The JSE's International Derivatives (IDX) provides South African investors with an opportunity to trade and gain exposure to the price movements of internationally listed equities (shares) and potentially internationally recognised indices. The JSE's Equity Derivatives Market (SAFEX) will list, provide a trading platform, regulate, risk manage and clear cash settled equity derivatives (initially futures and at a later stage options) on internationally listed shares (e.g. BP, Vodafone, Glaxo Smith Kline, Rio Tinto and Nokia) that are not listed on the JSE. This exciting initiative will allow local investors simple and effective access to international markets, without exchange control restrictions or the counterparty risk associated with unregulated over-the-counter trading.
Overview of Single Stock Futures
Single Stock Futures (SSFs) have taken the world by storm and the JSE was recently ranked number one in
the world in terms of volume (number of contracts traded). SSFs are futures contracts on individually listed shares. A futures contract is a legally binding agreement that gives the investor the right to buy or sell an underlying listed share at a fixed price on a future date. SSFs are traded on an exchange, in South Africa's case, the JSE.
They are standardised contracts with set specifications regarding size, expiry dates and tick movement (the minimum upward or downward movement in the price of a security). Investors are required to pay an initial margin ('good faith' deposit) upfront when trading in SSFs. Interest is earned daily on this margin which is held by the exchange. When positions are closed the initial margin plus interest is paid back. The value of an SSF contract is equal to the underlying share's futures price.
For example, if company A is trading at R20 then holding one futures contract is equivalent to investing R20 in that company. However, the investor is only required to pay an initial margin of R2 (approximately 10% - 15% of the value of the underlying shares). Due to this gearing, SSFs provide exposure to the underlying share at a much lower cost than trading in the underlying share.
A contract holder can exit a futures contract before the expiry date (this is called closing your position) or keep
the contract until the expiration date.
Who uses Single Stock Futures?
Derivatives have two main users: hedgers and speculators. Hedgers seek to reduce risk by protecting an existing
share portfolio against possible adverse price movements in the physical (or spot) market. Hedgers have a real interest in the underlying shares and use futures as a means of preserving their performance. Speculators use SSFs in the hope of making a profit on short-term movements in the futures contract price. They often buy and sell derivatives contracts in their own right without transacting in the underlying share. Speculators may have no interest in the underlying shares other than taking a view on the future direction of its price.
Trading in International Derivatives
Like all securities listed on the JSE you have to trade through a JSE member (broker). You can contact the Cortex Derivatives trading division on 011 451 0204 or info@cortexderivatives.co.za . International Derivatives are traded on the same equity derivative platform as all other equity derivative products. If you are already registered to trade on the JSE's Equity Derivatives Market you will also be able to trade International Derivatives through your broker.
Trading Positions
When trading in futures contracts there are two positions that an investor can take:
Long Position -Go Long - Buy Future
Short Position -Go Short - Sell Future
When you 'go long' you are buying exposure to the underlying share because you believe the price of the
underlying share will increase. If it does so by the time the contract expires (or before the contract expires),
you will be able to sell or 'close' your position, thereby realising a profit.
You will 'go short' if you believe the price of the underlying share will decrease, thereby realising a
profit if the futures price goes down over the life of the contract.
Margining
International Derivatives will follow the same margining process used in the Equity Derivatives Market. There
are two types of margins: initial margin and variation margin.
- Initial margin
When a position is opened (either long or short), the investor is called on to pay an initial margin. The initial
margin is approximately 10% - 15% of the value of the underlying share, this is an estimate of the maximum
amount that can be lost in one day. This amount remains on deposit as long as the investor has an open
position. It attracts a market related interest rate, which is refunded to the investor once the position is closed
out, or the contract expires. The initial margin protects investors from counterparty risk (the risk associated
with one of the initial parties defaulting).
Example:
A deal was concluded whereby a client of Broker ABC bought an International Derivative Single Stock Future (IDX SSF) contract to the value of R1700. Broker ABC would also have arranged a seller of one contract at this price. The JSE would require an initial margin deposit of approximately R170 from both buyer and seller of the contract.
