JSE - GARP presentation - Stock exchange developments - Leila Fourie
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JSE – GARP presentation
Stock exchange developments – Leila Fourie
www.jse.co.za
www.jse.co.za
Copyright© JSE Limited 2009
1
Top 20 WFE exchanges
Domestic market capitalisation (equities), July 2013
Taiwan SE Corp.
Singapore Exchange
Johannesburg SE $825,9 billion (18th largest)
BME Spanish Exchanges
National Stock Exchange India
BM&FBOVESPA
BSE India The JSE is a world class, liquid exchange. It
Korea Exchange is by far the biggest on the continent and
NASDAQ OMX Nordic Exchange
Shenzhen SE
one of only 4 African exchanges that are
Australian SE members of the WFE. It is the 4th largest
SIX Swiss Exchange bond market by value traded
Deutsche Börse
TMX Group
Shanghai SE
Hong Kong Exchanges
London SE Group
Japan Exchange Group - Tokyo
NASDAQ OMX
NYSE Euronext $m
0 5 000 000 10 000 000 15 000 000 20 000 000 25 000 000
www.jse.co.za
Sources: WFE
2
Finance is a Key Sector of the Domestic Economy
• South Africa has a world class financial
sector which accounts for around 20% of
GDP and provides employment for 12%
of the formal sector’s (non-agri)
employed
• In value terms, the stock market is
greater than the country’s total economy,
reflecting a high degree of financialisation
• The GFC of 2008-2009 has ushered in a
massive overhaul of financial regulation,
affecting banks, exchanges, CCPs,
CSDPs etc.
www.jse.co.za
Source: World Bank
3
Annual Stock Market Trends
USD Indices (2000=100) Indices (2000=100)
350 600 0
300 500 30
250
400 60
200 Divergence
300 90
150
200 120
100 ZAR depreciation
50 100 150
0 0 180
Developing Countries South Africa
JSE ALSI (LHS) USD/ZAR (RHS)
UK Germany
• South Africa’s stock market performance from 2002 up to the start of the GFC was more impressive
than that of its peers and some of the more developed markets
• It has also fared better post the GFC and has diverged from the currency’s performance since 2010
www.jse.co.za
Sources: World Bank; I-Net
4
JSE and Exchange Rate trends
Indices (Jan 2005=100)
350 50
Stocks continue to
Global financial crisis diverge from
economic reality;
300 bonds lose some 75
appeal as sovereign
indebtedness grows
and global LT rates
250 start to rise 100
200 125
150 150
Development of asset
100 price bubble
Strong portfolio capital Deteriorating domestic 175
inflows, aided by US factors; imminent end
and EU quantitative of QE measures
easing leading to capital
50 outflows 200
2005 2006 2007 2008 2009 2010 2011 2012 2013
JSE ALSI (LHS) USD/ZAR (RHS)
www.jse.co.za
Source: I-Net
5
Bond Market Trends
Sovereign spreads over USTs • From 2001 to 2007, positive domestic
(basis points) factors helped narrow the spread: GDP
1200
growth averaged 4.3% over this period;
interest rates declined from mid-2003 to
900
Aug 2006, fuelling spending and growth
600
• RSA’s sovereign credit rating also
improved between 2003 and 2007
300 • The GFC led to a blow-out of EMs
spreads in 2009
0 • Subsequently, however, a re-assessment
of “risk” led to a narrowing in spreads
Developing Countries Developing Asia
Latin America & Caribbean South Africa
www.jse.co.za
Sources: World Bank
6
Best Investment View of SA Asset Managers
Effective asset allocation
100%
9.0 12.5 14.2 17.3 14.0 14.9
90% 17.2 18.0 20.12 18.77
80% 17.2
13.4
12.7
9.6 8.5 12.7 13.6
70% 17.9 17.1 15.8
60%
50%
40% 72.4 71.7 69.5 68.9 69.4 67.0 66.7
30% 61.7 59.0 60.4
20%
10%
0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 Q2/2013
SA Equities SA Bonds SA Listed Property
SA Real Estate SA Cash SA Other
SA Commodities
www.jse.co.za
Source: Alexander Forbes
7
Uncertainty Heightens Volatility
Net inflows/outflows (Rm) Capital flows to developing countries
25000
20000
15000
10000
5000
0
-5000
-10000
-15000
-20000
2010 2011 2012 2013
Shares Bonds
• Foreign investors’ appetite for EM bonds after the GFC has been reflected on the JSE by strong net inflows into this
market. However, recently, these flows have wavered and there has been a moderate shift towards a preference for
shares.
