The regulatory demands of the G20, the Basel 3 framework and over-the-counter (OTC) market rules and regulations have all put pressure on JSE clients to find complementary exchange-traded instruments, otherwise known as swap futures. Under a multi-year licensing agreement with Eris Exchange (Eris) – a US-based futures exchange group – the JSE will now list swap futures. These offer participants all the benefits of futures contracts with interest-rate swap exposure.

In contrast to most standardised options and futures contracts, swaps are not traditionally exchange-traded instruments, says Bronwyn Bower, the JSE’s Interest Rate Product Manager for Capital Markets. ‘Instead, swaps are customised contracts that are traded in the over-the-counter market between private counterparties.’

With the introduction of the Eris methodology, the JSE will launch multiple swap futures products. Eris is designed to allow for the construction of capital-efficient futures that replicate cash flows of cleared OTC swaps and are traded on the exchange.

Eris is the first exchange globally to have listed a swap futures contract that exactly replicates the economics of an OTC-cleared swap.

Swap futures would appeal to clients who participate in the OTC-swap market. The product is well suited to sell-side participants (such as banks and brokers), and buy-side players (including asset managers and hedge funds).

‘This is a clear indication of the benefit and direction that exchange-traded swap futures are heading’

BRONWYN BOWER, INTEREST RATE PRODUCT MANAGER FOR CAPITAL MARKETS, JSE

This new offering will prove very useful to institutional investors. In addition, it offers entry to participants who previously weren’t able to access the swap market. The JSE is meeting client needs through the agreement with an internationally recognised and accepted swap futures exchange with market-leading product design, says Bower.

‘Previous product ideas that we proposed to the market did not meet their requirements, while this product addresses the concerns and key issues,’ she says. ‘The product is exactly what the market was requesting.’

The JSE joins the likes of the Montreal Exchange and Intercontinental Exchange, a US network of exchanges and clearing houses for financial and commodity markets, that have also licensed the Eris methodology and only requires standard swap futures documentation.

‘The JSE believes that this is a clear indication of the benefit and direction that exchange-traded swap futures are heading,’ says Bower.

Large international players such as Morgan Stanley, State Street, Société Générale and Fidelity are shareholders in Eris.

The JSE will phase in Eris products, starting with a standard interest rate-swap contract in late 2015. This will be followed by flexes (any day swap futures), cross-currency swaps and credit default swaps on SA single entities and baskets.

The JSE’s existing interest-rate derivative (IRD) members and their clients can trade the product, as it works with the already familiar IRD system infrastructure, says Bower.

Participants will be able to hold these futures through to the product’s maturity date, with no risk of delivery.

It is mandatory for clients who trade OTC swaps to sign the International Swaps and Derivatives Association master agreement, which sets out the terms applying to the transactions.

In contrast, clients do not have to sign these agreements when they trade swap futures on the JSE.

‘Due to onerous regulations being imposed on banks and market participants, listed swap futures eliminate most of the regulatory concerns and issues,’ says Bower.

The swap futures products will follow similar post-trade processes to other derivatives offered by the JSE. The soon-to-be introduced interest rate standard swap futures are based on the Johannesburg Interbank Agreed Rate, denominated in rand and follow SA’s swap market convention.

The JSE is confident these swap futures products will give clients the regulatory certainty of futures, allow them to operate in a familiar ecosystem and broaden their international exposure.

By Gene Michelson
Image: Gallo/GettyImages