Corporates Can Now Trade Currency Futures
JOHANNESBURG, 25 FEBRUARY 2008. – In a first for South African corporates, these organisations will from the 3rd of March be able to hedge their currency risk by trading currency futures on the JSE’s interest rate exchange, Yield-X. Minister of Finance, Trevor Manuel announced the opening of this market to corporates during his National Budget address on the 20th February. Previously only individuals were allowed to trade Currency Futures without restriction. The dispensation granted by the Minister now also permits all corporate entities to trade with no restrictions. This implies that corporates can trade the futures with no upper limit on the value traded. Additionally corporates do not require Excon approval from SARB, which was initially the case.
All investment managers, pension funds and long term insurers may also trade the currency futures provided their trades do not fall outside their increased prudential limits. The Minister has announced that all investment managers’ prudential limits have increased from 25% to 30% while pension funds and long term insurer’s limits have increased from 15% to 20%.
Yield-X’s second application, which motivated corporates trading the currency futures, was made in direct response to corporate demands for such a product to be traded on a regulated exchange. Yield-X thanks the South African Reserve Bank (SARB) and National Treasury (NT) for their willingness to consider and approve the second application.
Currency futures are derivative contracts which allow investors to trade the underlying exchange rate for a period of time in the future. Currency futures offer numerous benefits to corporates and the qualifying audience, including; hedging against currency risk, taking a view on the movement of the underlying exchange rates and diversifying internationally.
According to Warren Geers, General Manager of Yield-X at the JSE, “The dispensation granted by the Minister further enhances the SA financial markets and thereby further aligns SA with international standards.”
All corporate entities, including trusts, CC’s, (Pty) Ltds and partnerships are now permitted to trade the currency futures with no restrictions, i.e. all corporates can trade with no limits applicable with regards to the value traded.
All corporates may apply to hedge their currency risk through the OTC forward market. If this is the chosen method, SARB requires the corporates to apply for Excon approval, provided the corporate has a firm an ascertainable commitment, which justifies the trading of the forward contract. This is not required when trading the Yield-X currency futures contracts, which is a competing product. Although forward contracts are tailor made contracts, corporates may prefer to trade the futures contracts which require less administration.
Futures alike with the forward contracts allow corporate entities to hedge out their currency risk. Importers and exporters for example may therefore successfully hedge the value of a foreign exchange transaction with the futures contracts. Geers commented that “futures contracts are exchange traded contracts which offer sufficient liquidity to investors. Investors can therefore enter and exit a futures contract with ease”. There are two committed market makers in the currency futures market, Investec Bank and Standard Bank. RMB Bank has also begun market making in the currency futures. Yield-X anticipates that in response to the dispensation granted, additional Banks will begin market making in the product, which will add additional market depth, competitive pricing and liquidity.
Currency Futures trades have increased substantially in 2008, with the value traded reaching over R3 billion. All of the trades to date have been done by retail investors. It is anticipated that volumes will continue to grow in line with corporates trading. “We expect that corporates who prefer to trade the forward contracts, will use the futures contracts alongside, in order to try and make a profit from an unpredicted movement in the underlying exchange rate, or to hedge out the risk of a negative forward hedge”, says Geers. “Futures contracts will equalise the playing field for all corporate entities. The transparency offered in the futures market will allow smaller corporates to obtain the favourable rates charged to larger corporates”, continues Geers.
All approved members can begin trading for their corporate clients from the 3rd of March 2008. “All that is required is for members to complete a client registration form with the corporates details. No Exchange Control Approval (ECA) number is required”, says Geers. For more information on currency futures, market participants are asked to contact the product owner, Candice Quinn at the JSE on email@example.com
FOR FURTHER INFORMATION PLEASE CONTACT:
Corporate Communications Consultants (Pty) Ltd
Tel: 011 783 8926
Fax: 011 783 7608
ON BEHALF OF:
JSE General Manager: YieldX
Tel: 011 520 7470
083 296 8842
Product Specialist and Account Officer: YieldX
Tel: 011 520 7453
083 389 5679
About JSE Limited
As South Africa’s only full service securities exchange, the JSE connects buyers and sellers in four different financial markets, namely equities, equity derivatives, agricultural derivatives and interest rate instruments (Yield-X). The JSE Ltd offers the investor a truly 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