(MR), Andre Koen (AK), Ved Somera (VS), Bret Kotze (BK), Themba Maseko(TM ), Valdene Reddy (VR), Zweli Vonya (ZV)

Transcription

1 FINANCIAL DERIVATIVES ADVISORY COMMITTEE MEETING Date: 29 March 2017 Time: 11h00 Venue: Serengeti Conference Room 9th Floor, JSE Offices, Sandown Donna Nemer (DN), Guy Algeo (GA), Bryn Macullan (BM), Merlin Rajah (MeR), Crispin Gell (CG), Pumelele Sibisi (PS), Paul du Preez (PdP), Martin Koch (MK), Godfrey Matjuda (GM), Mark Randall Present: (MR), Andre Koen (AK), Ved Somera (VS), Bret Kotze (BK), Themba Maseko(TM ), Valdene Reddy (VR), Zweli Vonya (ZV) Apologies: Helen Masson (HM), Phillip Thuthuka Dube (PD), Neil Cohen (NC) Dialled In: Shiran Samuels (SS), Bryn Hatty (BH), Gavin Betty (GB), Matthew Arnott (MA) WELCOME AND APOLOGIES DN welcomed all the attendees to the first Financial Derivatives Advisory Committee (FDAC) for CONFIRMATION OF PREVIOUS MINUTES The minutes of the FDAC meeting held on the 11 October 2016 were confirmed and accepted. SINGLE STOCK FUTURE DISCUSSION DN shared her experience of the Derivatives Industry association conference which she attended in Florida, USA. She mentioned that the conference was well attended and that there was remarkable interest in the South African Single Stock Futures (SSF) market from most emerging markets exchange. DN suggested that a sub-group committee be formed to help revitalised the SSF product. VR presented the historical SSF graphics, highlighting the peak in 2008 in terms of the number of deals, volume and value traded which then subsequently decrease in the following years. VR mentioned that there has been some shift from SSF to CFD and the OTC market. She mentioned that market making program has not gain traction on SSF. VR requested the committee to provide insight on how they can help revitalise the products in terms of a market maker model and reported trade minimum size perspective. JSE Limited Reg No: 2005/022939/06 Member of the World Federation of Exchanges Page 1 of 6

2 DN inform the committee that the JSE has implemented a liquidity provider scheme as well as a market maker scheme in the Currency Derivatives market and is considering the possibility of introducing it in other markets provided the committee agreed. A committee member commented that SSFs are a short term product and with the cost of funding increases, shortterm cash has dried up. This makes the SSF product an expensive product to trade hence the drop in deal and volumes. He further commented on the onscreen liquidity issue highlighting that SSF s are geared instruments with the delta executed before the future is created and then booked A committee member explained that the role of market maker has been to provide liquidity to the product but that has become expensive as well. As the market maker they are keen on providing liquidity even though the volumes do not support them yet as they believe in the long-term there is potential for the product to gain traction. The committee member suggested that the JSE should look at introducing some incentive to the market maker. A further comment was made that a new trading system will possibly help the products because it will provide integration within trading platform for both retail and institutional business. Other members agreed that the onscreen business may improve liquidity and volumes as the JSE rolls out the new integrated trading system (ITAC). The JSE will work on organising the sub-committee that will discuss ways to help revitalise the SSF markets. ADDING OF SABOR TO CFD PRODUCTS MR informed the committee that during the March 2017 futures close-out the JSE has added the SABOR rate to CFD products in response to market request. This meant that when trading a CFD one has a choice of choosing either a SAFEY or SABOR rate that needs to be agreed and booked between trading counterparties. MR thanked the committee and other institutions on their on-going support leading to the implementation. A committee member also thanked the JSE and its IT team for implementation. VALUATIONS UPDATE The valuations team would like to implement some changes with regards to ALSI Futures Market to market (MTM) as well as the At-the-money volatility and volatility surface as per below: ALSI Futures MTM At current the ALSI Futures MTM is determined by taking a snap shot of the bids and offers at a random time after 17:00. This process will remain unchanged where a double is quoted, typically on the first two expiries. With regards to contracts that do not have a double on screen at 17:00, the MTM would then be calculated using the points from the near model. The model uses a static arithmetic difference from the near contract that is added to the MTM. There are two proposed changes: On daily basis, check if there are any trades booked. If there are, then use the points booked and their difference from the near contract to update the points from the near model. The spread would basically update every time there is a trade rather than onscreen doubles in a narrow time window, Page 2 of 6

