How the Market Works 04052015 - Amazon S3...HOW THE MARKET WORKS – JUNE 2015 2 of 28 Disclaimer:...

HOW THE MARKET WORKS NZX Derivatives Market June 2015

HOW THE MARKET WORKS – JUNE 2015 2 of 28

Disclaimer:

The information provided in this document is a guide only and intended for general information purposes. It shall not constitute investment advice. In particular it does not constitute an offer, solicitation or recommendation to acquire or dispose of any investment or to engage in any transaction.

While reasonable care has been taken in the preparation of this document to provide details that are accurate and not misleading NZX Limited ("NZX"), its subsidiaries, directors, officers, employees, contractors and agents (a) do not make any representations or warranties regarding the use, accuracy, correctness, quality, reliability, completeness or timeliness of such information, and (b) shall not be responsible or liable for any use of any information contained herein under any circumstances. All descriptions, examples and calculations contained in this document are for illustrative purposes only.

To the maximum extent permitted by law, NZX and its subsidiaries, directors, officers, employees, contractors and agents shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided or omitted or from anyone acting or refraining to act on this information. NZX and its subsidiaries offer services to market participants and to participants in its clearing and settlement system. Those who desire to trade any products available on any NZX market or to offer and sell any such products to others or to become a participant in the clearing and settlement system, should consider the requirements of the applicable Rules and other legal and regulatory requirements relevant to them, as well as the associated risks, before doing so.

All intellectual property, proprietary and other rights and interests in this document are owned by NZX and its subsidiaries including, without limitation, all patent, registered design, copyright, trademark and service mark rights. No part of this document may be redistributed or reproduced in any form or by any means or used to make any derivative work without the written consent of NZX.

NZX Derivatives Market is a licensed market operated by NZX, a licensed market operator regulated under the Financial Markets Conduct Act 2013.

The "S&P/NZX 20 Capital Index" is a product of S&P Dow Jones Indices LLC or its affiliates ("SPDJI") and NZX Limited ("NZX"). Standard & Poor's® and S&P® are registered trademarks of Standard & Poor's Financial Services LLC ("S&P"); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"); NZX® is a registered trademark of NZX Limited and these trademarks have been licensed for use by SPDJI. S&P/NZX 20 Index Futures are not sponsored, endorsed, sold or promoted by SPDJI, S&P, Dow Jones or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P/NZX 20 Capital Index.

© NZX Limited 2015


CONTENTS

INTRODUCTION ............................................................................................................. 4

ABOUT NZX .................................................................................................................... 5

MARKET OVERVIEW ...................................................................................................... 6

THE TRADING SYSTEM .................................................................................................. 7

THE CLEARING HOUSE ............................................................................................... 10

RISK ............................................................................................................................... 15

MARKET SERVICES ...................................................................................................... 16

MARKET DATA ............................................................................................................. 17

CONNECTIVITY ............................................................................................................ 19

EXECUTING TRADES ................................................................................................... 23

FEES .............................................................................................................................. 26


INTRODUCTION

To support all new and potential derivative market participants NZX has created this guide explaining how the derivatives market works. Here you will find useful information on:

� The Trading System � The Clearing House � What is required to become a Clearing Participant � Risk Management � Market Surveillance � Market Data � Connecting to the Trading and Clearing platforms � How to trade on the NZX Derivatives Market � Trading, Clearing and Market Data Fees


ABOUT NZX

NZX provides high quality information, data and tools to support business decision making. We build and operate capital, risk and commodity markets and the infrastructure required to support them. We strive to make a meaningful difference to wealth creation for our shareholders, and the individuals, businesses and economies in which we operate.

PRINCIPAL ACTIVITIES The principal activities of NZX are:

� An operator and regulator of securities and derivatives markets and provider of trading, post-trade and data services for securities and derivatives, as well as the provider of a central securities depository. NZX is the only licensed securities exchange in New Zealand, and is also an authorised futures exchange. Its wholly owned subsidiary, New Zealand Clearing and Depository Corporation, is the operator of a designated settlement system under Part 5 of the Reserve Bank of New Zealand Act 1989.

