Contracts for Difference (CFDs) Daily margined exposure to blue-chip shares

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1 Contracts for Difference (CFDs) Daily margined exposure to blue-chip shares

2 CFDs - Defined Unlisted financial contract encompassing an agreement between a buyer and seller to exchange the difference in price of an underlying instrument over a period of time Client places margin ahead of trading on a leveraged basis in shares Interest charged daily, real-time position management Trade OTC (off-exchange) Unregulated (Direct bilateral counterparty credit risk) Margined daily by Investec Risk (Top40 and liquid shares only) No maturity or expiry date therefore no rollovers or associated costs No automatic physical settlement Gearing 5-10* depending on client tier, liquidity and volatility

3 CFDs - Features Leveraged exposure to shares (Investec ED carries the shares as hedge) Geared instrument (margined daily by Investec) Lower cost than SSF (no STT, STRATE, Clearing or Exchange fees) Simple pricing (interest charged daily, dividends flow to or from margin) Robust, system-based trading: DMA available to Broker/client or EOD Allocation Real-time position management Daily and monthly automated statements Linear price relationship to underlying shares Funding linked to wholesale interest rates, adjustable per client according to relative credit risk and tier Stock borrow may be allocated according to each individual availability

4 Who should add CFDs to their portfolios Speculators Low cost market exposure Gearing (managed to individual tier limits) Long or short trading capability (depending on scrip availability) Pairs trading (margin offsets under consideration) Investors Extract cash from long stock positions to be employed elsewhere Alleviate STT Wholesale lending and deposit rates Hedgers Temporarily protect capital at risk in spot longs by shorting CFD Wholesale deposit and stock borrow rates

5 CFD - Pricing (Buy Long BIL) Assumptions (Stock: BHP Billiton Ltd BIL ) Lending rate 7%, Deposit rate 5%, Stock borrow 0.50% Day 1: Buy 1000 CFD at 27500, closes that night Day 2: No trade, BIL closes Day 3: Sell 1000 CFD at Trading fee: Indicative all-in to Broker Client 35 bps (0.35%), Investec to take only a fraction of this Investec required margin: 10% Day one: 1. Execution fee: (R275.00*1000*0.35%) = -R MTM Gain: ( )*1000 = +R3, Margin required to be held: (278.00*1000)*10% = R27,800.00

6 CFD - Pricing (Buy Long BIL) Day two: 1. Funding charge: 7%*(1000*278.00)*1/365 = -R MTM Gain: ( )*1000 = +R7, Margin required to be held: (285.00*1000)*10% = R28, Day 3: 1. Funding charge: 7%*(1000*285.00)*1/365 = -R Execution fee: (280.00*1000*0.35%) = -R MTM loss: ( )*1000 = -R5, Overall: +5, = +R2,949.52

7 CFD - Pricing (Sell Short MTN) Assumptions (Stock: MTN Ltd MTN ) Lending rate 7%, Deposit rate 5%, Stock borrow 0.50% Day 1: Sell 1000 CFD at 13000, closes that night Day 2: No trade, MTN closes Day 3: Buy 1000 CFD at Trading fee 35 bps (0.35%) Investec required margin: 12% Day one: 1. Execution fee: (R130.00*1000*0.35%) = -R MTM Loss: ( )*1000 = -R2, Margin required to be held: (132.00*1000)*12% = R15,840.00

8 CFD - Pricing (Sell Short MTN) Day two: 1. Funding earned: (5%-0.50%)*(1000*132.00)*1/365 = +R MTM Gain: ( )*1000 = +R4, Margin required to be held: (127.50*1000)*12% = R15, Day 3: 1. Funding earned: (5%-0.50%)*(1000*127.50)*1/365 = +R Execution fee: (135.00*1000*0.35%) = -R MTM loss: ( )*1000 = -R7, Overall: -5, = -R5,895.51

