feb. According to a press release, the company says it has spent 2 years investing heavily in repositioning itself as a trading solutions services provider alongside its roots as a stock exchange.
The Board of Directors says it is “well positioned strategically to exploit commercially the opportunities offered by significant changes in the regulatory and technological environment”. The Board has decided to conduct a formal sale process “in order to identify appropriate potential partners for the Company or major strategic investors”. It calls on potential offerors for the entire issued and to be issued share capital to contact their adviser, Wyvern Partners (www.wyvernpartners.com, Anthony Gahan +44 207 355 9857).
Plus Markets Group plc describes itself on its website as a “next-generation” stock exchange and a market operator under the European Union Markets in Financial Instruments Directive (MiFID) on Recognised Investment Exchanges (RIE). It operates a regulated market and multilateral trading facility (MTF). PLUS is the holding company for the PLUS Stock Exchange (PLUS-SX) and the PLUS Derivatives Exchange (PLUS-DX).
As an RIE, PLUS-SX can provide trading and listing services in the full range of financial instruments including cash, equities, derivatives, bonds and commodities. It provides cash trading and listing for UK and international companies with a range of markets through fully listed and growth markets to access capital. PLUS-DX offers derivatives and technology services and plans to offer short-to medium-term interest-rate related products. “We have designed PLUS-DX’s services to meet the changing regulatory and commercial landscape.”
PLUS Trading Solutions (“PLUS-TS”) responds to the growing demand from market participants to segregate or create their own matching systems and delivers a competitive, fully managed matching and surveillance service, designed to help firms satisfy new regulatory requirements. The group brings “product innovation and competitive pricing to market participants by operating a low cost base RIE. PLUS offers a neutral trading environment, wholly independent of any market user.”
The Board of PLUS adds: “scale and international reach will become increasingly relevant for interaction with exchanges, investment banks and other trading entities.”
According to a story on Reuters, the company reported a loss of GBP5.8m ($9.2m) on revenue of GBP3m in 2010, its sixth consecutive loss-making year. PLUS grew out of Ofex, an exchange for British small-cap stocks that required less regulation than the London Stock Exchange or AIM. The share price was at 1 penny.
“The Board believes that it is in the best interests of the Company to seek a partner which will help it achieve the scale and reach required to maximise value to stakeholders.”

JSE seeks more African equity listings in 2012, targets telecoms, mining and financials