� An online and hard copy publisher of information, news and data relating to the agriculture sectors in New Zealand and Australia.

� An operator of an electronic grain trading platform through Clear Grain Exchange, Australia’s only provider of online trading and clearing services for the buyers and sellers of grain.

� A provider of superannuation, KiwiSaver and managed investment products through fund manager SuperLife and a provider of passive funds management products through the Smartshares family of Exchange Traded Funds (ETFs) and the Smartshares KiwiSaver Scheme, smartkiwi.

� Market operator for New Zealand’s wholesale electricity market, under contract from the Electricity Authority, and the Fonterra Shareholders’ Market, under contract from Fonterra.

In addition, NZX has a 50% shareholding in LINK Market Services Limited, a securities registry business providing registry services to both listed and unlisted New Zealand companies.

LOCATIONS NZX’s offices are located across New Zealand and Australia. Our largest office is at the NZX Centre on Wellington’s waterfront. Our newest office is in Auckland, adjacent to the Britomart precinct. NZX’s Agri HQ is at Feilding and our Australian operation is based in Melbourne.

Contact details are available at: www.nzxgroup.com/contact


MARKET OVERVIEW

NZX launched the Global Dairy Futures and Options market in 2010 to help provide a useful tool for farmers, producers, and manufacturers, among others for management of the price risk inherent to the global dairy industry. Since the launch of Whole Milk Powder (WMP) Futures contracts, NZX has continued to expand its product offering with the introduction of Skim Milk Powder (SMP) and Anhydrous Milk Fat (AMF) Futures contracts in February 2011, WMP Options in November 2011 and Butter Futures in December 2014.

On 3 February 2014 NZX Dairy Futures Market was granted registration as a Foreign Board of Trade by US regulatory agency the Commodity Futures Trading Comission (CFTC) under the US Commodity Exchange Act. This allows NZX to permit direct access in the US to trade on the NZX market.

NZX launched an Equity Derivatives Market in June 2014, offering domestic and international investors the tools needed to manage and gain exposure to the New Zealand Capital Market.

The NZX Equity Derivatives Market offers Index Futures contracts based on the S&P/NZX 20 Capital Index and Exchange Traded Options contracts on selected stocks within the S&P/NZX 20 Capital Index.

NZX actively engages with participants on new products to list in the Equity, Dairy or additional derivative markets.

If you would like to request a new product or have ideas on viable risk management products please email Kathryn Jaggard, Head of Derivatives at [email protected]

DAIRY DERIVATIVE CONTRACT SPECIFICATIONS www.nzxfutures.com/dairy/contract_specifications

EQUITY DERIVATIVE CONTRACT SPECIFICATIONS www.nzx.com/Derivatives/market_information


THE TRADING SYSTEM

The platform that NZX uses for the provision of trading services is the NASDAQ OMX X-stream platform. For more than 40 years, NASDAQ OMX has been a leader in creating electronic technology solutions for the financial industry. The X-stream platform is the proven multi-asset trading solution that combines exceptional performance with exceptional adaptability.

The platform provides flexible connectivity options and can cater for both customers that want integration across multiple platforms through their own front end (via FIX 5.0 messaging) and for those that don’t have the same level of sophistication in the front office systems, via a ‘thick client’ front end.

The following diagram shows how external parties and other technology systems can interact with the X-stream platform:

Participants

Clearing System

X-stream Front End

Participant System

X-stream Core

Data Vendors (Bloomberg, Thomson

Reuters etc.)

FIX 5.0

Trade Feed FIX 5.0

Securities Feed

EOD File

FIX 5.0 & NZX Market Feed


ACCESSING THE TRADING SYSTEM Derivative Participants can interact with X-stream by:

� Direct access through the X-stream Trader Workstation � Through an accredited NZX Derivatives Participant � Through Direct Market Access (DMA) with a conformed Independent Software Vendor

(ISV) frontend.

DIRECT ACCESS Direct access to the market can be through either the NZX Network, a dedicated leased line or through internet VPN, connectivity details for these options is explained in the ‘Connectivity’ section of this document.

