JSE ERIS Interest Rates Swap Futures INTEREST RATE DERIVATIVES www.jse.co.za Johannesburg Stock Exchange
Background The JSE is proud to bring the first South African Interest Rate Swap Future to the market. This has been a long consultative journey and ultimately the JSE is delivering the markets product of choice. G20, Basel III and OTC market regulation have not only increased the need for clearing of standardised OTC instruments but have increased the need for complementary on-exchange instruments. Client demand for a swap-style product offering on exchange drove the JSE to begin product development late 2013. The JSE will launch this product on Monday, 31 August 2015. The product will be available for trading on the JSE on the Interest Rate and Currency trading platform. Participants will need to trade through an authorised Interest Rate Derivatives member of the JSE and the product will be cleared through JSE Clear. Participants will only require standard futures documentation. The advantage of this is that market participants can operate within familiar ecosystem and infrastructure. The JSE will list four tenors on launch, namely the 1, 2, 5 and 10 year tenors and hope to expand this list over time. The standard interest rate swap future that is being launched is based on the Eris Methodology and has been licensed from Eris Exchange, a U.S.-based futures exchange group. The JSE and Eris Exchange announced a Swap Futures partnership on 15 April 2015. The standard IRS Future product will be based on the Johannesburg Interbank Agreed Rate (JIBAR) and denominated in South African Rand (ZAR). The product will follow the standard South African swap market conventions while using the Eris Methodology, allowing the contracts to replicate the cash flows of OTC swaps. The JSE will use a portfolio VaR framework to determine the amount of initial margin participants should post for position in the swap futures product suite, instead of the J-SPAN framework that is used for all other futures. Portfolio level initial margin will thus recognise the offsets associated with trading long and short position across the curve. 2
Economics of Swap Futures A = Swap NPV Equivalent to NPV of analogous OTC Swap Can be referred to as the Clean Price ONLY element that changes continuously throughout the trading day JSE Standards will trade in terms of A. Daily settlement of A is based on the JSE Zero Swap Curve 5 decimals C = Eris PAITM Synthetic interest on variation margin Accrues at SAFEX Overnight Rate Analogous to interest on collateral on ZAR 0 threshold CSA (Gold Standard CSA) 100 decimals B = Historical Fixed and Floating Amounts Past fixed and floating amounts since inception Changes every 3 months, beginning 3 months after the Effective Date May be positive or negative Calculated and published prior to the market open 10 decimals JSE Futures Price = Settlement Price JSE Futures Price represents the All- In Settlement Price Often referred to as the Dirty Price Participants can book using A (NPV) or JSE Futures Price Final price rounded to 5 decimals 100 = Index Price Index Price of ZAR 100 Drastically reduces the likelihood of a negative JSE Futures Price 3
Why trade this product? It is traded on the JSE through the Interest Rate market It is cleared through JSE Clear It is traded as a future These contracts follow standard derivative listing principles Fixed rate set by exchange on day of listing Fixed tenors Reset convention based on standard Over The Counter (OTC) reset convention There is no ISDA documentation or Gold Standard CSA s to be signed by clients or members The contracts are standardised Remain Futures through to maturity date Methodology replicates: Cash Flows of Over The Counter (OTC) Cleared Swaps Swap economics by combining component Cash Flows into single futures price Product follows RSA standard swap conventions Anonymous central limit order book Off-Screen trade reporting available Market participants operate within familiar ecosystem and infrastructure Eris products listed on JSE are based on the Eris Methodology, Eris product design for constructing capital-efficient futures that 4
Trader Execution Reference Information Key Points to Remember - JSE Eris Standard Interest Rate Swap Futures Contract Size = ZAR 100,000 notional BUY = Pay Fixed, SELL = Receive Fixed Goal: Buy Low (pay a low NPV) and Sell High (receive a high NPV) All NPV quoted instruments are from the Buyer s perspective: Positive NPV: Par Rate Fixed Rate Negative NPV: Par Rate < Fixed Rate Direction of Premium in OTC Equivalent Terms: Positive NPV: Buyer/Fixed rate payer Pays premium and Seller/Fixed rate receiver Receives premium Negative NPV: Buyer/Fixed rate payer Receives premium and Seller/Fixed rate receiver Pays premium BID SIDE NPV where Market Maker Pays Fixed and End User Receives Fixed ASK SIDE NPV/Rate where Market Maker Receives Fixed and End User Pays Fixed Daily Mark-to-Market Daily valuation of instruments using the JSE Swap Zero Curve Methodology of curve construction remains unchanged The JSE will make B & C value available to participants post end of day run i.e. will be available to participants at T-1 end of day for trading day T End of day files disseminated will include A, B & C values per contract as well as the contract s final price 5
