New rules launched for new Derivatives Market Default
March 15, 2013
JOHANNESBURG, 14 MARCH 2013. Safcom - the clearing house for
the JSE’s derivatives market – today announced the promulgation of the rules
enabling the establishment of a default fund intended to add another layer of
investor protection in the exchange traded derivative market. The need for the
fund arises from the financial crisis of 2008, which prompted coordinated
efforts to improve global market stability. Internationally, derivatives markets
must now have prefunded resources to provide capital (in addition to the
collateral posted by participants) in case a clearing member defaults. The fund
aims to reduce the impact of this risk and thus limit the liability for Safcom’s
clearing members, most of whom are banks. Safcom calls for approximately
R14billion in margin to cover trading valued at R350 billion per day.
The proclamation of the new rules follows the recent signing of a
temporary legal agreement by all clearing members and paves the way for a new
best of breed risk management process for the SA derivatives market, one which
is aligned to global guidelines set by the International Organisation of
Securities Commission (IOSCO) and compliant with Basel III requirements.
structure of the new fund works on the basis that the nine clearing members,
together with the JSE on behalf of Safcom, will pay collateral into the default
fund (a legally separate entity) and invested as per an investment mandate
agreed by Safcom. Each clearing member’s contribution to the fund is calculated
according to the risk that each member brings to the central counterparty (CCP).
The size of the fund and proportional contributions will be recalculated by
Safcom quarterly and the total size of the fund will be disclosed to the market.
Under the new rules of the pre-funded limited liability default fund,
Safcom now has a clearly defined and transparent full risk waterfall with four
layers of defence built into the system for default purposes; namely initial
margin of the defaulting clearing member, the defaulting clearing member’s
contribution to the default fund, SAFCOM’s contribution to the fund and lastly,
non-defaulting members’ contributions to the fund.
This replaces the
previous model whereby Safcom’s members where liable for all losses incurred in
the default of another clearing member. If the losses depleted the defaulter’s
initial margin contributions, then the other members were obliged to step in to
support the CCP with their capital to the very last cent if required.
“For the JSE, this is a big step towards overhauling the risk process in
the SA exchange traded derivatives market and raising the profile and
credibility of this market, particularly given that trading decisions are
increasingly being made based on the costs of doing that trade,” says Leila
Fourie, director of post-trade services at the JSE. “For the first time, Safcom
effectively has “skin in the game” as it is now legally bound (as are other
clearing members) to contribute to reducing the impact of the risks faced by
clearing members. This ultimately adds additional layers of protection for both
its members and ultimately investors.”
The new fund reduces systemic
risk as well as clearing members’ exposure to counterparty credit risk when
clearing through Safcom. As a result, clearing members will need to hold less
capital for centrally cleared exposures in terms of Basel III. The Basel
Committee on Banking Supervision allows banks to apply a lower risk weight to
trades cleared through a CCP that complies with the IOSCO best practice
guidelines. IOSCO recommends that clearing houses should hold the necessary
financial reserves, such as additional collateral or a pre-funded default
arrangement to cover credit exposures from participant defaults in extreme but
credible market conditions.
The new rules govern the use of the fund,
the calculation of the required size of each member’s contribution and the
investment and maintenance and governance of the fund itself.
default fund applies to all markets for which Safcom provides a clearing service
and hence default in one market will consequently be funded by clearing members
across all markets. Due to the size of the different markets and trading profile
of clearing members, this was considered appropriate and more capital efficient
than having a separate fund for each market.
Following on from Safcom
becoming the first CCP in the world to qualify for IOSCO compliance in November
last year, the new default fund is another big step towards the JSE’s plans to
launch its own onshore OTC clearing service.
As South Africa’s only full service
securities exchange, the JSE connects buyers and sellers in four different
financial markets, namely equities, equity derivatives, commodities derivatives
and interest rate instruments. The JSE Ltd offers the investor a first world
trading environment, with world class technology, surveillance and settlement in
an emerging market context. It is amongst the top 20 largest equities exchanges
in terms of market capitalisation in the world.
For further information,
please visit www.jse.co.za
Roz Thomas/Victoria Williams
Corporate Communications Consultants
Tel: + 27 11 463 2198
Email: email@example.com / Victoria@corpcom.co.za
ON BEHALF OF:
Director of Post
Tel: + 27 11 520 7000