NZX DERIVATIVES PARTICIPANT Participants not accredited as a Trading Participant for the NZX Derivatives Market will need to enter into an aggreement with a Trading and Advising Firm for the execution of trades. A list of accredited Derivative Market Participants is available at: www.nzx.com/investing/find_a_participant

INDEPENDENT SOFTWARE VENDORS NZX’s open architecture gives Market Participants a wide range of front-end trading applications to choose from. Independent Software Vendors (ISVs) provide customers with a multitude of trading functionalities designed to accommodate a range of trading needs.

INDEPENDENT SOFTWARE VENDORS: � IRESS (Equity Derivatives): www.iress.co.nz � CQG (Dairy Derivatives): www.cqg.com

NZX is always keen to hear from ISVs or member developers who wish to write to the NZX Trading Engine. To find out more about becoming an ISV please email [email protected]

TYPES OF PARTICIPATION 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. The differing participant categories are explained below. For details on Clearing Participant types please refer to ‘The Clearing House’ section of this document.

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) - A Trading and Advising Firm is a Participant that has been accredited and approved by NZX for the purpose of providing advice to clients and trading in the derivatives market provided by NZX (the “NZX Derivatives Market”).

Bank Only Participant (Registered Banks only) - A Bank Only Participant is a Bank that has been accredited and approved by NZX as a Bank Only Participant for the purpose of providing advice to clients and trading in the NZX Derivatives Market.

Principal Book Only Dealer (Proprietary Trading) - A Principal Book Only Dealer is a Participant that has been accredited and approved by NZX for the purpose of trading on its own account on the NZX Derivatives Market. A Principal Book Only Dealer can not advise or trade on behalf of clients.

Technology Connecting Facility (Technology conduit to Market) - A TCF is a Trading Participant that has been accredited and approved as such by NZX for the purpose of facilitating trades for a TCF Client. A TCF Client is a Person who is regulated by an alternative regulator or has been exempted from such alternative regulation by NZX.

A TCF provides TCF Clients with DMA access to the NZX Derivatives Market. A TCF may not provide advice to clients, trade as principal or hold client funds.

All Trading Participants must either have clearing status or have a contractual arrangement with a General Clearing Participant.

ADVISING PARTICIPANT An Advising Firm is a Participant that has been accredited and approved by NZX for the purpose of providing advice to clients. Advising Firms are not able to directly enter and/ or settle trades and must enter into an agreement with a Trading and Advising Firm for the execution of trades.

INTRODUCING BROKER An Introducing Broker is a Participant that has been accredited and approved by NZX for the purpose of providing advice to clients. Introducing Brokers do not directly enter and/or settle trades and must enter into an agreement with a Trading and Advising Firm for the execution of trades.

For further information on becoming an accredited derivatives market participant please visit: www.nzx.com/services/become_a_participant


THE CLEARING HOUSE

ABOUT NZC New Zealand Clearing and Depository Corporation Limited (“NZCDC”) is a wholly owned subsidiary of NZX. NZCDC 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 NZC, which operates as a clearing house under a central counterparty model.

NZD is the operator of a central securities depository, 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.

For further information please visit: www.nzclearingcorp.com

SETTLEMENT SYSTEMS The core clearing and settlement software is the Tata Consulting Services (“TCS”) BaNCS system. The TCS BaNCS system is an integrated clearing house and depository system. The core modules utilised by NZCDC and its subsidiaries include:

� Core Services: including entity and user management, instruments, accounts and billing � Clearing: novation and netting of trades � Risk: margin and collateral management including derivatives mark-to-market � Settlement: Delivery versus Payment settlement of obligations and transactions � Registry Interface: seamless integration to external Registries of all listed NZX securities 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.


The following diagram shows how TCS BaNCS will interact with external parties and systems:

There are two ways to connect to BaNCS settlement system:

� BaNCS Screen Access: BaNCS screens are html and can be used with either Internet Explorer or Firefox.

