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Copyright© JSE Limited 2009
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Bonds and Financial Derivatives: Quo Vadis?JSE Media Day – August 2012Graham Smale – Director: Bonds and Financial Derivatives
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Agenda
• Equity Derivatives• Currency Derivatives• Bonds• Bond and IR Derivatives
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2012 – What has changed since last year
• In January 2012 all financial products, excluding cash equities and commodities we centralised under a single Exco position headed up by Graham Smale, who previously headed up the Interest Rates division.
• The operations staff for bonds and financial derivatives has been centralised under Brett Kotze, General Manager: Clearing and Settlement, reporting to the Director: Post Trade Services
• Divisional management has been streamlined into product groups and support;• Equity Derivatives – Magnus de Wet• Interest Rates and Currencies – Warren Geers• Can-Do products – Paolo Govetto• Change Management, Training and Education – Anthony Leibrandt• Quantitative Support – Rudolph Oosthuizen
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Equity Derivatives
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Equity Derivatives
• The JSE has a rich product suite• Index futures options – The flagship product and responsible for most of the activity• Single Stock Futures and Options – A leveraged alternative to shares• IDX futures and options – Exposure to international equities, including BRICS
(Bricsmart the JV with other BRICS exchanges)• Any-day expiry futures and options – Flexibility of expiry on standard products• Can-Do futures and options – OTC replication of complex products (as long as we can
value it we will clear it)
• Current challenges• Global equity markets are subdued in the wake of sustained economic uncertainty and
the tsunami of regulatory change• The technology arms race
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How does 2012 Look?A mixed scorecard
Product Jul-12 / Jul-11 %Index Futures -6.5%
SSFs -49.0%
IDX +76.7%
Can-Do’s +9.1%
Index Options -4.8%
SSF Options -11.9%
Open Interest -3.4%
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Index Futures – Our Benchmark Product
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50 000
100 000
150 000
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300 000
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5 000 000
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ope
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Cont
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Index Futures
Open Interest Contracts
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The Rise and Fall of Single Stock FuturesContracts
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4 000 000
6 000 000
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16 000 000
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50 000 000
100 000 000
150 000 000
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350 000 000
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450 000 000
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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Single Stock Futures
Open Interest Contracts
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The Rise and Fall of Single Stock FuturesValue Traded
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500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
0
50,000,000,000
100,000,000,000
150,000,000,000
200,000,000,000
250,000,000,000
300,000,000,000
350,000,000,000
400,000,000,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ope
n In
tere
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Valu
e Tr
aded
Single Stock Futures
Open Interest Value Traded
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Index Options
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500 000
1 000 000
1 500 000
2 000 000
2 500 000
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2 000 000
4 000 000
6 000 000
8 000 000
10 000 000
12 000 000
14 000 000
16 000 000
18 000 000
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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Cont
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Index Options
Open Interest Contracts
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Single Stock Options
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500 000
1 000 000
1 500 000
2 000 000
2 500 000
3 000 000
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5 000 000
10 000 000
15 000 000
20 000 000
25 000 000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ope
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Cont
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Single Stock Options
Open Interest Contracts
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Equity DerivativesOpportunities for 2013 and Beyond
• Bringing the equity derivatives closer to underlying equities• Billing models• Market-making incentives
• Product evolution• Exchange-cleared CFDs – To benefit from the consequences of the implementation of
Basel III on the costs of OTC products• Speculative dividend futures• IDX – International shares and indices• Stimulation of the options market – Electronic trading and Market-making
• Technology• Evolving the technology platform (Millennium Exchange)• Co-location – The rise of the machine and the value of proximity
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Currency Derivatives
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How does 2012 Look?Good Volume Growth
Product Jul-12 / Jul-11 %Currency Futures +75.7%
Currency Options +184.8%
Any-Day Options +974.8%
Can-Do’s +653.9%
Open Interest +27.1%
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Currency Futures
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100 000
200 000
300 000
400 000
500 000
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700 000
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20 000 000
40 000 000
60 000 000
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120 000 000
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2007 2008 2009 2010 2011 2012
Ope
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Total Curr Futures
Open Interest Contracts
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Currency Options
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100 000
200 000
300 000
400 000
500 000
600 000
700 000
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500 000
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1 500 000
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2007 2008 2009 2010 2011 2012
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Total Curr Options
Open Interest Contracts
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Plans for Currency Derivatives
• Evolution of the billing model• Incentives for market-makers and volume providers
• Offering products that compete effectively with the OTC market• Any-day expiry• Can-Do’s - Exotic options• Linking cash settled contracts to specific spot transactions on expiry• Cross currency pairs – e.g. EURUSD, requires policy and Excon approval
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Bonds and IR Derivatives
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Products
• The JSE runs a combined market for listed instruments:• Government and non-government bonds • Securitisations• Commercial paper• Bond and bond index derivatives• Short-term interest rate (STIR) futures (Jibar futures)
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How does 2012 Look?A product whose time has come?