The JSE Ltd (www.jse.co.za), South Africa’s securities exchange, is hoping to attract more listings from the rest of Africa in 2012 and to expand its range of products and services. This year should also see the JSE installing its equity trading system in Johannesburg, to avoid dependence on a transatlantic cable connecting it to the London Stock Exchange.
Nicky Newton-King, who took up her post as CEO last week after succeeding Russell Loubser and the first woman to hold the post, told Business Day newspaper the plan was to offer more access to African companies and products such as exchange-traded funds products that enable people to access new investments: “With the rules of inward listing being relaxed, we would also like to attract more inward listings.” Besides IPOs, Newton-King said she expected to see more types of products, such as depository receipts and derivatives linked to companies being offered.
The JSE is in “good conversation” with several companies elsewhere in Africa over more potential listings. Last November she told Reuters: “We’ve got good conversations going … particularly on the continent.” She said the bourse is targeting mining, telecommunications and financial services: “Our approach is to look at issuers that need capital — need investors where their home markets might be too small. So we’ve got a lot of different segments we are looking at, but we are looking at particular issuers rather than trying to speak to everyone.”
The JSE already has 14 African companies listed, with 4 different debt instruments and 1 African ETF. Last year Reuters highlighted that some growing African firms preferred other international exchanges, particularly the London Stock Exchange and its AIM market, over the JSE for raising capital and listings, as highlighted in stories on this website. The JSE seeks closer cooperation with other African exchanges as it competes with other world bourses: “Clearly we need to be trying to find a way to cooperate with African exchanges, with African issuers to bring more African product to the table here in SA, where we have a lot of international investors everyday.”
The JSE attracted a total of 16 listings last year, with a combined market capitalisation of more than R35 billion (US$4.3bn), according to data from the JSE’s director of issuer services, John Burke. There were also a number of initial public offerings from the property sector. About 15 companies de-listed last year and 21 were on the suspended list. The number of new IPOs worldwide is lower since the start of the global financial crisis. Newton-King said there is a pipeline for potential listings in 2012: “Definitely there’s a pipeline, there’s always a pipeline. We never talk about the number since how many companies actually list and when they list is very much dependent on the economic circumstances of the country and whether the companies themselves are ready to list.
“We are looking forward to being able to attract a wider range of companies and investment opportunities on the JSE.”
The plan is still to use the same computer provider, Sri Lanka’s Millennium IT which is a subsidiary of the LSE. In terms of a February 2011 press release, the JSE is to migrate to a new system Millennium Exchange™, which the LSE has also adopted, in the first half of 2012. Millennium IT systems are used on many African stock exchanges.
Newton-King told Business Day she hoped this will minimise the outages experienced last year, which were linked to technical issues on the transatlantic cable. The JSE halted trading on its equity markets at least twice last year, which led to the exchange attracting criticism from trading houses, which often spoke anonymously to the media.
She said: “We are critically dependent on information technology (IT) and invest heavily in IT to ensure it is robust and able to handle increased volumes as the JSE grows. Our equity systems are run in London and there’s been some trading outages in the lines between us and London…. We are bringing the systems back to avoid that. We will continue to look at whether our technology is robust enough to withstand volumes.”
She did not give much information on rumours that the JSE is talking with SA Treasury on starting a trading market for carbon credits but said the JSE was looking at the possibility and how it would work with others.
Of the type of environment that she envisions at the JSE, Ms Newton-King says: “In 2012 I would like the JSE to be recognised as a place of excellence, a place where SA’s top talent would come and work, where our clients recognise that we provide products and services that are valuable to them.”
Her former post as deputy CEO no longer exists and duties that fell to her are being given to other people so that they can also grow.

FTSE Group working on Pan-Africa index with African Securities Exchanges Association