9 Dividend Treatment Full transfer of dividends into/out of the hands of long/short holders in margin Dividend credited into margin a/c of long holders, debited against short holders PV assumptions of settlement taken into account Mitigates the variation effect on the CFD position for the stock falling on ex. date Dividend settles a week after ex. date, so PV bleeds back to/from holders on a daily basis leading up to pmt date Individual tax treatments to be sought as the responsibility of the holders

10 Why CFDs Cost effective alternative to share trading under the newly cumbersome SAFEX SSF onscreen requirements Long/Short strategies executed easily and reporting generated automatically Linear link to underlying share price Simple pricing methodology Low cost gearing to the market (no Securities Transfer Tax under current legislation) Direct market access (DMA) platform available, with full ED desk support Each trade executed in price/time priority on the JSE Central Order Book Trading is completely anonymous Full best execution offered to client as hedge is dealt directly into the underlying market

11 Why Investec? Robust credit rating against foreign and local peers Competitive funding linked to wholesale Treasury rates Corporate actions are controlled by Investec Clearing Admired risk management and compliance modelling within ICM Attractive brokerage rates (adjustable per client, according to risk tier) Full ISL research, IBL servicing and reporting to client Risk is run directly out of ICM Clearing: no intervention from Investec Securities and therefore no risk of give-up by external broker of client to ISL Execution capacity on the ED desk Full transparency on pricing

12 The Risks High risk trading tools, only for those who understand gearing Gain amplified exposure to share price movements due to margining Interest rate is variable (linked to Repo/Prime) Direct credit risk between client and Investec Bank Ltd (no Exchange involved) Additional margin calls required to be settled to keep losing positions open Automatic close-out on non-payment of margin, subject to stated protocols Be aware of the dividend effects on margin Corporate actions (Investec to control all distributions to clients in the form of margin variations and new positions) Margin Calls Governed by Investec s assumptions on stock and individual client risk Can result in pressure on illiquid stocks (therefore top tradable underlying shares only)

13 Differences between SSFs and CFDs SSFs are Exchange-traded securities, CFDs trade OTC (over the counter) SSFs are regulated by SAFEX, currently no regulation of CFDs by the FSB SSFs are margined by SAFEX, using their assumptions on dividends, forward interest rate curves - CFDs are margined by Investec on one set of assumptions SSFs carry term interest rate risk, CFDs carry overnight rate risk SSFs are backed by the JSE Guarantee Fund, CFDs are not SSF reporting done by the Clearing Banks, CFD reports come directly out of ICM NB. SSFs now required to be traded onscreen into the SAFEX Nutron platform, whereas CFD hedge can be dealt directly into the underlying share Price discovery is therefore now more prevalent in CFDs SSFs pre-discount any assumed dividends within the period, whereas CFDs handle any dividends in the margining process on ex. Date Lower cost of execution in CFD as no SAFEX or Clearing House fees as with SSF

14 Contact details Investec Equity Derivatives (Retail Products) Richard Swain Phillip Dube Jason Fourie Marco Sebastiao

15 Disclaimer This material is for your private information, and we are not soliciting any action based upon it. Terms and conditions contained herein are indicative only. Final terms and conditions are subject to further negotiation. The information contained in this communication does not constitute an offer, advertisement or solicitation for investment, financial or banking services. It is for informative purposes and is not intended to constitute advice in any form, including but not limited to investment, accounting, tax, legal or regulatory advice. The information therefore has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. The material is based upon information that we consider to be reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. All illustrations, forecasts or hypothetical data are for illustrative purposes only and are not guaranteed. The sender accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this communication. Prospective investors should be fully aware of the risks involved in dealing in financial products. This presentation is confidential and may not be disclosed to any third party without the written consent of Investec. Capital Markets, a division of Investec Bank Limited. Reg. No. 1969/004763/06. An Authorised Financial Services Provider and registered Credit Provider. A member of the Investec Group.

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