� Back Office Vendor & BaNCS Message Interface: The majority of participants connect to BaNCS via the message interface which is ISO15022 based. Each Message Interface client must present a static source address that is predefined to the BaNCS system.

Data Feeds (ISO15022 & Other)

TCS BaNCS Trade Feed

(FIX)

NZX Data Systems

SPAN

Participants

TCS BaNCS Web Screen BOS Systems

ISO15022

X-stream (Trading)

Registries ESAS

(Cash)

Cash Msg (SWIFT)

Registry Gateway (GWII)

Securities Feed

EOD File

RBNZ NZ Clear

Depository

(SWIFT)


BACK OFFICE SYSTEM VENDORS Back Office System Vendors (BOS) develop custom interfaces to the New Zealand Clearing and Depository Limited’s settlement system. This enables clearing and depository participants to interact with the settlement system more easily and quickly. Clearing and depository participants use the settlement system for;

• Enquiries • Trade settlement • OTC • Risk management • Corporate action information • Securities custody • Direct access to external registries • Interface with NZ Clear Depository • Stock lending

Before entry to Market all back office system software goes through technical conformance to ensure integrity of the software.

Back Office System Vendors: � SecuritEase International – www.securitease.co.nz � Dion Global Solutions (RTGS) – www.dionglobal.com � GBST Holdings – www.gbst.com � Chelmer - www.chelmer.co.nz � Sungard – www.sungard.com Visit www.nzclearingcorp.com or contact [email protected] for more information.


BECOMING A CLEARING PARTICIPANT - 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 PARTICIPANTS (ICP) An ICP has the ability to clear and settle transactions through the Clearing House on its own behalf only.

GENERAL CLEARING PARTICIPANT (GCP) A GCP has the ability to clear and settle transactions for itself and/or on behalf of Trading Participants with whom it has a Clearing and Settlement Agreement.

DEFAULT CLEARING PARTICIPANT (DCP) A DCP has the ability to clear and settle transactions through the Clearing House on behalf of Trading Participants only. A DCP cannot clear and settle transactions on their own behalf, and must accept any genuine and reasonable request from a Trading Participant who seeks to enter into a Clearing and Settlement Agreement with the DCP.


APPLICATION PROCESS Applicants 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:

Please Note: This is not an exhaustive list and is designed to provide guidance to applicants. All applicants should ensure that they have read the Clearing and Settlement Rules and all required documentation is submitted with their application.

� Application Form � Responsible Person Application Form � Copies of all Licences, Consents and Approvals (Rule 2.2.1(c)) � Certificate of Incorporation (Rule 2.2.1(p)) � Management Structures (Rule 2.2.1(c)) � Corporate Structure � Constitution � Insurance (Rule 2.7.2(i)) � Evidence of Financial Position (Rule 6.15.2) � Overseas Activities (Rule 2.8) � Audited accounts for previous 5 years (Rule 2.7.2(h)) � Business Continuity Plan � Business Plan � Compliance Plan (Rule 2.7.2(a)) � Training Plan (Rule 2.7.2(c)) � Details of Payment and Accounting systems (Rule 2.2.1(f)) � Completion of BOS conformance testing � Completion of business functionality (streetwide) � Undertakings from Settlement Bank (Rule 2.2.1(j)) � Applicants Standard Clearing & Settlement Agreement (Rule 2.14) � Details of all Trading Participants that have executed the Agreement � Details of any agreements which have deviated from the Standard Agreement

If you are interested in learning more on application for designation as a Clearing Participant please refer to Section 2 of the Clearing and Settlement Rules.

For further information on becoming a Clearing Participant or to request an application form please email [email protected]


RISK As the central counter-party, NZC assumes counter-party risk for all trades executed on NZX Markets. NZC addresses counter-party risks through key risk management policies, including:

� Requiring Clearing Participants to have minimum financial resources and operational capability

� Requiring Clearing Participants to collateralise the risk of their open positions � Holding capital which can be used in the event of participant default, where margin

collected is not sufficient to cover losses.

Other risks faced by NZC include liquidity risk, operational risk, legal risk and settlement bank risk. These are mitigated through robust operational and financial processes and controls.