Dateline – Marrakech
FTSE (www.ftse.com) is working on a FTSE-ASEA index with the African Securities Exchanges Association (www.africansea.org), which will help to unlock Africa an investment for larger portfolio investors. According to Imogen Dillon Hatcher, Executive Director, FTSE Group, speaking at the ASEA conference in Marrakech, Morocco, on 12 Dec, the index will make clear how much Africa is outperforming the rest of the world: “A ‘back-cast’ of the FTSE Africa index performs better than FTSE world index by quite a margin”. The index covers stocks on 16 exchanges and is adjusted for investibility, including free float and liquidity.
She said that FTSE Group was restructured on 12 Dec, with the London Stock Exchange Group buying out the 50% share owned by Pearson, owner of the Financial Times newspaper, “as of this morning”. The buyout transaction is set to close in the first quarter of 2012. FTSE calculates and manages over 200,000 indices worldwide, which are linked to over $3 trillion in global assets under management. These include the widely-used global benchmark, the FTSE All-World Index. She said FTSE is the top index group worldwide: “FTSE is known as a partner around the word, FTSE works with you to unlock the investment potential that is your market.” As markets mature, broader ranges of investible tools are needed including a reliable index that can promote the development of a wider range of investment products, including exchange-traded funds (ETFs).
The group had a strong commitment to Africa and already been working with South Africa’s JSE Ltd (www.jse.co.za) since 2002. In December 2010 they signed with the Casablanca SE (www.casablanca-bourse.com) to create FTSE CSE Morocco Index Series with two index products. On 8 November 2011 FTSE announced a partnership with the Nairobi Stock Exchange (www.nse.co.ke) to create new indices. FTSE NSE Kenya Index Series track the performance of the largest and most widely-traded stocks listed on Africa’s fourth oldest securities exchange.
Dillon Hatcher said FTSE China indices form the basis for $14 billion worth of ETFs, including giant funds by iShares. The group had worked to develop the indices with international and domestic managers including Xinhua Finance Ltd. She added: “We know something about building an index” and the ASEA index would “throw the light of transparency onto your markets”.
The work of developing the ASEA index had been led for over a year by Jonathan Cooper, Managing Director Middle East and Africa, working with a broad range of African exchanges. The target was to build an investible index, with clear and transparent rules and methodology. They started with all African companies; then filtered for those whose price information is available on Bloomberg and Thomson Reuters. They looked at securities types, adjusted for a minimum 15% free float (the proportion of shares potentially available for buyers) and did liquidity testing on the securities and then did country weightings. The index now covers 16 countries, which have securities which meet the requirements.
The new index will be reweighted twice a year. Dillon Hatcher added that FTSE would be working with a prospective client base to put forward this pan-Africa index: “We hope funds will come out of this and drive Africa as an investible destination, make sure the index stays fresh and make it sure it stays relevant, as the client base comes to us with ideas, such as sectoral indices.
She also explained how securities markets indices had evolved. It started as a general economic indicator, showing how share prices are moving as an indicator of investors’ expectations of business prospects. Then indices became a tool for benchmarking but were still simple measurement tools. From this they became an underlying framework for more passive asset management such as ETFs, and depending on market these could be simple or ever more complex, depending on the needs of organizations such as asset managers or investment banks. Eventually they would also develop into a tool to assess market risk, with much potential to get involved in top-end investment strategy, where “we are starting to blur the lines between passive and active management”.
She threw down the gauntlet to active managers “We would assert that over time it is very hard for an active manger to beat an index, we have done lots of work with academics.” She said indices bring market benefits including low-cost market access provided they are transparent, rules-based and useful. “All the name-brand indices have to be fit for purpose and they have to do a job. You know they will behave in a particular way.” At other meetings this author has heard exchanges have wondered about the future of securities markets when the volume and value of derivatives and ETFs traded far outweighs the trade in the actual shares.
Commenting on the transaction in which the LSE buys out Pearson, LSE CEO Xavier Rolet commented in a press release: “Fully aligning FTSE with one of the world’s most liquid and most international trading groups is an exciting opportunity. This transaction further delivers on our diversification strategy, expanding the London Stock Group’s existing offering deeper into indices, derivatives and market data products and services. This is a business we know well, and we expect that going forward our customers will directly benefit from greater choice, opportunity and innovation.”

JSE boosts net profit by 22% for first half

South Africa’s JSE Ltd stock exchange (www.jse.co.za) reported a 22% increase in net profit after tax to R253.8 million (US$35.8 m) for the six months to June 2011. This is driven by a 7% increase in revenue combined with controlled operating costs and the group declared a special dividend of 210c/share.
CEO Russell Loubser said in a press release: “All divisions of the JSE reported an increase in revenue in the first half of 2011, with particularly strong performances from the cash equities, commodity derivatives and currency derivatives markets. This revenue growth, combined with lower operating expenses, indicates a better performance. We also retained the focus on our major strategies.”
The JSE says it offers investors “a truly first-world trading environment, with world-class technology, surveillance and settlement in an emerging market context. It is amongst the top 20 largest equities exchanges in terms of market capitalisation in the world.”