Product Jul-12 / Jul-11 %Spot Bonds +12.9%
Bond Repos +18.3%
Foreign Purchases +44.5%
Bond and IR Derivatives +118.8%
Bond and IR Options +731.5%
Bond and IR Derivatives Open Interest +59.0%
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1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
%
Years
Swaps
R157R201
R206
R203R204
R207R208
R186 R213 R209 R214
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
%
Years
RSA Bonds
R189
R211R212 R197 R210 R202
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
%
Years
ILBs
R157R201
R206
R203R204
R207R208
R186 R213 R209 R214
R189
R211R212 R197 R210 R202
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
%
Years
Swaps RSA Bonds ILBs
Product toolset
Jibar Futures
GOVI
FutureInflation
ILBI
Real Rates
Interbank Swaps
Government Bonds
“Risk-free”
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Issuance by sector
0% 0% 0% 2%2%
15%
15%
10%
55%
1%Agriculture, forestry & f ishing
Mining
Construction
Manufacturing
Services
Financial sector
State owned enterprises
Securitisations
Government
Inward listings
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Bonds by type
71%5%
1%
9%
2%0%
11%1% 0% 0% 0% Vanilla
Commercial paper
Credit linked note
Floating rate note
Amortizing floating rate note
Equity structured note
CPI linked
Customized instrument
Amortizing instrument
Perpetuity
Weighted floating rate note
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Bond Issuance – Dec-06
R208R209
R206 R207
R204
R203
R201
R186
R157
R194
R153
5.00
5.50
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
10.00
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
%Yi
eld
(NAC
S)
Years
Bond Issuance Across the Yield Curve - Dec-06
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Bond Volumes – Dec-06
R208R209R206
R207
R204
R203R201
R186
R157
R194R153
5.00
5.50
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
10.00
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
%Yi
eld
(NAC
S)
Years
Bond Volumes Across the Yield Curve - Dec-06
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Risk-Adjusted Bond Volumes – Dec-06
R208
R209R206R207
R204
R203
R201 R186
R157
R194 R153
5.00
5.50
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
10.00
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
%Yi
eld
(NAC
S)
Years
Rpp Adjusted Bond Volumes Across the Yield Curve - Dec-06
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Bond Issuance – Dec-11
R206R201
R157
R203R204
R207R208
R186 R213 R209 R214
5.00
5.50
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
10.00
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
%Yi
eld
(NAC
S)
Years
Bond Issuance Across the Yield Curve - Dec-11
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Bond Volumes – Dec-11
R206R201
R157
R203
R204R207 R208
R186 R213R209 R214
5.00
5.50
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
10.00
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
%Yi
eld
(NAC
S)
Years
Bond Volumes Across the Yield Curve - Dec-11
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Risk-Adjusted Bond Volumes – Dec-11
R214R213
R206R201
R209
R157
R204
R203
R208
R207
R186
5.00
5.50
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
10.00
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
%Yi
eld
(NAC
S)
Years
Rpp Adjusted Bond Volumes Across the Yield Curve - Dec-11
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Bonds and IR DerivativesFocus areas for 2012 and beyond
• Defining new secondary market trading rules for the cash market• Government bonds – This will be the output from a policy forum chaired by National
Treasury• Non-government bonds – Working with the market on options• Clearing of bonds – Counterparty risk will become a limiting factor under Basel III
• Growing the interest rate derivatives market• Liquidity providers on key products – Aids with the “transparency” debate• New product development – Bond futures similar to popular international products
• Billing model• New billing model for cash bonds• Linking the cash and derivatives markets
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THANK YOU
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REFERENCE SLIDES