MARGIN NZC uses the SPAN© (Standard Portfolio Analysis of Risk) margining system, developed by the Chicago Mercantile Exchange (CME), the industry standard for derivatives margining. By using a defined set of parameters set by NZC, SPAN© assesses the maximum potential loss for a given portfolio in a normal market, and matches the initial margin required to cover this risk.

To view the latest SPAN© parameters please visit www.nzclearingcorp.com/risk-management

As an indication, Initial Margin requirements will be between 5-15% of the notional value of the futures contract. Therefore, if an investor was to buy 1 WMP Futures contract at US$4,500, they would be required to post between US$225-$675 as initial margin.

Daily settlement prices are calculated after market close each business day and are used as a reference for margin calls. If the futures price moves unfavourably participants are required to to post cash to settle the losses on a daily basis. If the price moves favorably participants will receive cash as the other side of the trade posts cash to settles their losses.

Daily settlement methods are published in the Derivatives Market Procedures document available at www.nzx.com/market-regulation/rules/derivatives-rules


MARKET SERVICES

SURVEILLANCE NZX’s Market Surveillance team have the key responsibility of monitoring real-time trading activity in the Derivatives Markets for compliance with the Derivatives Market Rules and Procedures. This monitoring may also raise issues concerning compliance with financial markets legislation, which NZX must then refer to the appropriate regulator. In addition, Market Surveillance is a key point of contact for Market Participants.

Key tools for performing real-time monitoring are the SMARTS surveillance system, the Trading System, and internally developed analytics using data from NZX’s historical database and market data providers such as IRESS and Bloomberg. Market Surveillance works closely with other operations areas and regulation.

In addition to monitoring for compliance with the Derivatives Market Rules and Procedures, Surveillance is responsible for the following tasks for the Derivatives Market:

� Managing price limits � Monitoring open interest � Approving off-market trades

o Block trades o Exchange for Physical (EFP) o Exhange for Swaps (EFS)

� The calculation and dissemination of final settlement prices.

If you have any trade related questions or would like to contact the Market Surveillance team please email [email protected] or call +64 4 495 2829

CLIENT AND MARKET SERVICES NZX’s Client and Market Services team (CMS) have the key responsibility of providing information to the Derivatives Market. This includes the calculation and dissemination of daily settlement prices, release and updating of expiry calendars and providing correspondance relating to market updates, market outages and events affecting securities.

In addition to providing information to the market, CMS have the responsibility of halting the market from time to time when applicable.


MARKET DATA There are three ways to receive market data from NZX:

� Connect directly via the Market Data Feed (MDF) � Subscribe to a Data Vendors already connected to NZX � Connect via FIX to the trading engine

MARKET DATA FEED NZX provides the Market Data Feed for Real Time or Delayed data. The MDF consists of messages that provide the following information:

� Corporate Action Messages � General Messages � Index Messages � Order Book Messages � Quote Messages � Trade Messages

The MDF is a network service, which provides an interface for receipt of the data over a TCP/IP connection. Participants may subscribe to this feed using the same network connection that is used for trading and settlement. The feed is accessed from servers in Auckland and Wellington NZ. The MDF requires a user id and password to be issued by NZX before a subscriber can access it. A MDF subscriber may have user ids allocated on both servers to allow them to switch from one to the other in the event of a failure. The SSL wrapping/unwrapping and the additional routing for the data mean it has somewhat higher latency, and with connections over the public Internet there are many more points of possible failure. Clients who don’t need their data to be up-to-the-second may very well prefer it. Since it doesn’t require arranging a circuit connection into the NZX it makes a good backup/DR option even for those clients who do have circuit connectivity.

If you wish to receive market data via MDF, please email [email protected] to request the latest MDF specification document.

NZX also provide other Data services, real time and delayed, which are delivered by the Internet or email. More information can be found at: www.nzx.com/products/nzx-info

DATA VENDORS To receive market data from an NZX conformed Data Vendor, please visit www.nzx.com/services/find_a_vendor


FIX The Financial Information eXchange (FIX®) Protocol has become the language of the global financial markets used extensively by buy and sell-side firms. The FIX Protocol language is comprised of a series of messaging specifications used in trade communications.