- Variation margin
This can be seen as your daily profit or loss. At the end of each trading day, contracts are Markedto-Model (M-t-M). The exchange independently calculates a fair value (or closing price) for each contract. The difference between your traded price, if traded on the day, and the previous day's M-t-M, if this is a brought forward position, is calculated as profit or loss, payable to the clearing house via the clearing member. This payment is called variation margin.
Closing a position
An IDX SSF contract holder has two options, either wait until expiry or arrange with his/her broker to close
the position before expiry. The official close out price (expiry price) will be determined by the JSE on the
expiry date of the contract. The holder also has the option to roll (close current contract and open a new
contract for a future expiry date) his/her position on expiry to the next expiry date. Expiry dates are contract specific, however the JSE recommends that they are aligned with the currency derivatives market.
International Derivatives Dividend Futures
When a company pays a dividend its share price usually declines by a corresponding amount. The reason for this price decline is that part of the company's available capital has now been paid back to shareholders.
When you buy an IDX SSF the exchange has already estimated the dividends that will be paid prior to expiry
and removed them from the price. You can limit this estimation risk (the risk associated with an incorrect
calculation by the exchange or liquidity provider) by buying a dividend future along with your IDX SSF.
Some Liquidity Providers will require you to purchase a dividend future when purchasing an IDX SSF. This
helps to ensure that neither party loses out on the transaction due to incorrect dividend estimations.
Clearing and Guarantee
All trades on the JSE's Equity Derivatives Market are M-t-M, margined daily and guaranteed by the clearing
house.Due to the clearing house guarantee and our regulatory framework, investing on the JSE exposes
the investor to less counterparty risk than investing in over-the-counter products. The clearing house
guarantee and the daily margining process ensures that investors' margins are safer from the risk of a
defaulting counterparty.
Benefits of International Single Stock Futures
- Diversify offshore
Investing internationally is an important part of building a diversified investment portfolio. By
investing in IDX SSF's investors can not only sharein the growth of the world's largest and profitable
companies but also reduce overall investment risk;
- Convenience
IDX SSFs provides a convenient entry point into foreign markets without the restrictions and
paperwork of exchange control regulations or the expense of setting up a foreign trading account.
When investing directly into a foreign market there are complicated securities laws, levies and taxes. If
you go through a third party manager there are additional costly fees. The JSE's International
Derivatives initiative eliminates all these obstacles.
- Invest offshore without using or minimising your Offshore Allowance
As an individual or corporate entity investing in International Derivatives does not use any of your offshore
investment allowance. As a registered asset manager,IDX products do not require Reserve Bank permissions
but they do fall under your prudential foreign portfolio limits. The IDX liquidity providers will be responsible for
buying the underlying shares. The JSE will then issue an IDX SSF contract on the underlying asset enabling
investors to get foreign exposure effectively and easily through a local broker.
Contract Specification Example
|
| Product |
International Derivative (Single Stock Future) |
| Underlying Equity |
Vodafone Group PLC |
| Underlying Listed Exchange |
London Stock Exchange (LSE) |
| Underlying Sector Code |
Telecommunications |
| Part of Underlying Index |
FTSE100 |
| Underlying ISIN |
GB00B16GWD56 |
| JSE Nutron Code |
VODG |
| Contract size / Nominal |
1 x The underlying equity price in ZAR |
| Expiry dates and times |
16h30; 2 days prior to the third Wednesday of March, June, September and December or the previous business day if a public holiday. |
| Quotations |
Price per underlying equity to two decimals in ZAR. |
| Minimum Price Movement |
0.01 ZAR |
| Expiry Valuation Method |
The official close out price determined by the JSE will be used. |
| Settlement Method |
Cash settled |
| Trading Hours |
08h30 - 17h30 |
| JSE Fees |
2 Basis points of nominal value |
| Daily M-t-M closing price |
The official daily closing price will be determined by the JSE between 17h00 and 17h15 |
The JSE's International Derivatives (IDX) provides South African investors with an opportunity to trade and gain exposure to the price movements of internationally listed equities (shares) and potentially internationally recognised indices. The JSE's Equity Derivatives Market (SAFEX) will list, provide a trading platform, regulate, risk manage and clear cash settled equity derivatives (initially futures and at a later stage options) on internationally listed shares (e.g. BP, Vodafone, Glaxo Smith Kline, Rio Tinto and Nokia) that are not listed on the JSE. This exciting initiative will allow local investors simple and effective access to international markets, without exchange control restrictions or the counterparty risk associated with unregulated over-the-counter trading.