• Portfolio inflows are at risk in the short-term for as long as speculation of an easing in QE continues to drive market
sentiment. www.jse.co.za
Sources: JSE; World Bank
8
The crisis changed our approach
www.jse.co.za
9
CCP purpose - providing settlement assurance
• Reduce systemic risk
• Ensure efficient, fair markets
• Protect investors
• Ensure orderly markets
• Promote transparency
www.jse.co.za
10But what is a CCP?
Counterparty Counterparty
A B
Should one of the counterparties to the trade default the other faces losses
(credit risk)
Central
Counterparty Counterparty
Counterparty
A B
(CCP)
A central counterparty (CCP) stands between two parties of a financial trade and absorbs
the credit risk each party faces by becoming the counterparty to each trade
www.jse.co.za
11CCPs in the spotlight
CCPs are seen as systemically important and if ineffective, they could be a source for
contagion, financial shocks and default
• 2008 Global Financial Crisis highlighted gaps in financial institutions risk management
• However, it also highlighted the important role that CCPs play in reducing trading risks:
Lehman Brothers’ entire derivative book that was cleared through LCH
Clearnet (a CCP) was successfully unwound and any losses absorbed by
the clearing house’s risk management controls
• Financial regulators focus widened from banks (e.g. Basel 2/3) to include CCPs
(CPSS-IOSCO, ESMA)
• CPSS-IOSCO requires a CCP to have sufficient financial resources to cover credit
exposures in extreme yet plausible market conditions
www.jse.co.za
12Nothing new...CCP failures prior to the 2008 crisis
CCP COUNTRY DATE DESCRIPTION
Caisse de Liquidation France 1974 • Steep rise in sugar prices attracted speculative investors, who were caught out by a
sharp correction, leading to inability to meet margin calls
• CCP failed to increase margin in response to greater market volatility
• Lack of coordination between clearing house and exchange
• Allocation of losses among GCMs were not transparent
Kuala Lumpur Malaysia 1983 • Crash in palm oil prices led to the default of six brokers
Commodity Clearing • CCP slow to respond to market conditions – 12 day delay between market crash and
House broker default
• Lack of management experience and coordination among market participants
Hong Kong Futures Hong Kong 1987 • Trading suspended for four days in the wake of “Black Monday”
Exchange • Bailed out by consortium of banks supported by government once it was clear the
guarantee fund would be insufficient
• Guarantee fund separate from clearing house and exchange – clearing house
responsible for risk management, but was not exposed to losses
• CCP did not increase margin despite sharp growth in trading volumes
• No position limits and high concentration of brokers
BM&F Brazil 1999 • Sudden $/Real devaluation caused two small clearing banks to default
• Margin and default funds insufficient as banks were beyond BM&F operational
limits, and margin stress tests were inadequate for major move
• Central bank intervened and bailed out the banks
Actual CCP failure Near CCP failure
www.jse.co.za
Source: Oliver Wyman 2011
13South African CCP: Safcom
• In South Africa, all exchange-traded derivative
trades are cleared through Safcom, a wholly
owned subsidiary of the JSE
• Safcom thereby mitigates systemic risk in the
South African exchange-traded derivatives
market, as it reduces the risk of a single default
impacting other counterparties and thereby
contaminating the market
• Imperative that Safcom’s risk management
practices are of the highest standards and its
financial safeguards quantified as accurately as
possible
• Equities are cleared by the JSE – potential exists to move to CCP model
www.jse.co.za
14Safcom growth – initial margin at an all time high
Initial Margin Date
1 20,141,569,086 27-Aug-13
2 19,935,505,763 26-Aug-13
3 19,892,281,931 01-Jul-08
4 19,852,376,156 02-Jul-08
5 19,838,111,897 22-Aug-13
6 19,830,893,646 15-Jul-08
7 19,807,451,439 23-Aug-13
8 19,755,821,585 18-Jun-08
9 19,753,674,514 08-Jul-08
10 19,747,127,668 14-Jul-08
www.jse.co.za
15Creditworthiness of the CCP: Safcom
Safcom mitigates its risk through the following measures:
1. Entry requirements to becoming a clearing member (financial and capital adequacy
requirements)
2. Collateral for each trade that is cleared – initial and variation margin
3. A default fund, to which all clearing members must contribute, that can be accessed
to cover losses suffered as the result of one clearing member defaulting