Sources of revenue

The JSE gets its revenue from different activities:
Issuer services –This division handles company and debt listings and revenue climbed, 6% to R48.8 m (H1 2010: R45.8 m). In the first six months of 2011, 5 companies listed on the bourse, compared to 6 in the first half of 2010. Loubser said: “Though there is a listings pipeline, potential issuers remain hesitant about the current economic environment. This is in line with the experience of other World Federation of Exchanges members.” (www.world-exchanges.org).
Equity market – The number of trades climbed 5% and value traded increased 4% pushing total equities revenue up 8% to R371.7 m (H1 2010: R344.5 m).
Equity derivatives market – Revenue rose 5% to R55.9 m (H1 2010: R53.3 m) as a 4% dip in the number of contracts traded was countered by a 12% rise in value traded. Loubser said: “This year, the equities derivatives team has worked hard to encourage trading of single-stock futures on the central order book, which we believe is key in unlocking larger volumes and attracting international players. There was also strong growth in index derivatives and bespoke products traded on-exchange.”
Currency derivatives market – Revenue climbed 44% to R7.2 m, attributed to a change in the billing model to stimulate trade, a wider range of instruments traded and the introduction of bespoke, on-market products. Currency derivatives are a small but growing portion of group revenue.
Commodity derivatives – revenue grew by 15% to R23.6 m (H1 2010: R20.6 m) largely due to increased trade. Loubser explained: “Local maize and wheat contracts continue to make up most of the trade in this market, but the trade of foreign-referenced instruments under licence from the CME Group continues to rise.”
Interest rate market – Strong secondary trade figures resulted in a 16% revenue growth to R19 m (H1 2010: R16.4 m).
Information product sales – Data sales to existing clients contracted, both locally and internationally, but revenue grew 4% to R61.1 m as the team continues to grow its base of international clients.

Special dividend
The special dividend is to be paid because the exchange has sufficient cash reserves for its current needs. It sets aside cash to fund operations, guarantee central order book equities trades, maintain infrastructure and meet capital needs for expansion. Loubser said: “Testing of the new equities back office system is progressing well and the new system is set to be implemented in 2012. As the capital expenditure for this project comes to an end.. the Directors have declared a special dividend of 210 cents per share”. The dividend will be paid out on 12 September.
In the last six months, the JSE has:
• Completed the integration of the interest-rate market trading platforms so that there is now a single platform for trading.
• Delivered the first phase of the remote disaster recovery site
• Made good progress in implementing the new state-of-the-art data centre which is scheduled to be completed before year end.

JSE mixes exotic flavours in currency derivative trading

South Africa’s securities exchange, the JSE Ltd (www.jse.co.za), is to launch a set of exotic currency products after demand from some South African banks. These derivatives give investors the advantages of listed derivatives with the flexibility of over-the-counter contracts.

Investors can negotiate the terms of an option contract, choosing the underlying asset as well as the expiry date. SuperDerivatives (SD – www.superderivatives.com), a derivatives benchmark and multi-asset front office system, announced on 23 May that it will provide the market data to power the Johannesburg Stock Exchange’s (JSE) new exotic currency options offering, namely the ‘any-day expiry’ contracts.

The JSE will feed in SD’s independent market data to enable accurate calculation of daily closing prices, ensuring investors are equipped with the most accurate information to inform trading decisions.

Warren Geers, General Manager of Trading at the JSE, said in a press release: “As the South African listed derivatives market develops and matures, investors are seeking more complex structures, such as non-vanilla/standardised options, in order to hedge their specific risk profiles. These exotic products are often illiquid and difficult to price – however with SuperDerivatives’ market data we can be sure that investors know the true market value of the derivatives they trade with us. Accurate data is an essential component of increasing transparency and improving confidence and liquidity in this market overall.”

AD Trading should be reserved for risky assets, if you want to trade forex try FXCM (www.fxcm.co.uk), an international group.

Maria Johansson, Regional Sales Manager UK and Africa at SD, added: “Our data is sourced from trading desks at close to a hundred global and local interdealer brokers, market makers, exchanges and trading platforms as well as top data aggregators. These true live market rates are then acid tested in real-time in the marketplace by active traders.

“Our insistence on broad market data contribution means that pricing information is truly neutral and unbiased, ensuring market participants trading on the JSE will have access to the most accurate information at all times.”

SD is seeking to bring more transparency to all major traded derivative classes including foreign currency, interest rates, equities, commodities, energy and credit by providing prices that reflect the interdealer market. At the core of all its solutions is SD’s extensively sourced and intelligently amalgamated market data, comprising true live market rates that are tested in real-time in the marketplace by active traders and run through a proven pricing model.

Its web-based, market-calibrated solutions are widely accepted as the benchmark for derivatives pricing and customers include leading banks, hedge funds, asset managers, custodians and hedge fund administrators in more than 60 countries, supported by a global network of SD offices with 24-hour support.

