Market Information Seminar12 October 2004

Allan Thomson

Introduction

Yield-X is the new interest rate exchange of the

JSE:

• A totally separate exchange for the trading,

clearing & settling of interest rate products

• Will trade a wide spectrum of interest rate

products

• Fulfills the need in the market for a

“one-stop-yield-shop”

• Encourages liquidity in South African

instruments

Background & Motivation for the JSE

• Since the acquisition of SAFEX in August 2001, JSE has looked to develop the derivatives market

• Since 2001 single stock futures have grown from 4% - 68% of financial derivatives income - JSE can grow a market where there is need

• Internationally turnover in interest rate products exceeds equity and derivative turnover, but not so in South Africa

• Lack of liquidity of interest rate products listed on SAFEX was fully investigated

• Key market players approached the JSE to introduce new products and grow the market

How?

Following the success of the JSE equities and futures trading systems, it was decided to trade both interest rate derivatives and spot bonds:

• 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

Trading of Spot Bonds• Initially, was not the JSE’s intention to

get involved with Spot Bonds

• Demand to value the Derivative against true market price of underlying security

• Initially, JSE will only trade Spot Bonds where there is a Derivative that is traded on-exchange

• The consequence of increased trade on derivatives is increased liquidity in spot bonds

The drive for trading of spot bonds, true price discovery of underlying securities

The drive for trading of spot bonds, true price discovery of underlying securities

Products

• j-Carries: Buy-sell back transactions

• j-Rods: RODI swaps against 3-month JIBAR

• j-Swaps: Bond look-alike swaps

• j-Notes: futures on notional swaps

• j-FRAs: Forward Rate Agreement

• j-Options: Options on futures

• j-Futures: Futures on bonds

• j-Bonds: Spot and forward bonds

(secondary listing of spot bonds on which the JSE currently has futures)

The following products will be tradable on Yield-X:

Systems design considerations

MatchingNEW

SAFEMSClearing Members

Trade for margin

Yield-X

Spot trades

Derivatives

Matching STRATESettlement

agents

Infrastructure considerations

• Utilise existing structures, including systems and processes as much as possible

• Minimise system changes

• Settle spot trades through existing infrastructures, STRATE(UNEXcor) and CSDPs

• Risk manage Spot Bonds through current clearing structures, SAFCOM and Clearing Members

• Guarantee settlement of spot bonds, driven by pre- and post-trade anonymity

• JSE will install software on all bond traders desks to enable electronic trading

The start of a consultative, re-iterative process with participants, including STRATE, CSDPs, and Clearing Members

The start of a consultative, re-iterative process with participants, including STRATE, CSDPs, and Clearing Members

Membership requirementsYield-X calls for a separate membership category requiring:

• One JSE right

• Connectivity

• A formal membership agreement to be submitted

• Compliance officer

• Settlement officer

• A sponsoring clearing member

• R200 000 capital for non-client broking members

• R400 000 capital for client-broking members

No costs to the clients for the first six months in order to encourage market participation

Target market

• Existing market participants on the buy and sell

side - fund managers, banks, corporate

treasuries, intermediaries

• New participants – smaller financial institutions,

BEE players, retail investors

• Retail investor would look to j-Swaps and j-

Notes to swap variable rates for fixed rates

• Local and global players encouraged

Benefits • Multi-lateral netting across all yield traded products

• Achieves one risk position for spot and derivatives

• No need for ISDA agreements

• One central counter-party (i.e. SAFCOM is buyer and seller to all trades)

• New and improved risk management model – Calm Methodology

• Applies spot margining only when risk exists

• Margin ensures guaranteed settlement and minimizes risk

• Amount of margin required is not that inhibitive

• Utilises securities lending, buy/sell backs to prevent failed trades

• Achieves T+3 settlement of spot trades

Software rollout

Testing

Training

Regulatory Approval

Test

15 November 2004Systems up

Early 2005Market Go-Live

Timelines

Questions

Assumptions:

Positions as at 13-Aug-2004Yield curve and bond yields as at same dateSettlement day is 18-Aug-2004Margining valuations for 16-Aug-2004Margins calculated as the one-trading-day Value-at-Risk

(VAR) of the position at 99.95% confidence level

"On the one day in 2000 when things are really bad, just how bad are they likely to be?"

Calm Results

• (NB: settlement margins are ignored. Once a deal has been irrevocably committed to, it falls out of the risk position.)

Instrument Position MarginSpot R153 +R1m 17,855

-R1m 20,847 Spot R157 +R1m 28,906

-R1m 32,920 Spot R186 +R1m 36,198

-R1m 41,679

Physical bonds

Instrument Settlement Position MarginR153 18-Nov-2004 +R1m 18,133

-R1m 20,033 18-Aug-2005 +R1m 15,736

-R1m 16,791

Forward bonds

Instrument Settlement Position MarginR153 18-Aug-2004 -R1mR153 25-Aug-2004 +R1m 105

R153 18-Aug-2004 -R1mR153 18-Aug-2005 +R1m 4,846

Carries

Instrument Settlement Position MarginR153 18-Aug-2004 -R1mR157 18-Aug-2004 +R2mR186 18-Aug-2004 -R1m 16,182

Compound spot positions

Instrument Settlement Position MarginNov 04 R153 -1 20,515

Nov 04 R153 -1Spot R153 04-Aug-2004 +R1m 575

Positions with futures

Instrument Settlement Position Marginj153 9.5 swap +R1m 18,226

j153 9.5 swap +R1mNov 04 R153 1 2,296

Positions with j-Swaps