Empowering investors with innovative, safe and flexible financial tools fosters a more inclusive and dynamic financial ecosystem, attracting a diverse range of market participants and enhancing overall market liquidity. A clearing house, for example, adds value to market participants by reducing counterparty risk, increasing market efficiencies, and providing centralised clearing and settlement services. This is why the recent introduction of JSE Clear’s new service to accept SA government bonds as collateral against open derivative positions marks a significant development, with important benefits for investors.

‘Previously, only cash was accepted as collateral but this has now been extended to allow investors with JSE derivatives exposure to cover up to 35% of their collateral with South African government bonds,’ says Matthias Kempgen, Chief Information and Operating Officer of JSE Clear, a wholly owned subsidiary of the JSE that is the clearing house and central counterparty for the JSE derivatives market.

‘The service gives investors an extra tool to manage their cash flows and availability in a more flexible manner in a business environment where the cost of cash is high. The use of bonds, which are sometimes considered to be “lazy assets”, are therefore an appropriate mechanism to reduce the amount of cash required for an investor’s margin requirement. Lowering the cash requirement for collateral also materially lowers the risk of cash liquidity constraints that generally arise in times of market stress. The result of this is that billions of rands in cash are released back to investors, which can be used for more trading activities or address other needs.’

Kempgen says the primary motivation behind the decision was the striving of JSE Clear to offer additional value and more innovative services to the market. JSE Clear has implemented measures to ensure the integrity and reliability of the collateral management process, particularly in terms of risk mitigation and regulatory compliance.

‘JSE Clear has initially implemented this service for the equity and currency derivatives markets and will hold the securities as collateral using the “pledge” mechanism. The securities are ringfenced and separated from the other assets of JSE Clear. The functionality that enables this service is a fully automated process between the JSE Clear clearing system and the STRATE collateral management system, where qualifying securities are made available by investors for pledging against their exposure held in JSE derivatives.

‘All daily operational processes that enable securities collateral are fully automated and require no manual intervention from the JSE Clear operations team. The messaging flow between the various components of the solution is integrated using SWIFT messaging. The software that enables the service is part of JSE Clear clearing and settlement systems, which make use of multi-node architecture – enhancing its redundancy and ensuring business continuity of its services.’

Kempgen says eligible securities are determined using strict criteria adhering to JSE Clear’s collateral risk framework. ‘This ensures only high-quality liquid assets that adhere to specific requirements – including availability of pricing information, number of securities in issue and appropriate liquidity – are accepted.’

Looking ahead, Kempgen says investors can expect further innovation from JSE Clear to continue improving efficiency in the derivatives market. ‘JSE Clear is considering further enhancements to this service as more investors make use of the functionality. This includes increasing the maximum percentage of non-cash collateral that can be pledged, currently 35%, and potentially extending the list of eligible securities. In addition, we are planning on rolling the service out to the remaining derivatives markets over the medium term.’

By Patrick Farrell
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