4. Fidelity fund – for isolated and limited circumstances
In addition:
• Back testing
• Stress testing
• Default ‘fire drills’
• Safcom risk waterfall
• Risk tolerance
• Liquidity lines
www.jse.co.za
16Main trends - CCPs
www.jse.co.za
171
Re-regulation
and extra -
territorial reach
www.jse.co.za
18Re-regulation and extra-territorial reach
The G-20 reform was a catalyst for a coordinated global regulatory response
US Dodd-Frank Act • SWAP dealers and participants must register
• Central reporting in a depository
• Central clearing of standardised OTC derivatives
• Mandatory margin for cleared trades
• Central trading of standardised derivatives
• Restriction of activities
EMIR • Operational risk monitoring measures
• Central reporting
• Central clearing of standardised OTC derivatives
• Regulation of CCPs as ‘systemically important’
BIS / Basle III • Lower capital for centrally cleared derivatives and structured products
• Capital for default fund contributions
• Margin for non-centrally cleared transactions
CPSS IOSCO • Global standard for CCPs and financial market infrastructures
www.jse.co.za
192 Product
expansion . . .
OTC clearing
www.jse.co.za
20OTC Derivatives Clearing : Market size
According to BIS, 85% of all derivative transactions are traded OTC
• In June 2008, the global OTC derivatives market
gross notional outstanding peak trading volumes
were more than $680 trillion
• OTC trading increased by 535% over 7 years to
2008
• OTC market subsequently contracted to $615
trillion to date
• 2010: ZAR OTC derivatives ZAR24 trillion,
ZAR800 billion traded on exchange
www.jse.co.za
Source: BIS, ISDA, SARB
213 Default funds –
more science
required
www.jse.co.za
22CCP risk waterfall
• A CCP’s risk waterfall defines how risk mitigants will be used in the case of a default
• A typical CCP (and Safcom’s) risk waterfall follows a defaulter-pays model
In the case of a default, losses are funded as follows:
Initial margin of the defaulting clearing member
The defaulting clearing member’s contribution to the default
fund
CCP’s contribution to the default fund
Non-defaulting member’s contribution to the default fund
www.jse.co.za
23CCP default fund quantification
Possible alternatives to quantifying a default fund:
• CPSS-IOSCO requires a CCP to have sufficient financial resources to cover credit
exposures in extreme yet plausible market conditions
• Default fund must cover losses under extreme market conditions
• Therefore need measures of extreme losses, or tail-end losses
• Conditional VaR (CVaR) = the expected loss given that VaR is exceeded
• Extreme VaR (EVaR) = employ EVT for modelling losses within the tail end of a
distribution of returns
• Stress Testing = possible losses on today’s portfolio should historic stress events
repeat
www.jse.co.za
2425
4
Capital
adequacy
requirements
for CCPS?
www.jse.co.za
25Capital
Capital is now a focus for CCPs
• Economic capital in a CCP refers to all levels of prefunded resources to protect
the market and the structure thereof
• Twin Peaks regulation – trend: CCP capital adequacy to be regulated
• Safcom economic capital approach:
• Operational risk
• Counterparty risk
• Legal risk
• Liquidity risk
www.jse.co.za
264 The search
for margin
efficiency
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27The search for margin efficiency
• Growing demand for collateral puts margin efficiencies in the limelight.
• Growing number of CCPs are offering initial margin offsets between OTC and
ET derivatives.
• Margin Methodology:
• CCPs have traditionally made use of portfolio scanning methodologies when
determining initial margins for ET derivatives.
• Portfolio scanning typically fails to adequately recognise the benefits of
diversification.
• CCPs are looking to migrate towards VaR type portfolio margining methodologies
(Eurex call’s theirs Prisma).
www.jse.co.za
28Unknown unkowns
• How many CCPs is right?
• Capital markets are global, regulators are national – how do we reconcile
these?
• How do small countries manage systemic risk when much of the flows are
offshore?
• How to align global regulatory trends to the national agenda?
• How much capital should a CCP hold?
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29Thank you
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30Contact the JSE & join us on social media
Email: Leilaf@jse.co.za
www.jse.co.za
Copyright© JSE Limited 2011
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