JSE To Launch Contracts-For-Difference

11/11/2012

In response to market demand, the JSE today announced that it will launch a prototype Contract-For-Difference (CFD) instrument early next year.

“The market has become very familiar with the design of a CFD which closely mirrors the pricing behaviour of the cash spot market and offers leverage. A CFD is an over-the-counter (OTC) product and many of the clients of JSE members have the need to trade an exchange-traded product either because of preference or because of mandate restrictions,” says Magnus de Wet, Manager, Derivatives Specialist “With our prototype CFD, trades will be reported to the JSE thus providing the same risk management processes that are applied to the other successful JSE equity derivatives products. In addition with the listed aspect we can hopefully find new clients for our members to service.”

Capital adequacy requirements for banks in respect of OTC derivatives will be changing from 2013 due to the implementation of Basel III. The impact of this change on the OTC derivatives market is uncertain at this point but it factored into our thinking to bring this prototype to market. Rather than compete with SSFs, the JSE regards the two products as existing side by side thus offering clients the choice of instruments most suited to their specific needs.

According to De Wet, the JSE will use its existing infrastructure and facilities to create a prototype which it will test with the market and if favourably received, then work with interested members to co-produce the final version of the product.

“This initiative forms part of the JSE’s focus to be more responsive to the needs of the market rather than develop products simply because they seem like a good idea.”

Like the OTC CFD, the JSE eCFD requires the calculation of an overnight funding cost. For this purpose the JSE proposes to use the SA Benchmark Overnight Rate, published daily by the SA Reserve Bank.