HOW THE NZX DERIVATIVES MARKET WORKS JULY 2010
CONTENTS NZX - WHO WE ARE 3 THE TRADING SYSTEM 4 THE CLEARING HOUSE 5 NZX PARTICIPANT CATEGORIES 7 CONNECTIVITY 8 TRADING ON THE NZX MARKET 12
DISCLAIMER The information contained in this document is a guide only. Participation in, and trading on any NZX Market is subject to compliance with the relevant Rules, and this document is not a substitute for those Rules. NZX, or NZCC, as appropriate, will determine, in its sole discretion, whether any Issuer or potential Issuer meets the requisite criteria to participate in any NZX Market or to clear via NZCC. This publication is for information only and does not constitute an offer, solicitation or recommendation to acquire or dispose of any investment or to engage in any other transaction. Those wishing either to trade in any products available at NZX or to offer and sell them to others should consider both their legal and regulatory position, including the relevant Rules, and the risks associated with such products before doing so. All information, descriptions, examples and calculations contained in this publication are for guidance purposes only, and should not be treated as definitive. No part of this publication may be redistributed or reproduced in any form or by any means or used to make any derivative work without written permission from NZX. NZX (including its subsidiaries, directors, officers, employees and contractors) shall not be liable (except to the extent required by law) for the use of the information contained herein however arising in any circumstances connected with actual trading or otherwise. NZX is not responsible for any errors or omissions contained in this publication. NZX Limited 2010 1
INTRODUCTION This guide is intended to support all new NZX Derivative market participants. In this guide you will find information on the NZX trading system, Trayport s GlobalVision; an introduction to the clearing house and what is required of participants to become a Clearing Participant as well as an outline of the application process; detailed information of how to connect to the trading platform and how to trade on the NZX market. NZX s strategy is to build and grow markets, with expertise applied across the securities, energy and agri-business sectors including the development of derivatives products. NZX Markets offers its clients an increasingly diverse set of markets related services, supported by world class infrastructure and real time information. We support companies and investors with strong technology and robust regulatory infrastructure, tailored solutions for companies, and comprehensive data and information services. 2 HOW THE NZX DERIVATIVES MARKET WORKS 2
THE TRADING SYSTEM The platform that NZX uses for the provision of trading services is Trayport s GlobalVision. The solution has been developed by Trayport Limited - a London based company whose energy trading platform is used by many energy trading infrastructure providers. GlobalVision provides the following main components: The platform provides flexible connectivity options and can cater for both customers that want integration across multi platforms through their own front end (via FIX 4.4 Messaging) and for those that do not have the same level of sophistication in the front office systems (via a thick client Front End). Core Services: including users and group management, instruments; Support for equities and derivatives including futures and options; Messaging Gateway based on the FIX 4.4 protocol (www.fixprotocol.org) The following diagram shows how GlobalVision will interact with external parties and their technology systems: Participants Participant Systems GlobalVision Front End FIX 4.4 Trayport Trayoprt GlobalVision Trade Feed (FIX 4.4) Securities Feed (EOD File) Clearing System FIX 4.4 & NZX Market Feed Data Vendors (Reuters, Bloomberg, Registries etc) 3
THE CLEARING HOUSE About NZC New Zealand Clearing and Depository Corporation Limited (NZCC) is a wholly owned subsidiary of NZX. NZCC in turn owns New Zealand Clearing Limited (NZC) and New Zealand Depository Limited (NZD). All trades on NZX s markets are cleared and settled by New Zealand Clearing Limited (NZC), a wholly owned subsidiary of NZX Limited and which operates as a clearing house under a central counterparty (CCP) model. An associate company, New Zealand Depository Limited (NZD) is the operator of a central securities depository (CSD) which forms part of the clearing house system and provides for centralised recording and transfer of beneficial interests in securities and maintains accounts against which derivatives positions are recorded. As central counterparty, NZC replaces trade counterparts and becomes the buyer to each seller and the seller to each buyer. NZC therefore assumes counterparty risk for its participants. NZX Participation Requirements A Clearing Participant must be a company and meet specific criteria, including meeting minimum capital requirements on an initial and ongoing basis. Applicants must possess the personnel, facilities, procedures and controls, accounting systems and back office systems to manage transactions and meet their settlement obligations. An applicant must also have a satisfactory regulatory record. In cases where an applicant is already regulated in a recognised foreign jurisdiction, this existing regulatory status will in most cases satisfy NZX s participation requirements. Clearing Participants fall into three main categories and can be eligible to clear all products if they choose to: Individual Clearing Participant (ICP) An ICP clears and settles transactions only for itself and will be a participant in any market operated by NZX. General Clearing Participant (GCP) A GCP clears and settles transactions for itself and/or other market participants who are not Clearing Participants. Default