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Copyright© JSE Limited 2009

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Bonds and Financial Derivatives: Quo Vadis?JSE Media Day – August 2012

Graham 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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The Rise and Fall of Single Stock FuturesContracts

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The Rise and Fall of Single Stock FuturesValue Traded

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Open Interest Value Traded

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Index Options

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Single Stock Options

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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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Total Curr Futures

Open Interest Contracts

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Currency Options

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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

R203

R204R207

R208R186

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

R203

R204R207

R208R186

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

R206R207

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

(NA

CS)

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

(NA

CS)

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

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

(NA

CS)

Years

Rpp Adjusted Bond Volumes Across the Yield Curve - Dec-06

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Bond Issuance – Dec-11

R206

R201

R157

R203

R204

R207R208

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

(NA

CS)

Years

Bond Issuance Across the Yield Curve - Dec-11

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Bond Volumes – Dec-11

R206

R201

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

(NA

CS)

Years

Bond Volumes Across the Yield Curve - Dec-11

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Risk-Adjusted Bond Volumes – Dec-11

R214R213

R206

R201

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

(NA

CS)

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