Trading professionals on both the buy and sell side benefit daily from SD’s unique combination of unbiased, aggregated market data and sophisticated modeling techniques. The company also provides fully-fledged risk management solutions, award winning derivatives data and independent portfolio revaluation services.

JSE revenues climb 9% despite challenging year

South Africa’s securities exchange the JSE Limited (www.jse.co.za) increased Group revenues by 9% to R1,255 million ($178 mn) from R1,156 mn in 2009. The exchange described it in a press release as “a fair year in challenging conditions in 2010” and said it focused on operational projects and responding to changes in the global exchange industry. Results were driven by strong performances from the cash equity market, information products sales and commodity derivatives.
CEO Russell Loubser has also announced that he will stand down as CEO at the end of 2011, having taken the post in 1997. His place will be taken by Nicky Newton-King, who has been deputy CEO for eight years.
Commenting on the 2010 results, Loubser in the release: “The past 15 years have been a time of extraordinary development for the JSE. The diversity of revenue streams in the business reflects the fundamental nature of its transformational journey. The JSE’s ability to remain competitive in our fast- changing industry has been maintained through continued growth in product range and trade volumes, as well as tight management of costs while still maintaining world-class standards.”
JSE operating costs before net finance income rose by 8% to R879 mn (2009: R810 mn) resulting in a net profit after tax of R378 mn (2009: R366 mn). Much of the cost increase can be attributed to costs related to the JSE’s large IT projects, which required increased staff numbers. The JSE has no borrowings and R1,046 mn in cash reserves (2009: R921 mn).

Farewell Russell
The JSE Board has been relatively unchanged for the past decade but CEO Russell Loubser has decided to stand down as CEO with effect from 31 December 2011. JSE non-executive chairman Humphrey Borkum said: “Russell joined the JSE as CEO in 1997 and has been responsible for significant and highly successful innovations. This is not the time to praise or thank Russell for his enormous contribution as he still has 9 months left before leaving the JSE. The time for farewells will come later. I am delighted to announce that the Board has appointed Nicky Newton-King as CEO with effect from 1 January 2012. This appointment is well deserved and will ensure an orderly transition.”

2010 Overview
• Growing trading volumes pushed up equities trading revenue again, up 5% year-on-year to R325 mn in 2010 (2009: R310 mn). The number of daily equity trades increased 13% year-on-year (2010: 94,656). The JSE implemented a new equities billing model to incentivise increased trading in March 2010.
• The interest rate market also increased revenue, partly because of including 12 months of revenue, compared to only 6 months before since it was June 2009 when the JSE acquired the Bond Exchange South Africa (BESA). Like-for-like, revenue fell 10% to R35 mn (2009: R38 mn). Bond market volumes in 2010 were driven partly by foreigners entering the SA bond market, with net purchases valued at R58.6 billion (2009: net positive R24 bn). Interest rate derivatives volumes continued to grow off a low base. The JSE continues to discuss the model and ways forward with all market participants.
• In the equity derivatives market, the number of futures contracts traded rose in value and number, but revenue fell slightly owing to a changed product mix. Trade in international derivatives – that is, derivatives on companies listed on a stock market offshore – grew particularly strongly. The team continues to bring new products to the market. To encourage a move to a central order book and to stimulate greater activity on the equity derivatives market, the JSE introduced the maker-taker billing model in July 2010.
• The commodities derivatives market performed well in 2010 with a 12% rise in commodity derivative contracts to 2.1 mn. This is largely owing to a rise in volumes traded in its oldest product set – agricultural product derivatives – but also aided by the expansion of trade into new hard commodities products thanks to a licensing agreement with the CME Group.
• Revenue from the issuer services division which does listings including equities, bonds and other instruments, rose to R86 mn (2009: R79 mn), mainly owing to the inclusion of 12 months of revenue from the interest rate market. The number of new company listings on the JSE rose to 14 in 2010 (2009:10) including one on AltX and one on the Africa Board. Loubser comments: “Listings remained subdued, an experience shared with most other members of the World Federation of Exchanges. Notably, 2010 saw the listing of Wilderness Safaris – the second Africa Board listing.”
• Trade in currency derivatives for 2010 was slightly down on 2009 levels. In 2010, the JSE added contracts on the Swiss franc and Chinese yuan.
• The Information Products Sales division focused on new markets and grew revenue by 7% to R117 mn (2009: R109 mn). The team also expanded its product range and adjusted some fees to give more retail clients access to data.