Initial Margin Requirements Contract level Initial Margin (IM) requirements will be calculated as follows: VaR Methodology Confidence Interval Liquidation Period Look-Back Period HistVaR 99.7% At least 2-days Rolling 750-day plus stressed 250-day For portfolio level initial margin requirements, it will be a portfolio Value at Risk (VaR) framework used for the swap futures product suite, instead of the J-SPAN framework currently used for all other futures at the JSE. Concentration margin will be applied in order to acknowledge the higher liquidation costs typically associated with large positions. The Proposed Portfolio VaR Framework The portfolio level VaR calculation will involve: 1. Obtaining the relative 2-day shifts in the ZAR zero coupon JIBAR swap curve, associated with each day in the look-back period (rolling 750 days plus pre-defined 250 stressed days); 2. Applying these 2-day curve shifts to the most recent ZAR JIBAR swap curve in order to obtain a set of hypothetical zero-coupon ZAR swap curves for T+2; 3. Revaluing each swap futures contract under the hypothetical set of curves for T+2; 4. Calculating the profit and loss (P&L) for each future under each hypothetical curve; 5. Aggregating the contract level P&L s in order to obtain the portfolio level P&L associated with each hypothetical curve. 6. Calculating the 99.7th percentile of the portfolio level P&L vector. Concentration Margin The Hedge Cost matrix will be a matrix where element (i,j) represents the basis point cost typically associated with executing a trade with a PV01 of j, in the i th input to ZAR JIBAR swap curve. The following algorithm will be applied to the portfolio level IM calculation for each portfolio containing swap futures: 1. After completing the portfolio VaR calculation, calculate the PV01 ladder for each portfolio; 2. For each portfolio, multiply each step in the PV01 ladder by the corresponding step in the hedge cost matrix in order to obtain the concentration margin attributable to each input to the swap curve; 3. For each portfolio, add the relevant concentration margin requirements attributable to each input to the curve, in order to obtain a portfolio level concentration margin requirement. 6
Maintenance Fees: JSE Eris Standards Maintenance Fees are assessed quarterly for JSE Standards contracts that are held past the Effective Date of each instrument. The JSE Eris Standards maintenance fees are Rx.xx per contract which is equivalent to unwinding and replacing with the active contract (also known as rolling a position), but without having to pay fees on both legs. Maintenance Fees are NOT applicable to positions that are closed out or rolled prior to the contract s Effective Date. * For this example we will assume maintenance fees to be R 2.00 Example: Trade Date: 13 November 2013 Buy to Open 10 2Y December 2013 JSE Stnd Contact Specifications Trade Date 13/11/2013 Effective Date 18/12/2013 Maturity Date 18/12/2015 Total Maintenance Fee = R0 No Maintenance Fee charge for positions closed out, or rolled, on or prior to the Effective Date Total Maintenance Fee = R80 Maintenance Fee assessed on COB of Effective Dates for points 1-4 (R2 * 4 * 10 contracts) Total Maintenance Fee = R160 Maintenance Fee assessed on COB of Effective Dates for points 1-8 (R2 * 8 * 10 contracts)* No delivery fee at maturity 7
For additional information contact: JSE +27 11 520 7777 www.jse.co.za/swaps DISCLAIMER: This document is intended to provide general information regarding the JSE Limited and its affiliates and subsidiaries ( JSE ) and its products and services, and is not intended to, nor does it, constitute investment or other professional advice. It is prudent to consult professional advisers before making any investment decision or taking any action which might affect your personal finances or business. The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the accuracy or reliability of any advice, opinion, statement, or other data and information contained in, displayed on, linked to or distributed through this document. All information as set out in this document is provided for information purposes only and no responsibility or liability of any kind or nature, howsoever arising (including in negligence), will be accepted by the JSE, its officers, employees and agents for any errors contained in, or for any loss arising from use of, or reliance on this document. Except as is otherwise indicated, the JSE is the owner of the copyright in all the information featured in this document and of all related intellectual property rights, including but not limited to all trademarks. No part of this document may be copied, reproduced, amended or transmitted in any way without the prior written consent of the JSE. 2014 Compiled: April 2014. 8