Leanne Parsons (JSE); Bryan MacCullum (RMB MS); and Chris Sturgess (JSE)

Transcription

1 HEADING: Financial Derivatives Advisory Committee Minutes Date: 23 February 2016 Time: 10:00 am Venue: Serengeti Matt Arnott (Deutsche Securities); Mark Humphreys (SBG Securities); Crispin Gell (Phoenix); Jaco Eager (Vunani); Ved Somera (Nedbank); Paolo Govetto (JSE); Valdene Reddy (JSE); Donna Present: Oosthuyse (JSE); Gregori Nicola (JSE); Merlin Rajah (JSE); Adele Hattingh (JSE); Kim-Zara Hoosen (JSE); Terence Saayman (JSE); Martin Koch (JSE); Alex Comninos (JSE); Mark Randall (JSE) Apologies: Leanne Parsons (JSE); Bryan MacCullum (RMB MS); and Chris Sturgess (JSE) Dialed In: Shiran Samuels (ABSA); Bryn Hatty (Old Mutual); Gavin Betty (Peregrine); Petrus Bosman (Avior); Geeneshan Naidoo (RMB) WELCOME, APOLOGIES AND NEW MEMBERS Donna Oosthuyse welcomed all the attendees to the first Financial Derivatives Advisory Committee for Minutes: CONFIRMATION OF PREVIOUS MINUTES The minutes of the FDAC meeting held on the 29 th of October 2015 were confirmed and accepted. JSE Limited Reg No: 2005/022939/06 Member of the World Federation of Exchanges Page 1 of 9

2 ITAC UPDATE The JSE used this opportunity to discuss some pertinent questions which need to be answered for the development of ITaC, these questions included: 1. Circuit Breaker Percentages on SSF, Indices and IDX Dynamic circuit breakers are to be introduced with the aim to avoid fat-finger trouble and large price moves. It was discussed that the JSE should look to keep the breaker limit between 0.5% - 1.0% for Indices. The committee had asked for some guidance on the following: What is done off shore? What is the global standards with respect to circuit breakers on derivatives 2. Duration of Volatility Auctions / Period were agreed to: SSF and IDX will be set to 5 minutes Indices will be set to 2 minutes 3. Use of Anonymous RFQs RFQ is sent by a market participant and will be anonymous. The response from the market makers / interested parties back to the client would be: Should be anonymous, or Should be named? 4. Off Book Price Publication The committee agreed that prices will be published for all off-book trades reported to the system including price and size without delay. Trading at the Close Price It was proposed to have a trading at the close session which allows participants to trade at the closing price. This session will occur post close. 5. Halt Resume Duration Should an instrument be moved from a halt session into a continuous trading session the process is facilitated and streamlined through an opening auction. 6. Closing Price Methodology The 5pm MTM snapshot process should stay as well as continuous trading for 30minutes post cash close. A suggestion was made to introduce a closing auction possibly from 17h30 to 17h35 or shorter which will precede the trading at the closing session (should that be Page 2 of 9

3 approved). This will allow for the closing price to be determined in the closing auction or according to a predefined methodology. STT RELEASE 2 The JSE gave an update on STT release two and stated that there was an unforeseen error in the application of dynamic circuit breakers which means that they will not be implemented for the time being. TAKING A TURN ON COMMISSION The current practice of taking a turn in the derivatives markets refers to changing of the price when assigning or allocating a trade to another trading member or client (direct or tripartite). This practice during assigns and allocations limits the market from seeing the true price execution without built-in commissions, and does not lend itself to international best practice. As part of the ITAC Project 1 go-live, the new JSE Real-Time Clearing (RTC) system will not include the ability to take a turn during the assignment or allocation of trades. On the back of decommissioning the take a turn functionality, the JSE has investigated various alternative solutions that would assist the market in settling commissions for agency trades by acting as a payment clearing house. Subsequent to the Q1 FDAC meeting, the JSE hosted a workshop where a potential commission s solution suggestion was made where the primary role of the exchange will be to act as a payment clearinghouse for settling daily net commission amounts across Clearing Members on T+1. Daily commission amounts relating to give-up activity (i.e. between trading members and between trading members and tripartite clients) will be rolled up to the Clearing Member level and net amounts settled as part of the daily margin and fee settlement process on T+1. Commission information will be provided to Trading and Clearing Members in order for them to do reporting, reconciliation, VAT invoicing as well as cash collections and payments at trading member and client levels. Clearing Members, Trading Members and Independent Software Vendors (ISVs) will be required to develop the necessary front-end functionality to utilise the new JSE commission service. Trading members will be required to actively monitor and manage their commission Page 3 of 9