Clearing Participant (DCP) A DCP is a category of GCP that maintains technology to support all products offered by NZX and is required to be available to clear and settle trades for any participant in NZX markets. Application Process Applicants for participation must complete an application form specifying the participant category(ies) they are seeking approval for. An applicant for GCP status must also identify, where appropriate, the NZX Market Participants for whom it will clear. An applicant must nominate a natural person who will act as Responsible Person. The role of the Responsible Person is to represent the Clearing Participant in dealings with NZC and to procure the Clearing Participant to comply with the Rules at all times. The Responsible Person should be an executive who is responsible for the control, leadership and influence of the Clearing Participant s business. Information that must be included with the application includes: Evidence of current financial position; Details of any potentially adverse events, including regulatory investigations and legal proceedings threatened or pending; Information regarding the applicant s technology, accounting and payment systems; and A company profile, including details of the applicant s corporate and management structure. 4 HOW THE NZX DERIVATIVES MARKET WORKS
THE CLEARING HOUSE CONTINUED For full details of the application process and information requirements please refer to the External Guide for Applicants. including derivatives mark-to-market; Settlement: Delivery versus Payment settlement of obligations and transactions. Technology The core clearing and settlement software is the Tata Consulting Services ( TCS ) BaNCS system. The TCS BaNCS components utilised by NZC include: The platform provides flexible connectivity options and can cater for those customers who desire integration with their own back office systems (via ISO15022 messaging) and also for those who wish to use a browser based user interface. Core Services: including entity and user management, instruments, accounts and billing; Clearing: novation and netting of trades; Risk: margin and collateral management, The following diagram shows how TCS BaNCS will interact with external parties and systems: Participants BOS Systems TCS BaNCS Web Screen ISO15022 Trayport (Trading) Trade Feed (FIX) TCS BaNCS Data Feeds (ISO15022 & Other) NZX Data Systems Registry Gateway (GWII) SPAN Cash Msg (SWIFT) Registries Registries ESAS (RBNZ Cash) 5
NZX PARTICIPANT CATEGORIES NZX Derivatives Market Participants are accredited and approved by NZX for the purpose of providing client advice and trading in the markets operated by NZX as principal or on behalf of clients. Trading Participants Trading Participants are able to access NZX s trading system to enter orders into the derivatives market operated by NZX either on their own behalf or on behalf of a client. Trading Participant categories are: Trading and Advising Firm (Broker) - provides advice and facilitates trading on NZX s derivatives market, either as principal or on behalf of its clients. Bank Only Participant (Registered Banks only) - a specific category of Trading and Advising Firm, available only to Registered Banks. All Trading Participants must either have clearing status or have a contractual arrangement with a General Clearing Participant. Advising Participant An Advising Participant may advise clients and hold client funds, but may not execute trade orders for clients. Introducing Broker An Introducing Broker may advise clients and refer clients to Trading Participants for execution, but does not have the ability to hold client funds. For further information please refer to the Rules and Procedures of the Derivatives Market. Principal Book Only Dealer (Proprietary Trading) - trades solely as principal on NZX s derivatives market. Technology Connecting Facility (Technology conduit to Market) - provides third party connectivity infrastructure to NZX s derivatives market. The TCF will have a Clearing and Settlement Agreement with a Clearing Participant whereby the TCF does not hold client funds directly. 6 HOW THE NZX DERIVATIVES MARKET WORKS
CONNECTIVITY CONNECTIVITY TO THE CLEARING HOUSE TCS BaNCS and the NZC/NZD systems operate within the established and proven NZX core broker network. Connectivity is based on NZX (and global) exchange standard practices. The network solution provides multiple redundancy components. There are three physical connection options available for participants: Dedicated Circuit: Browser and Messaging SWIFT: Messaging Only Secure Internet VPN: Browser and Messaging New Zealand Clearing Corporation Network Topology 7
CONNECTIVITY CONTINUED Connecting to the Trading Platform The same infrastructure can be used if accessing both the clearing house and the trading platform. The infrastructure for connecting includes the following components: Dual path hardware configuration i.e. dual network endpoints/routers, dual switches, dual CheckPoint firewalls DMZ Zone is visible to participants and outside world only Core Trading and Office Systems Zone only visible to NZX operational support staff, not the outside world Web VPN connectivity via CheckPoint firewall A Conformance/Test Environment (replica of production) is provided. Access via dedicated leased line Typical system configuration for access via a dedicated circuit/line: 8 HOW THE NZX DERIVATIVES MARKET WORKS
CONNECTIVITY CONTINUED Access via internet VPN Typical system configuration for access via internet VPN: 9
CONNECTIVITY CONTINUED Technology Connecting Facility Participants ( TCF ) access to NZX Technology Connecting Facility ( TCF ) Participants provide connectivity to NZX s markets. TCF s are regulated by NZX and their infrastructure must meet a conformance standard in order to offer NZX market connectivity to third parties. The diagram below shows a typical connectivity layout when connecting to NZX via a TCF Participant: 10 HOW THE NZX DERIVATIVES MARKET WORKS
