An efficient way for investors to obtain exposure to SA interest rate markets is through JIBAR futures listed on the JSE’s interest rate derivatives market. These are short-term interest rate contracts, or derivative products, which use the Johannesburg Interbank Agreed Rate (JIBAR) as a reference.

JIBAR is an average rate, determined from both borrowing and lending rates, and is independently derived from quotes obtained by the JSE from a number of banks for terms ranging between one and 12 months.

According to Udesh Moodley, Head of Interest Rate Derivatives, Bonds and Currencies at the JSE, JIBAR futures ‘are used to protect against movements in interest rates lower or higher depending on the user’s needs’. Because of the liquidity and transparency provided by these futures contracts, they are ideal for trading and hedging interest rate exposures.

Moodley cites an example where ‘if a loan was taken by a market participant, the participant could synthetically fix their interest rate for a three-month to 24-month period by purchasing a strip of futures’.

The product, he says, is simple, standardised and ‘can be used by all segments of the market, including institutional and retail market participants’. In order to promote the use of these instruments, the exchange announced in June that it would relist the full JIBAR futures strip in the interest rate derivatives market, which will allow participants to trade these contracts out to two years. These contracts are listed on the standard quarterly cycle of March, June, September and December. As these expire, additional contracts are listed.

As Moodley explains, futures would be ‘traded via the exchange through one of the members of the JSE or brokers’.

There are a number of different trading strategies using JIBAR futures. These include speculating on the future direction of interest rates, the managing of money market portfolios, hedging over-the-counter derivatives such as forward rate agreements, the hedging of borrowings and investments, spread trading, arbitrage, and managing the interest rate risk inherent in a portfolio.

The futures are available to trade on a JSE central order book. This ensures continuous electronic trading with ‘immediate disclosure of competitive prices in real-time’ through the exchange’s Nutron system. Market participants therefore have the typical access to bid and offer prices, as well as market depth.

Moodley says all JIBAR futures products are explicitly marked to market. ‘This provides an accurate valuation of the product and is necessary for margining the product.’ Contracts are quoted in the same way as the underlying JIBAR rate, namely on a yield basis. The price of a contract is determined from the yield by using the formula 100 minus yield (or the rate of interest). This implies that the price of the JIBAR future moves inversely to the interest rate. In other words, as interest rates move up, prices move down and vice versa.

The fees charged for these short-term interest rate contracts are dependent on the broker and clearing members used, explains Moodley. These include exchange trading fees of 0.125% per contract of R100 000.

He says these were significantly reduced – by 50% in June this year – in order to ‘facilitate access to the marker for all segments, as well as be competitive with other global players’.

By Hilton Tarrant
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