4 entries JSE will not be liable for any mismanagement of commissions. Once trades are booked and deal managed, commission amounts are captured separately by initiating trading members. Entries can be captured at a deal level or aggregated by trading member or client. Once captured, the commission is deemed confirmed i.e. no confirmation is required by the recipient trading member. Recipient trading members are allowed to reject incorrect commissions captured against them before the end of the day. Initiating trading members are allowed to cancel incorrect commission entries that were previously captured. Commission notifications are sent to both the initiating and recipient trading members and associated Clearing Members upon a new, cancel or reject commission event. Clearing Members and Trading Members will be able to download all commission entries at end-ofday in order to facilitate their reconciliation, invoicing and collection processes. Commission amounts are aggregated to the CM level and net amounts are settled by the JSE as part of the daily settlement process. The key features of the solution include: Providing the ability for trading members to capture their commissions against clients (direct and tripartite) and other trading members; Providing trading members with the ability to cancel and reject incorrectly booked commissions; Aggregating commission amounts to the CM level and settle net amounts across Clearing Members as part of the daily settlement process on T+1; and Providing clearing members and trading members with sufficient reporting information to facilitate their reconciliation, collections/payments and VAT invoicing processes. INDICES New reconstitution rules for the FTSE/JSE indices Mark Randall (MR) mentioned that the Index Team has sent out a market proposal on ranking the Top 40 companies on net market capitalisation rather than full gross market capitalisation. The proposal changes the Top 40 from being viewed currently as Top 40 largest companies but rather, to a Top 40 most investable companies approach. This could be achieved by selecting the 40 constituents based on the net market capitalisation rather than gross market capitalisation. FTSE/JSE believes that the change will improve consistency Page 4 of 9

5 by selecting and weighting on the same factor, reduce concentration, prevent crowding-out of material index constituents by larger companies with low free float, and improve liquidity of the index. Mark further mentioned that the difference between ranking on net market capitalization and gross market capitalization is essentially not significant but will have relative turnover on implementation. The proposed was welcomed by the market and there are no set dates schedules for implementation as yet. The possible effect of AB InBev s listing on indices Mark informed the committee about AB InBev obtaining a secondary inward listing on the JSE Main Board with effect from the commencement of trading on 15 January As an inward listing listed on the JSE after October 2011, AB InBev is treated as foreign company for index purposes and is free float will be determined by the proportion of the share capital that is held in dematerialized form and registered on the South African share register, as maintained by Strate. Mark mentioned that any fast entry inclusion to the FTSE/JSE Africa Index Series is not applicable to any share that is classified as foreign for index purposes and as such AB InBev is not currently a constituent of any indices in the series. It will be considered for inclusion at the March 2016 review for the first time, although it will not be eligible for addition unless its free float is in excess of 5%. At the end of January 2016, AB InBev s market capitalisation was the largest on the JSE at around R2.875 trillion, representing over 20% over the total market capitalisation represented on the bourse. VALUATIONS Mark Randall advised the committee that the valuations team has put together a document detailing the Mark to Market procedure of Equity Derivative products. The document was sent out to the broader market on the 23rd of February Mark further advised that the Valuations team is working on a more detailed version that will be sent out before the year is finished. There was a concern raised by committee members that Option valuations where not on the mark in terms of where options where trading at. Mark raised the point that the JSE has an Option valuation system that the market can use but due to various reasons the broader market has been reluctant to use it. Mark undertook to do a market consult and come up with a better system that all involved will be happy with and that will correctly value the Options. Page 5 of 9

6 TRADING Zero Fee request process Gregori Nicola informed the committee that there is a new guideline on requesting Zero fees dated 16 February Zero fee requests need to be submitted within one hour of the trade booking time. A Zero fee submitted the following day will be subject to a R500 (inc.vat) minimum rebate due to administrative and bank transactions costs. It is also requested that as much information on the error trades be supplied as possible to assist in making the process easier. The required information is also outlined in the guideline. Termination of FCO results page A proposal was made to the committee to decommission the FCO Website made available to clients to be able to view the indicative closing values on Futures Closeout days. The following reasons were stated: High cost to maintain the website Currently there are between 50 to 80 logins to the website on average for 3 minutes (these are largely refreshed logins) If a webpage is still required by clients, the JSE suggested a webpage that refreshes every minute or so. Because streaming the data poses an issue, this could be an alternative as it is less intensive. Feedback from Committee members: One committee member (M. Arnott) indicated that they do not use the website Another member (M. De Wet) said that it was useful when the previous FCO methodology was used, but the website is no longer useful Another member (C. Gell) advised that there have been stability issues and a delay, but it was useful to receive the information. Andre K (JSE) suggested that the files which have the FCO result could just be published to the Market The Committee agreed to decommission the website and receive the results. CANDO FEE MODEL VALUATION The committee was informed that Paolo Govetto has moved to strategy and that the JSE is Page 6 of 9

