Exchange For Physical. NZX Derivatives Market

Transcription

1 Exchange For Physical NZX Derivatives Market

2 CONTENTS 1. What is an EFP Benefits Examples How an EFP Works Procedures for EFPs on NZX

3 1. What is an EFP? An Exchange for Physical ( EFP ) involves simultaneous transactions in the underlying market and the futures market. EFPs are privately negotiated with the transaction executed off market but once accepted by the exchange, the futures are margined and cleared in the same way as futures executed on the trading platform. The underlying physical instrument can be the physical product i.e. Whole Milk Powder ( WMP ) or an Over-The-Counter ( OTC ) swap or other OTC derivative in the same or related industry. EFPs are a common trading facility used in futures markets globally. 1.1 Benefits 1) Counterparty credit exposure may be reduced when an existing swap position is reversed and replaced with a futures position. 2) EFPs are negotiated and traded between counterparties off-market with price and volume details not being reflected on the screen. EFP futures prices are not considered in the end of day price settlement process. 3) Without an EFP, the sale or purchase of Physical Product and the separate entry of a Futures order may result in price slippage due to market volatility or fluctuating trading volume in the spot and/or futures markets. EFP transactions are often for hundreds if not thousands of contracts and typically there is not sufficient depth in the bids and asks to fill such a large order at the same price.

4 1.2 Examples: Exchange for Physical (Existing Futures Position) Assume it is January and a purchaser needs 10 tonnes of WMP and has previously gone long (bought) 10 March WMP futures contracts at $3,000/t in anticipation of prices rising. A seller has 10 tonnes of WMP unsold and also believes the price is going to rise. Both participants are long in the market as the purchaser has bought in the futures market and the seller has not yet sold physical product (so are long). The seller wishes to secure a buyer for the WMP and the buyer wishes to secure supply and delivery date and set the price for its WMP. As both purchaser and seller believe price will rise, the seller wants to remain long the market (floating) and the purchaser wants to secure product and price on physical now. The seller agrees to sell 10 tonnes of physical WMP to the purchaser at today s March futures daily settlement price, at the same time the purchaser agrees to sell its futures position to the seller of physical WMP at the same price. The purchaser is now long (has bought) 10 tonnes of physical WMP and has exited its futures position, the seller is now short (has sold) 10 tonnes of physical WMP and long (bought) the corresponding futures. The seller sets price when futures are sold or expire. Positions after the EFP The March settlement price for the WMP futures is $3,300 per tonne Seller Short 10 tonnes of WMP $3,300 Long 10 March WMP futures $3,300 Sale of WMP not priced until seller sells futures Purchaser Long 10 March WMP futures $3,000 Sold 10 March WMP futures $3,300 Long 10 tonnes WMP at $3,300 Physical delivery has been fixed at $3,000 $300 Profit (exit futures market) The EFP has benefited both parties and allowed the seller to remain exposed to the WMP price.

5 Exchange for Physical (No Existing Futures Position) Assume that neither party has an existing position in WMP Futures. A seller has been approached by a purchaser, who wishes to secure supply of 10 tonnes of WMP for delivery in June. The seller would like to supply the purchaser but does not want to fix price now, rather they want to stay floating because they believe the price is going to rise. The seller asks the purchaser if they will agree to do an EFP and take on an equal and opposite futures contract to them. The purchaser agrees to the EFP in order to secure the physical product and both parties agree to the physical transaction (for June delivery) at the price of the corresponding futures contract for that day s trading ($3,000/T).The seller is now short 10 tonnes physical WMP at $3,000/t for delivery in June and long the corresponding WMP futures at $3,000/t. The buyer is now long 10 tonnes physical WMP at $3,000/t for delivery in June and short the corresponding futures at $3,000/t. Either party can choose to exit their respective positions in the market at any time with another participant i.e. set their price when exiting their futures position.

