JSE: Currency futures growing fast

The JSE, which is listed on its own exchange and operates Africa's largest bourse, said on Wednesday that its currency derivatives business was exploding and indicated that it was bracing for a bigger share of SA's US$1.3 trillion-a-year currency derivatives market.

Warren Geers, general manager of currency trading at the JSE, told I-Net Bridge/BusinessLIVE that he expected local and international regulatory changes to bring more currency derivatives business to the exchange.

At present, banks - Standard Bank (SBK), FirstRand (FSB), Nedbank (NED), ABSA (ASA) and Investec (INL) - dominate the currency derivatives market through forward exchange contracts.

A forward exchange contract differs from the currency futures contract in that the latter is regulated, while the former operates on an over-the-counter basis.

Both of these currency derivatives instruments allow investors to either hedge against foreign exchange risk or speculate on the currency direction.

In contract to forward exchange contracts, Geers said currency futures brought transparency to pricing, carried no balance sheet exposure, posed no credit risk and operated in a regulated environment.

Geers said the currency derivatives unit had generated 200 billion rand in total value since its inception in June 2007.

Currency futures trading had grown exponentially, which the local exchange recording a record monthly 18 billion rand in value, he said.

In the first quarter of this year, the bourse posted 48 billion rand in total value, which was more than what it made in seven months in 2010.

Geers said the JSE's share of the currency derivatives market was still small, but indicated that more business was coming its way.

In 18 months' time, local banks might shift parts of their forward exchange contracts to the exchange when Basil III came into effect in January 2013, he said.

“Banks might move FECs (forward exchange contracts) to the futures market. Banks were already doing analysis in the lead-up to that,” he said, referring to the Basel III introduction in 2013.

Geers also said that, if the Financial Services Board made a ruling forcing banks to give up their forward exchange contracts, the exchange might experience further pick-up in currency futures trade.

In the US and Europe, derivatives trading was done on the exchanges, rather than off the market. “The FSB (Financial Services Board) could follow suit,” he said. - I-Net Bridge