Overview of Single Stock Futures
Single Stock Futures (SSFs) have taken the world by storm and the JSE was recently ranked number one in
the world in terms of volume (number of contracts traded). SSFs are futures contracts on individually listed shares. A futures contract is a legally binding agreement that gives the investor the right to buy or sell an underlying listed share at a fixed price on a future date. SSFs are traded on an exchange, in South Africa's case, the JSE.
They are standardised contracts with set specifications regarding size, expiry dates and tick movement (the minimum upward or downward movement in the price of a security). Investors are required to pay an initial margin ('good faith' deposit) upfront when trading in SSFs. Interest is earned daily on this margin which is held by the exchange. When positions are closed the initial margin plus interest is paid back. The value of an SSF contract is equal to the underlying share's futures price.
For example, if company A is trading at R20 then holding one futures contract is equivalent to investing R20 in that company. However, the investor is only required to pay an initial margin of R2 (approximately 10% - 15% of the value of the underlying shares). Due to this gearing, SSFs provide exposure to the underlying share at a much lower cost than trading in the underlying share.
A contract holder can exit a futures contract before the expiry date (this is called closing your position) or keep
the contract until the expiration date.
Who uses Single Stock Futures?
Derivatives have two main users: hedgers and speculators. Hedgers seek to reduce risk by protecting an existing
share portfolio against possible adverse price movements in the physical (or spot) market. Hedgers have a real interest in the underlying shares and use futures as a means of preserving their performance. Speculators use SSFs in the hope of making a profit on short-term movements in the futures contract price. They often buy and sell derivatives contracts in their own right without transacting in the underlying share. Speculators may have no interest in the underlying shares other than taking a view on the future direction of its price.
Trading in International Derivatives
Like all securities listed on the JSE you have to trade through a JSE member (broker). You can contact the Cortex Derivatives trading division on 011 451 0204 or info@cortexderivatives.co.za . International Derivatives are traded on the same equity derivative platform as all other equity derivative products. If you are already registered to trade on the JSE's Equity Derivatives Market you will also be able to trade International Derivatives through your broker.
Trading Positions
When trading in futures contracts there are two positions that an investor can take:
Long Position -Go Long - Buy Future
Short Position -Go Short - Sell Future
When you 'go long' you are buying exposure to the underlying share because you believe the price of the
underlying share will increase. If it does so by the time the contract expires (or before the contract expires),
you will be able to sell or 'close' your position, thereby realising a profit.
You will 'go short' if you believe the price of the underlying share will decrease, thereby realising a
profit if the futures price goes down over the life of the contract.
Margining
International Derivatives will follow the same margining process used in the Equity Derivatives Market. There
are two types of margins: initial margin and variation margin.
- Initial margin
When a position is opened (either long or short), the investor is called on to pay an initial margin. The initial
margin is approximately 10% - 15% of the value of the underlying share, this is an estimate of the maximum
amount that can be lost in one day. This amount remains on deposit as long as the investor has an open
position. It attracts a market related interest rate, which is refunded to the investor once the position is closed
out, or the contract expires. The initial margin protects investors from counterparty risk (the risk associated
with one of the initial parties defaulting).
Example:
A deal was concluded whereby a client of Broker ABC bought an International Derivative Single Stock Future (IDX SSF) contract to the value of R1700. Broker ABC would also have arranged a seller of one contract at this price. The JSE would require an initial margin deposit of approximately R170 from both buyer and seller of the contract.