7 very happy to have him on strategy. Valdene Reddy will be responsible for Can do s going further. Paolo presented the CanDo fee model to the committee. There were two main sections, AnyDays and Exotics. Basic salient features are as follows: Any Day / Vanilla Keep current Fee Model Maintain basis point fees on AnyDay Futures Lower basis point fees for AnyDay Options Increase the fee cap on Single Stock Anyday contracts Exotic / Cando Replace the Matrix fee model with an Underlying Value-Based model (using same Value-based model as that used for Any Day market Increase basis point fees to compensate for the extra effort and complexity required Implement a fee Cap to cater for a wide range of transaction sizes Charge some Give up activities at a discount Allocate fees to client trades on a Pro-rata basis Further details can be found on the market notice sent out to clients. Gavin Betty mentioned that the CanDo product has been successful given that there is a dislocation in the index market. He would have liked to have seen a white paper on CanDo fees. He also mentioned that round trip fees, including clearing, for bespoke structures could be between 5 to 10 basis points which affect client interest in the products. Donna mentioned that we will prepare a white paper and come back to the committee. RISK MANAGEMENT As the committee is aware, the introduction of a liquidity add on margin began in August of 2015 and a second add on margin for concentrated positions will now be introduced. This margin only affects about 10 of the more than 7000 equity derivative accounts and is levied in a situation where under stressed conditions; the individuals position threatens more than half of JSE Clear s R500 million default fund. All members currently breaching this limit have been notified. As a benchmark, in order to qualify for this margin a single account would need an ALSI position in excess of R5 billion. It was discussed that in large structures where the derivative is hedged, since the JSE has no claim to the cash securities, it cannot be considered by JSE Clear for the purposes of margin reductions. Page 7 of 9

8 The JSE risk committee has approved the acceptance of non-cash collateral. Initially this will be in the form of government bonds and only for add on margin. If anyone wishes to make use such a facility they should contact their clearing member and set up a specifically segregated account at STRATE. Over the next few months the risk team will be amending the series spread margin between the ALSI and the DTOP contracts in an effort to provide more offset between these two contracts. INNOVATION AND PRODUCT DEVELOPMENT Gregori Nicola provided the committee with an update on the work being conducted to enhance the JSE s CFD product offering. After much consultation with market participants, the following issues were raised to the JSE: Market makers have 2 key issues which include crossing and accountability of spreads. Also admin/systems limitations for accounting for end client positions. While is it sub-optimal for a user to open with one market-maker and close with another, this wouldn t necessarily happen by nature of product. Therefore, it would be preferred if an exclusive naming convention were implemented. Contract specification difficulties include : Funding differential is an issue plus that can t nett off contracts JSE should also look at offering other base rates e.g. JIBAR and repo Market participants don t see the need to trade with more than 1 counterparty in OTC CFD space there is in any case also just 1 counterparty ecfds will require market participants to bring technological enhancements to the encourage scale but difficult to justify Catch 22 can t grow the product if you don t spend money to make changes to technology Gregori then added that the JSE s CFD are one of the Equity Derivative Market s few retail offerings and also has features which make it appealing to institutional clients, particularly unit trusts. The product is much simpler than single stock futures and market participants have also found that the product is being requested more by their clients; especially on inward/foreign listings. The key problem however is that the product is not fungible and that the spread pricing is dependent on pre-existing positions. Based on feedback from the market and the JSE s research, the following measures were tabled : Long Term Solution The JSE intends to investigate OTC clearing however this will only be a possibility post the Page 8 of 9

9 implementation of ITaC. Short Term Solution As requested, the JSE has changed the CFD Exposure screen on Nutron to aggregate positions on the member rather than the dealer level (Hotline 0916 EDM). Following a request to list multiple versions of a CFD each appended with the market makers name so that a market maker can identify that the deal was initially done with them; the JSE s legal team stated that it would be impermissible to attach the name of the market maker to the CFD (as done in the warrant market) because derivatives are issued by the JSE and not by participant It would however be possible to amend the contract specifications to stipulate that the contract must be closed with the member that the position was originally opened. In accordance with this proposed change to the contract specification. It is possible for the JSE to automate a daily file which will notify CFD participants of their counterparties to any previous CFD transactions. CLOSING REMARKS The meeting was closed by Donna Oosthuyse and she thanked everyone for their commitment and for attending the meeting. Page 9 of 9