3 A clause to be added that allows the JSE to subjectively reset the spread if a contract has not traded for a period and is therefore deemed as stale. The resetting of the spread can be by means of a polling system, cost of carry model or other subjective determination by the JSE. A committee member asked about the impact of the change at ex-dividend date as the basis will move a lot. The member further asked if there is specific number of days that would be used as a bench mark for resetting if there are no trades in a contract. On the subjective resetting the JSE would ideally not look to make changes unless a contract has not traded for a significant period. The committee also recommended that a minimum deal size of between 50 and 100 be considered. The JSE will implement a minimum deal size of 50 and provide feedback to the committee. At-the-Money Volatility Currently, a snap shot of the onscreen double is taken at 16:00 based on a single strike. This is the anchor strike which is the closest price to the prevailing futures price at the time. If there is no onscreen volatilities at the time, a volatility surface adjustment will be applied based on where the future is. Proposed changes: Move the volatility double to 17:00 from 16:00 to be in line with the futures snap shot. A further recommendation would be for the anchor strike to remain at a single strike with the intention of increasing it to a range of strikes in the future. A clause to allow the JSE to apply changes subjectively if there is significant staleness in the volatility. This will be by means of either a polling system, vendor volatility or other subjective determination by the JSE. At current the volatility surface is updated on a fortnightly basis using trading data. The JSE is now in a position to move the process to a vendor which will provide volatility surfaces that can be implemented on a weekly basis. The vendor that will be used for the volatility surface will be Super Derivatives. The JSE will issue a formal market notice outlining the changes. The notice period which has been agreed upon is between 15 to 30 days prior to implementation. MONTHLY EXPIRIES ZV highlighted the proposed offering of the standardised monthly expiries. He mentioned that other global exchanges are already offering the products and some have even extended to weekly expiries. ZV emphasized that the quarterly expires will remain unchanged and the index rebalancing will not change. He then asked the committee to advice and comment on the proposal from a liquidity and viability point of view. A committee member stated that monthly expiries will be in line with international standard and may improve product liquidity and offer more trading opportunity for their hedge. Another committee member suggested that the proposal be rolled over to currencies and interest rate products as well. The committee agreed that the near dated future may improve and concentrate liquidity. Another committee member commented that the proposal will see more liquid hedging products coming to the market. VR asked the committee whether the JSE should look at introducing both the futures and option at the same time. Page 3 of 6

4 DN suggested that the JSE should introduce both monthly futures and options to assess market demand and if not, the JSE will use its discretion to determine whether to terminate or continue with the products. AK informed that the any -day can-do s product will be flagged as its own instrument class type in new ITAC world. A committee member suggested that both future and option be introduced to help the market maker to trade the delta. DN assured the committee that the JSE will consult other market participants and check if the internal system will be able to accommodate these products. VR asked whether there is any objection to the JSE taking the entire listed stocks into an auction at Future Close out (FCO) date. She mentioned that currently, only the top 40 stocks with open interest are selected to go into an auction process. The committee did not object to the suggestion. RISK UPDATE PdP commented on the perceived flexibility associated with the Can-Do platform saying that it has greatly contributed to the success of the can-do offering. However, from the JSE s perspective, the flexibility introduces a significant amount of operational risk. Furthermore, regulation is leading to an increased focus on governance surrounding new product offerings. To this end, a framework has been put in place to standardize (as much as possible) the can-do offering with the aim of mitigating operational risk and ensuring the appropriate level of governance surrounding the approval of new product types. Under the new framework: The JSE will maintain (to be published on the JSE website) a list of products which have been approved and thus satisfy JSE Clear s clear-ability criteria. Any products which are not on this list will have to go through a new product approval process - where the product could in fact not be approved if it fails to meet the clear-ability criteria. It should be noted that whilst the JSE will treat all new products with the appropriate level of urgency, the JSE cannot commit to an approval process that will take less than two weeks for new products. Participants are thus advised to carefully consult the list of eligible products before looking to execute new Can-do transactions. Participants are also strongly encouraged to liaise with the Capital Markets team on an ongoing basis with regards to new product ideas in order to prevent any possible frustration with regards to the process by the time an idea translates to a potential transaction. PdP then told the committee that the JSE has spent great effort in improving its risk management system. When looking particularly at the initial margin that the JSE requires from its participants; the JSE recognizes that there is conservativeness in the model that can be optimized. PdP then added that one of the key focus areas of the JSE s Post Trade Services team for the next couple of years will be to ensure that the JSE s platform continues to be safe with regards to management of default risk; yet at the same time ensuring that the JSE does so in an efficient manner for participants. This will mean moving away from the current initial margin portfolio level calculation system called J- Span to portfolio VAR. This journey will start with the Interest Rate Derivatives (IRD) Market and will result in approximately 40% to 50% reduction in initial margin required. Once implemented in the IRD Market, the team will then investigate ways in which to optimize initial margin in the rest of the markets, e.g. CCP model in the Equity Market. Page 4 of 6