Strategic initiatives
The global financial services industry is changing fast and the JSE, haveing already changed enormously, has to keep moving. Big technology projects are central to the JSE’s focus for 2011. Other strategic initiatives include:
• Building consensus on the growth of the spot and derivatives interest rate markets;
• Growing the client and product range in all market segments, concentrating particularly on how to bring over-the-counter (OTC) trade on-market and on how to encourage more foreign activity on the JSE derivatives exchange;
• Unlocking the opportunities for investors on the African continent by attracting listings on the JSE’s Africa Board as well as creating indices on African stocks that allow investors to track the performance of top issuers across the continent.

Prospects
Revenue projections are not possible in the stock exchange industry, since they depend on trading volumes, which are driven by market conditions. Loubser says: “In a globally competitive environment, markets with strong regulation, solid infrastructure and thriving institutions will be better positioned to attract sustainable capital flows. The recognition by the World Economic Forum (WEF) Global Competiveness Report 2010-2011 that South Africa’s securities exchange regulation is the best in the world reflects our transformation from a single product equity exchange to a well regulated fully horizontally and vertically integrated exchange.”

Board changes
Non-executive directors Gloria Serobe and Wendy Luhabe have indicated that they will not make themselves available for re-election at our AGM in April 2011. Chairman Borkum says: “After having served 10 and 8 years on the Board respectively they have both made significant contributions to the JSE’s affairs and I thank them most sincerely”, says Borkum.
Jonathan Berman resigned during the course of the year due to his other business commitments. He joined the Board as an alternate director following the BESA merger.
Lastly, in terms of accepted practice, it has been decided to shrink the number of executive directors on our Board. Borkum says: “Leanne Parsons and John Burke, who are senior and highly respected executives of the JSE, will both stand down as executive directors at our AGM in April.” They will continue to contribute to the Board as alternate directors.

Stock exchange merger trend will end with “three, four” global exchanges

The world is moving into fast consolidation of stock exchanges through mergers and acquisitions among the giant exchanges. London Stock Exchange chief executive Xavier Rolet said: “In five years there will be three, four international exchange groups with global distribution capabilities”, according to a report in London’s City AM newspaper (24 Feb).

African stock exchanges have not announced any changes to their style of operations.

The LSE is busy with a £4.3 billion merger with Canada’s TMX exchange. The Ontario Securities Commission chairman Howard Wetson said the regulator would review the value of the deal. In 2010 Canadian regulators blocked mining giant BHP Billiton’s $39 bn takeover bid for Potash Securities.

New York’s NYSE Euronext is planning a $9.5 bn merger with Germany’s Deutsche Boerse, which could face challenges on grounds of reducing competition. According to the report, Rolet said: “There’s going to be big competition issues because, between them, they control 93% of equity and index derivatives in Europe. It cannot be said that this is going to be anything but a monopoly.”

Also complicating the transaction is speculation that US stock exchange NASDAQ is contemplating a rival bid for NYSE Euronext. NASDAQ is valued at $5.7 bn and is worried that it may become a takeover target if it does not grow. The holding company of Chicago Board Options Exchange reportedly said on 23 February that it is open to “strategic transactions” such as a sale or merger with another operator of securities exchanges.

The Singapore Stock Exchange is merging with the Australian Stock Exchange as a growing share of world trading and capital-raising moves to Far Eastern and Chinese markets.

A few years ago South Africa’s JSE Ltd sought to acquire a stake in the Stock Exchange of Mauritius but this was blocked by regulators. Traditionally African leaders and regulators see them as national institutions, preferring sovereignty to liquidity and efficient capital markets. Structures have also been designed to link African exchanges without compromising these principles but these are awaiting funding.