TRADING ON THE NZX MARKET The default in the Trading System order entry window is a Firm Order with a Good Til Cancelled duration. When entering Orders into the Trading System, participants must use one of the following Order types: Market Orders are Orders entered into the central order book that are executed at the best price available (Trading Participants do not specify a price value for the Market Order) until all available volume has been traded. Any residual volume left after part of a Market Order has traded is automatically deleted by the Trading System A Firm Order (commonly known as a limit order) is an order placed onto the market at a specified quantity and price and executed at that price or better, if obtainable. Any residual volume of the Firm Order unable to be filled immediately, will remain on the central order book until it is withdrawn or traded (unless a time duration is added which prevents the untraded part of the Firm Order from being retained) A Withheld Order is an order that is not visible to others on the order book and that does not enter the Market until the order has been submitted ( firm order ) by the Participant. It will then enter the Market as a Firm (Limit) order A Stop Order with a price is an order to buy or sell a contract when the market value of that contract reaches the price specified in the order ( Stop Price ). The order is initially untradeable and only visible to the submitter and to the Participant on whose behalf the submitter has entered the order. The order remains in place until a trade takes place at the Stop Price specified in the order. Once a trade occurs at the Stop Price, the order is submitted to the Market (the Stop Price is removed from the order) and the order remains in the market as a normal Firm Order, until it is dealt, cancelled (deleted) or expires. A Firm Order with a fill type of fill or kill is an order to fill a transaction immediately and in its entirety and if the entire order cannot be filled immediately the order is automatically deleted A Firm Order with a fill type of fill and kill causes the order to be executed at that price or better up to the volume of the fill and kill order with any residual volume from the fill and kill immediately cancelled 11
TRADING ON THE NZX MARKET CONTINUED Order Durations The following types of duration may be entered for an Order: A Good For Day Order will remain on the order book until filled / cancelled or up to the end of the Trading Day the order was entered A Good Til Date/ Time Order will remain on the order book until filled / cancelled, or up to the date/time specified. The maximum timeframe permitted under such an order is 48 days (inclusive) after the date of the order; and A Good Til Cancelled Order will remain on the order book until it is deleted, traded or expired. The maximum timeframe permitted under such an order is 63 days (inclusive) after the date of the order. Wholesale and Pre-negotiated Trades Block Trades occur when approved participants or clients engage in pre-trade discussions to arrange large size transactions away from the electronic trading system at prices mutually agreed upon. 1 An EFS allows a futures position to be exchanged for an OTC swap that serves as the actual underlying commodity in the transaction. 1 Cross Transactions - A cross transaction occurs when two orders of opposite sides originating from within the same participant or between two different participants, are intentionally executed against each other on the central order book, as a result of pre-negotiation. Cross transactions are subject to a minimum time period whereby matching business may only be entered into the matching engine after the time period, as specified in contract specifications, has elapsed. Price Limits All incoming orders into the central order book are subject to price limits to assist in preventing the execution of orders with pricing errors. Any orders submitted outside of these price limits in the relevant contract month will automatically be rejected by the trading system and the relevant trader immediately notified. Exchange for Physicals (EFPs) and Exchange for Swaps (EFSs) An EFP is a pre-negotiated trade in which counterparties simultaneously exchange futures positions with a corresponding physical commodity position in the underlying market. 1 1 One of the counterparties is required to submit details of the trade to the exchange for approval. Once approved the exchange will publish details of the trade to the market. 12 HOW THE NZX DERIVATIVES MARKET WORKS
THE TRADING DAY SESSION DERIVATIVES MARKET NZX WMP FUTURES (NZST/NZDST) Initial Enquiry Log-on and subscribe to the market, no orders can be submitted. Orders may be withdrawn. 07:00 hrs Pre-Open May enter, withdraw and/or amend orders, no orders will be matched. 07:30 hrs Open Trading (Normal) May enter, withdraw and/or amend orders and orders will be matched according to the price time priority algorithm. 08:00 hrs Pre-Close Shortly before close, the system sends a message to all customers subscribed to the market, advising that the market will close in 2 minutes. Same functionality as Open Trading is applicable. 15:58 hrs Close Trading ceases. Orders can be amended (volume reduction only) or withdrawn but no orders may be entered. 16:00 hrs Enquiry No orders may be entered or amended. Orders may be withdrawn. 16:30 hrs Trading Halts Similar to Pre-Open session - orders may be entered, withrawn or amended. When the trading halt is lifted, the Open algorithm is applied before the market transitions to Open session. As determined by NZX Whole Market Halts View only. Minimum of 15 min pre-opening session will occur prior to market reopens. As determined by NZX 13