9 March 2007
South African stock exchange operator the JSE is set to launch a currency futures market that will give retail investors access to offshore foreign exchange markets while giving added stimulus to the country’s economy.
The rand futures market, which will operate on Yield-X, the JSE’s interest rate exchange, will also allow individuals to trade in the currency futures market through a regulated exchange for the first time in South Africa.
“Currency futures will be used for trading, hedging and speculating,” says Yield-X senior manager Warren Geers. “Participants will be able to take a view on where the currency is moving to and protect themselves by buying or selling currency futures.”
According to Geers, currency futures will “bring offshore markets closer to home. This means positive growth for our economy. They will also provide a successful mechanism to ensure that the development of South African financial markets happens in a safe and controlled way.”
Finance Minister Trevor Manuel gave the JSE the go-ahead to launch the market in his 2007/08 Budget speech in February, saying it would would “deepen SA’s financial markets and increase liquidity in the local foreign exchange market”.
According to news agency Reuters, market players have welcomed the move, with analysts saying it would put South Africa on par with other developed emerging markets as well as facilitate foreign investment.
The JSE’s currency futures contracts are standardised, cash-settled, rand-denominated contracts. Rand dollar contracts will be traded to begin with, with more currency futures contracts expected to follow.
Individuals and foreigners will be allowed to trade currency futures without limits, while pension funds and long-term insurance companies will be able to trade subject to their 15% foreign allocation allowance, and asset managers and registered collective investment schemes subject to their 25% foreign allocation limit.
Corporates and trusts will not be allowed to trade currency futures unless they have a valid exchange control approval number or approval from the South African Reserve Bank.
The JSE chose Yield-X as the platform for the new market because of the link between currencies and interest rates. The Yield-X platform “will ensure that only standardised contracts will be traded on a fully electronic platform, resulting in guaranteed settlement, a transparent dealing environment and true price discovery,” says Geers.
“We have worked very closely with South African Reserve Bank, National Treasury and with the two market makers, Standard Bank and Investec, on creating this product,” Geers says, adding that trading will begin “once agreements between all parties have been finalised.”