Additional information about the Currency Derivatives Market
Following the success of the JSE equities and futures trading systems, it was decided to trade the interest rate and currency derivatives products:
- electronically, with automated trade matching of firm orders,
- through a central order book, with
- Anonymous trading and settlement assurance, with
- Easy access, resulting in
- Clear transparency of price and depth of market, leading to
- Efficient price discovery, thereby
- Creating an honest market with a high level of integrity,
- A central counterparty to all trades,
- Multilateral netting for all products.
thereby creating the Interest Rate & Currency Derivatives Markets.
The JSE believes that South Africa deserves a world-class interest rate market. The Currency Derivatives Market provides ease of access, ease of use and cost effectiveness in an environment that encourages a high level of transparency and integrity. The Currency Derivatives Market brings a greater range of products to the market and allows for the participation of new entrants, which, in turn will generate increased liquidity and market efficiency. Altogether, broader, cheaper capital markets will translate into benefits for all stakeholders and the South African economy at large.
Overview
The Currency Derivatives Market system allows for order driven interest rate product trading in a user-friendly environment. It also creates a full and comprehensive "cradle to grave" (initial order to final settlement) audit trail in a fully regulated environment. Regulation is within the ambit of the JSE acting as a Self Regulating Organisation within the Securities Services Act SSA, co-regulated by the Financial Services Board.
System Requirements
JSE User Connectivity to the Currency Derivatives Market system
Currency Derivatives Market infrastructure
The JSE is leveraging off existing but improved infrastructures and is utilising a hybrid of proven and successful systems in order to trade, clear and settle Currency Derivatives Market products.
- The trader enters an order on the front end.
- Derivatives trades are matched on a derivatives automated matching engine.
- Derivatives are cleared and risk managed by the clearing system through to expiry
- Spot bonds are matched on a spot bond automated trading engine.
- Spot bonds are sent to STRATE for settlement on a T+3 rolling contractual settlement basis.
- Spot bonds are reported on the clearing engine for clearing and risk management purposes until settlement of the spot bond.
- Deliver versus Payment of securities and cash is handled by the settlement agents.
- The status of spot bonds are monitored.
- On final settlement spot bonds are removed from the clearing system and margins are returned to the clearing members
- Margin requirements are sent and collected from the clearing members.
Trading Model
At the heart of the market is the central order book where all main board buy and sell orders are stored until they are executed on the basis of price/time priority. Traders are able to see depth of the order book to the best nine bids and offers.
Two order types may appear in the order book, namely "limit orders" and "market orders". Limit order types stipulate both a volume to be bought or sold and a limit price. Limit orders always execute at the specified limit or better. Market order types only stipulate a volume and do not specify any limit price. Thus, they will execute against as many orders on the other side of the book as are necessary to fill the order.
Both market orders and limit orders can be subject to either execution constraints or validation constraints. There are two possible execution constraints, namely "execute and eliminate" or "fill or kill".
Execute and eliminate orders are matched immediately and as fully as possible against the existing orders on the order book. Any volume that cannot execute against existing orders is immediately cancelled.
Fill or kill orders are either matched immediately and fully against existing orders on the order book, or the entire order is cancelled.
Another notable feature of the trading model is the adoption of both pre and post-trade anonymity. This will enhance market fairness. Member details will not be disclosed to the market or counterparties to the trade upon trade execution. The existence of a central counterparty and risk management obviates the need for bilateral counterparty limits.
Additional points to note about the Currency Derivatives Market trading model:
- Dealing capacity: Orders can be submitted in either an agent or principal capacity and will be in price/time priority
- Order modification: The number of contracts on an active order can be reduced without losing price/time priority; any other fields can only be modified by suspending or deleting and re-submitting the order.
- Lot size: There will be a lot size of one
- Tick size: There will be a tick size of 0.01%
- Quotation: In yield
- Currency: ZAR
The JSE's Surveillance Division is responsible for the surveillance of market activities and the members' accounting records to ensure compliance by JSE members with the Securities Services Act SSA, JSE rules, directives and special gazettes and JSE Committee decisions. They also monitor capital adequacy and risk operations of the members and conduct special investigations into market or stockbroker activities.
In the interest of Interest Rate Market market transparency, sound surveillance is imperative. Several system tool developments have been instigated to strengthen the surveillance supervision of Interest Rate Market. The market will operate on both pre- and post-trade anonymity.
SAIFM
South African Reserve Bank
STRATE
World Federation of Exchanges