- Variation margin
This can be seen as your daily profit or loss. At the end of each trading day, contracts are Markedto-Model (M-t-M). The exchange independently calculates a fair value (or closing price) for each contract. The difference between your traded price, if traded on the day, and the previous day's M-t-M, if this is a brought forward position, is calculated as profit or loss, payable to the clearing house via the clearing member. This payment is called variation margin.
Closing a position
An IDX SSF contract holder has two options, either wait until expiry or arrange with his/her broker to close
the position before expiry. The official close out price (expiry price) will be determined by the JSE on the
expiry date of the contract. The holder also has the option to roll (close current contract and open a new
contract for a future expiry date) his/her position on expiry to the next expiry date. Expiry dates are contract specific, however the JSE recommends that they are aligned with the currency derivatives market.
International Derivatives Dividend Futures
When a company pays a dividend its share price usually declines by a corresponding amount. The reason for this price decline is that part of the company's available capital has now been paid back to shareholders.
When you buy an IDX SSF the exchange has already estimated the dividends that will be paid prior to expiry
and removed them from the price. You can limit this estimation risk (the risk associated with an incorrect
calculation by the exchange or liquidity provider) by buying a dividend future along with your IDX SSF.
Some Liquidity Providers will require you to purchase a dividend future when purchasing an IDX SSF. This
helps to ensure that neither party loses out on the transaction due to incorrect dividend estimations.
Clearing and Guarantee
All trades on the JSE's Equity Derivatives Market are M-t-M, margined daily and guaranteed by the clearing
house.Due to the clearing house guarantee and our regulatory framework, investing on the JSE exposes
the investor to less counterparty risk than investing in over-the-counter products. The clearing house
guarantee and the daily margining process ensures that investors' margins are safer from the risk of a
defaulting counterparty.
Benefits of International Single Stock Futures
- Diversify offshore
Investing internationally is an important part of building a diversified investment portfolio. By
investing in IDX SSF's investors can not only sharein the growth of the world's largest and profitable
companies but also reduce overall investment risk;
- Convenience
IDX SSFs provides a convenient entry point into foreign markets without the restrictions and
paperwork of exchange control regulations or the expense of setting up a foreign trading account.
When investing directly into a foreign market there are complicated securities laws, levies and taxes. If
you go through a third party manager there are additional costly fees. The JSE's International
Derivatives initiative eliminates all these obstacles.
- Invest offshore without using or minimising your Offshore Allowance
As an individual or corporate entity investing in International Derivatives does not use any of your offshore
investment allowance. As a registered asset manager,IDX products do not require Reserve Bank permissions
but they do fall under your prudential foreign portfolio limits. The IDX liquidity providers will be responsible for
buying the underlying shares. The JSE will then issue an IDX SSF contract on the underlying asset enabling
investors to get foreign exposure effectively and easily through a local broker.
Contract Specification Example
|
| Product |
International Derivative (Single Stock Future) |
| Underlying Equity |
Vodafone Group PLC |
| Underlying Listed Exchange |
London Stock Exchange (LSE) |
| Underlying Sector Code |
Telecommunications |
| Part of Underlying Index |
FTSE100 |
| Underlying ISIN |
GB00B16GWD56 |
| JSE Nutron Code |
VODG |
| Contract size / Nominal |
1 x The underlying equity price in ZAR |
| Expiry dates and times |
16h30; 2 days prior to the third Wednesday of March, June, September and December or the previous business day if a public holiday. |
| Quotations |
Price per underlying equity to two decimals in ZAR. |
| Minimum Price Movement |
0.01 ZAR |
| Expiry Valuation Method |
The official close out price determined by the JSE will be used. |
| Settlement Method |
Cash settled |
| Trading Hours |
08h30 - 17h30 |
| JSE Fees |
2 Basis points of nominal value |
| Daily M-t-M closing price |
The official daily closing price will be determined by the JSE between 17h00 and 17h15 |