If you wish to receive market data via FIX messaging, please email [email protected] and request the latest FIX specification document.


CONNECTIVITY

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 Approved leased line providers include Telecom NZ, BT Radianz, IPC Networks and TNSI.

Typical system configuration for access via a dedicated circuit/line

Trading Participant

NZX WAN

Clearing House

Core Primary

Trading Engine

Core Primary

Clearing House

Core Secondary

Trading Engine

Core Secondary

Auckland

Wellington

Dedicated Line

NZX Infrastructure

Trading Participant Infrastructure


ACCESS VIA INTERNET VPN Typical system configuration for access via Internet VPN

Clearing House

Core Primary

Trading Engine

Core Primary

Clearing House

Core Secondary

Trading Engine

Core Secondary

Auckland

Wellington

NZX Infrastructure


Trading Participant

VPN


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:

Clearing House

Core Primary

Trading Engine

Core Primary

Auckland

Clearing House

Core Secondary

Trading Engine

Core Secondary

Wellington

Dedicated Line

NZX Infrastructure


Trading Participant

TCF Participant

Third Party Infrastructure

NZX WAN


CONNECTING 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

CLEARING HOUSE NETWORK TOPOLOGY

Core Primary

Main Engine, DBs

Auckland Carrier Grade Hosting

Wellington Carrier Grade Testing

DMZ Servers

Gateway, Web

SWIFT Network (SWIFT Traffic Only)

NZX WAN WWW

Secure VPN

Core Backup

Main Engine, DBs

PARTICIPANTS

NZX Operational / Monitoring

Systems

DMZ Servers

Gateways, Web


EXECUTING TRADES

ORDER TYPES 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 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

� 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.


ORDER DURATION The following duration types may be applied to a Firm (Limit) 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

EXCHANGE FOR PHYSICALS (EFP) AND EXCHANGE FOR SWAPS (EFS) 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

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.

Price limits are unique to the product being traded. To view price limits please refer to the Individual Contract Specifications available at www.nzx.com/Derivatives/market_information

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.


SESSION TYPES

SESSION DESCRIPTION

Initial Enquiry Log-on and subscribe to the market, no orders can be submitted. Orders may be withdrawn.

Pre-Open May enter, withdraw and/or amend orders, no orders will be matched.

Open Trading (Normal) May enter, withdraw and/or amend orders and orders will be matched according to the price time priority algorithm.

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.

Close Trading ceases. Orders can be amended (volume reduction only) or withdrawn but no orders may be entered.

Enquiry No orders may be entered or amended. Orders may be withdrawn.

Trading Halt

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.

Whole market Halt May enter, withdraw or amend orders. No orders will be matched. Minimum of 15 min pre-open session will occur prior to the market re-opening.

TRADING HOURS To view Derivatives Market Trading Hours and Market Holidays please visit www.nzx.com/Derivatives/trading_hours


FEES

TRADING For Trading related fees please see the NZX Participant Fee Schedule available at: www.nzx.com/services/participant_fees

CLEARING For Clearing related fees please see the NZCDC Participant Fees found at: www.nzx.com/services/participant_fees

For details in respect of Transaction Fees and Technology Fees, please visit: www.nzclearingcorp.com/additional-information

MARKET DATA For Market Data related please contact: [email protected]

CONNECTIVITY Connectivity Fees may apply in some instances. These are outlines in the NZX Participant Fee Schedule available at: www.nzx.com/services/participant_fees

NZX Fee Schedules are updated July each year.


For further information

To find out more about NZX's Derivatives Markets please contact:

Kathryn Jaggard Head of Derivatives Phone: +64 9 368 1242 Mobile: +64 27 234 3778 Email: [email protected]

NZX Limited – Auckland Level 7, Zurich House 21 Queen Street Auckland 1010, New Zealand PO Box 106 555

Phone: +64 9 368 1375 Fax: +64 9 379 0644

www.nzx.com

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