6 2. How an Exchange For Physical Works (Existing Futures Position) Before EFP Purchaser Action After EFP Long WMP futures Sell WMP futures (exit futures mkt) No futures position Short physical (not yet long) Buy WMP physical Long physical WMP Seller No existing futures Buy WMP futures from purchaser (enter futures mkt) Long WMP futures Long WMP physical (not yet short) Sell WMP physical No physical position

7 EFPs on Index Futures EFPs are also available in the index futures market as well as the dairy futures market. EFPs are accepted on one or more stocks that are listed on the NZX Main Board and where the stock or basket of stocks have a value within 10% either side of the notional value of the futures contract at the time of transaction. Before EFP Purchaser Action After EFP Long S&P/ NZX 20 futures Sell S&P/NZX 20 futures (exit futures mkt) No futures position Short NZX equity (not yet long) Buy NZX Equity Long NZX equity Seller No existing futures Buy S&P/NZX 20 futures (enter futures mkt) Long S&P/ NZX 20 futures Long NZX equity Sell NZX equity No equity position

8 3. Procedures for EFPs on NZX Exchange for Physicals Facility ( EFP Facility ) and Exchange for Swaps Facility ( EFS Facility ) Capitalised terms used in this discussion bear the meanings contained in the NZX Derivatives Market Rules ( Rules ), the NZX Derivatives Market Procedures ( Procedures ) and the NZX Derivatives Market Contract No. 1 - Global Whole Milk Powder (WMP) Futures Contract Terms, NZX Derivatives Market Contract No. 2 - Global Anhydrous Milk Fat (AMF) Futures Contract Terms, NZX Derivatives Market Contract No. 3 - Global Skim Milk Powder (SMP) Futures Contract Terms, NZX Derivatives Market Contract No. 5 S&P/NZX 20 Index Futures and NZX Derivatives Market Contract No. 6 Global Butter (BTR) Futures, as appropriate. Similar to the Block Trade facility, the EFP and EFS Facilities allow Participants to trade orders that directly relate to a physical Commodity, Security, Instrument or OTC swap and is a bilaterally agreed trade. These facilities allow trades to be executed alongside the central order book which remains the primary method of Trading on the Market. Q: What is an EFP Facility and an EFS Facility? An EFP Facility allows for the simultaneous exchange of a futures position for a corresponding physical (cash) position at a price privately negotiated between the counterparties. An EFS Facility allows for the simultaneous exchange of a futures position for a corresponding OTC swap at a price privately negotiated between the counterparties Q: Why are EFP Facilities and EFS facilities commonly used? An EFP Facility and EFS Facility are commonly used to assist in the mitigation of execution risk and to increase price certainty where the futures trade is directly linked to a physical or underlying trade i.e. this avoids price slippage. Q: What is NZX s fee for using the EFP Facility or EFS Facility? NZX s fees for using the EFP Facility and EFS Facility may differ between Contracts. Please refer to the Participant Fee Schedule for the current EFP Facility and EFS Facility fees. Q: In which Contracts can an EFP Facility or EFS Facility be used? NZX has specified in the Procedures whether an EFP Facility or EFS Facility can be used for a specific Contract. Both the EFP Facility and EFS Facility are available for NZX Dairy Futures and S&P/NZX 20 Index Futures.

9 Q: Is there a minimum number of Contracts that must be traded through the EFP Facility or EFS Facility? NZX will specify Minimum Volume Thresholds for each Contract for which the EFP Facility or EFS Facility are available in the Procedures. There is no Minimum Volume Threshold for NZX Dairy Futures. Q: What are the price requirements for trades made through the EFP Facility or EFS Facility? There are no price requirements for Contracts traded via an EFP Facility or EFS Facility. However, if the price of the Contract was substantially different from the current Market price, NZX may question why the parties wished to trade at the price of the Contract traded through the facility. Q: Who can execute an EFP or EFS Order? Any Trading Participant or Advising Participant can arrange an EFP or EFS Trade. Only a Trading Participant may execute an EFP or EFS Order. A Participant Client or non- Participating Client may be a counterparty to a Trade executed through the EFP or EFS Facility by a Trading Participant. Q: When can a trade made through the EFP Facility or EFS Facility be submitted? A trade made through the EFP Facility or EFS Facility can be submitted up to 15 minutes after the central order book for the Contract for which those facilities are available has closed, so long as it has been organised during the Open (Normal) Session State for that Contract. Trades through the EFP and EFS facilities are also accepted during normal trading hours. Q: How are trades made through the EFP Facility or EFS Facility submitted? Once the terms of a trade to be executed through the EFP Facility or EFS Facility have been agreed, the Trading Participant must advise NZX (by ) within 10 minutes of verbal agreement or, in the case of exceptional market conditions or a Trade that is dependent on the execution of another instrument, within 15 minutes of verbal agreement. Trades to be executed through the EFP Facility or EFS Facility must be submitted to NZX by ing the completed EFP Facility or EFS Facility form to surveillance@nzx.com in accordance with the timeframes set out in the above paragraph. An EFP/EFS form can be found on our website:

10 Q: What information needs to be submitted to NZX when a Trade is executed through an EFP Facility or EFS Facility? The Procedures require the following information to be submitted to NZX when a trade is executed through the EFP Facility or EFS Facility (as set out in the EFP Facility or EFS Facility form): - the Contract indetifying code (including Contract Month/s); - the price agreed upon; - the quantity of Contracts; - the firm reference; - the account details; - the settlement date; - identity of the reporting Trading Participant; - identity of the reporting party s Dealer or DMA Dealer; - identity of the reporting party s Clearing Participant; - identity of the reporting party s account type; - identity if the reporting party s telephone number; - identity of the reporting party s address; - identity of the counterparty s Trading Participant; - identity of the counterparty s Dealer or DMA Dealer; - identity of the counterparty s Clearing Participant; - identity of the counterparty s account type; - identity of the counterparty s telephone number; - identity of the counteparty s address and; - the deal date and time Q: What happens next? Trades submitted to NZX through either the EFP Facility or EFS Facility are validated by NZX Market Surveillance. Primarily, the price and volume of such trades are checked to ensure that they comply with the Procedures. Once accepted, the trade will be regarded as executed and NZX will disseminate the price and the volume to the Market via the market depth feed. In addition, the details of a trade executed through the EFP Facility or EFS Facility are published on TCS BaNCS where post trade processing, including allocation of the trade to the member counterparty (ies), can be conducted. Q: What information needs to be retained after a trade has been executed by using the EFP Facility or EFS Facility? NZX has the ability to audit a trade, to ensure that all the requirements regarding EFP Facilities and EFS Facilities have been complied with. Participants are required to keep all details of trades made via an EFP Facility or EFS Facility for five years from the date of the trade. In addition to the information set out above, this will include: (a) In relation to a trade made through an EFP Facility, documentary evidence of the physical contract itself, including evidence that:

11 (i) The price equates to the price at which the trade made through the EFP Facility was transacted; (ii) The futures delivery month referred to in the physical contract is the same date as the date of the trade made through EFP Facility was entered into the Clearing House; and (iii) The physical contract relates to at least the equivalent amount of the underlying Commodity or related Commodity. (b) In relation to a trade made through an EFS Facility, documentary evidence in the form of a copy of the OTC contract itself. The contract should contain the following information: (i) The fixed price or fixed price formulae of the swap, and who pays; (ii) The floating price or floating price formulae of the swap, and who pays; (iii) The termination / maturity date; (iv) The effective (start) date of the swap; (v) The quantity of the swap position relating to the underlying commodity or the direct product of such commodity, and (vi) The referenced futures delivery month. Please see the Rules and Procedures for further details on our website:

12 Disclaimer: This document is provided for general information purposes only and is not intended as, and shall not constitute investment advice nor an offer, invitation, inducement, solicitation or recommendation to engage in any transaction. Although NZX Limited (NZX) has taken care to ensure the accuracy of the examples and other information as at the date of publication, NZX does not give any warranty or representation as to the accuracy, reliability or completeness of the examples given or information in this document. To the maximum extent permitted by law, NZX and its subsidiaries, employees, officers and contractors shall not be liable for any loss or damage (whether direct, indirect, consequential or otherwise) arising in any way (including by way of negligence) from or in connection with any information provided or omitted or from anyone acting or refraining to act in reliance on this information. Before entering into any transaction you should take steps to ensure that you understand the transaction and have made an independent assessment of its appropriateness in light of your own objectives and circumstances.the reader of this document should seek independent advice before acting on any information in this document. NZX Derivatives Market is a licensed market operated by NZX, a licensed market operator regulated under the Financial Markets Conduct Act NZX and its subsidiaries offer services to participants and to participants in its clearing and settlement system. Those who desire to trade any products available on any NZX market or to offer and sell any such products to others or to become a participant in the clearing and settlement system, should consider the requirements of the applicable Rules and other legal and regulatory requirements relevant to them, as well as the associated risks, before doing so. The "S&P/NZX 20 Capital Index" is a product of S&P Dow Jones Indices LLC or its affiliates ("SPDJI") and NZX Limited ("NZX"). Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC ("S&P"); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"); NZX is a registered trademark of NZX Limited and these trademarks have been licensed for use by SPDJI. S&P/NZX 20 Index Futures are not sponsored, endorsed, sold or promoted by SPDJI, S&P, Dow Jones or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P/NZX 20 Capital Index.