5 PdP then concluded by telling the committee that another big drive is non-cash collateral and hopefully when ITAC goes live, the team will be able to implement this option. ITAC UPDATE IDX Futures AK informed the committee that in the new ITAC world the dividend future on single stock futures will be discontinued. The JSE will only have a Dividend Neutral contract and the JSE will automatically migrate all SSF positions for all members with positions on single stock future with a relevant Dividend Future to the Dividend Neutral Contracts. Currently, members trade single stock futures and dividend futures on a 1 to 1 basis, and when the dividend falls due on ex-date, a journal transaction is created for the trading member. A concern was raised by IDX market makers who trade IDX dividend futures on a net-dividend-ratio and not on a 1 to 1 basis with the underlying future. With dividend futures falling away post ITAC, the JSE proposed to address this in one of 2 ways: 1. Members would trade the full dividend neutral contract and the offsetting naked future in the applicable netdividend-ratio, or 2. For, the JSE to process the dividend journals on a net dividend payment. This would require internal system changes from the JSE side and manual uploading of different tax rates per domicile. Since this may be different per member, it would not be a universal approach for broader market. The committee member who is also an IDX market maker said option 1 would work for them. VR would inform all other IDX market participants of the changes and processes for full coverage. High-Level Summary MK informed the committee that the JSE has been on market roadshow to see every Equity Derivatives and Currency Derivatives member to advise them about the upcoming ITAC changes and requirements. MK informed the committee about the updates on trading functionality; market data as well as deal management and told them that the presentation will be made available on the JSE ITAC website. The presentation will highlight all the new functionality and upgrade that will come with the ITAC system for the front-end users. He emphasised that the JSE will no longer provide trading and deal management front-ends system (Nutron) but members need to engage with software providers. The JSE service agreement (JSA) and data agreements will need to be signed by all market participants prior to using JSE customer test service (CTS) or production services. BK mentioned that a clearing member working group has been created to ensure that every clearing member is well informed about the upcoming changes and operational requirements. This will entail systems testing but not limited to clearing and deal management but will also cover futures close-out, margining, interest calculation and more for user-readiness. PdP advised that non-cash collateral is going to be through STRATE and members will need to ensure that they liaise with STRATE directly. VR added that the agenda will be sent to all members prior to the meeting to clarify all items that will be covered in the upcoming ITAC sessions for market participants. Page 5 of 6

6 Options Matching Criteria VR gave feedback on a previous concern raised at a previous FDAC meeting on the credibility of option trading information, particularly volatility and forward inputs. At the previous FDAC, the committee asked for options to be mandated to match on two criteria being premium and volatility or premium and forward opposed to just premium as current. From a systems point of view, the JSE is unable to change current systems to mandate matching on 2 inputs and trading members were urged to use best practices when booking or reporting single stock options. VR mentioned that in the ITAC world this change could be implemented. MK reiterated that the trading front-end is moving from JSE responsibility to software providers. MK advised the committee that the system will do its calculation based on the matching field provided by the trading member when booking off-book option trade; those fields being either the volatility or premium. The matching criteria for naked options will be on premium and underlying price submitted by the trader. The delta options matching criteria will be the volatility submitted by the trader. CLOSING REMARKS The meeting was closed by DN and she thanked everyone for their commitment and for attending the meeting. Page 6 of 6