Johannesburg Stock Exchange updates rules for new derivatives market default fund

Safcom, the clearing house for the JSE’s derivatives market, announced the promulgation of the rules enabling the establishment of a default fund intended to add another layer of investor protection in the exchange traded derivative market.

Internationally, derivatives markets must now have prefunded resources to provide capital (in addition to the collateral posted by participants) in case a clearing member defaults. The fund aims to reduce the impact of this risk and thus limit the liability for Safcom’s clearing members, most of whom are banks.

Under the new rules of the pre-funded limited liability default fund, Safcom now has a clearly defined and transparent full risk waterfall with four layers of defence built into the system for default purposes; namely initial margin of the defaulting clearing member, the defaulting clearing member’s contribution to the default fund, SAFCOM’s contribution to the fund and lastly, non-defaulting members’ contributions to the fund.

The new fund reduces systemic risk as well as clearing members’ exposure to counterparty credit risk when clearing through Safcom. As a result, clearing members will need to hold less capital for centrally cleared exposures in terms of Basel III.

“For the JSE, this is a big step towards overhauling the risk process in the SA exchange traded derivatives market and raising the profile and credibility of this market, particularly given that trading decisions are increasingly being made based on the costs of doing that trade,” says Leila Fourie, director of post-trade services at the JSE.