.01 Bonds refer to fixed interest securities issued in the primary market by the Government, a Municipality, a Local Authority, any Statutory Body or corporate. Bonds are redeemable at a specific future date and are generally purchased and sold on the basis of "yield to redemption" or "yield to maturity". This yield to maturity is the effective yield taking into account the interest receivable and the capital amount over the period to redemption. The yield varies depending upon the general level of interest rates in force from time to time and reflects demand and supply for a particular bond security.
.02 The bond market is regulated by the Bond Exchange of South Africa (BESA). Participants in the bond market include issuers, investors, intermediaries and speculators. These participants may be a JSE member of the exchange or clients of JSE members. In terms of the Financial Markets Control Act, the “business of buying and selling of listed debt securities” may only be carried on by exchange JSE members operating through BESA or through a BESA JSE member.
.03 JSE membership of the exchange is restricted to corporate entities that may elect to be registered as either trading or broking JSE members. Trading JSE members are permitted to trade on own account with or on behalf of clients while broking JSE members are restricted to providing a name-give-up broking service to trading JSE members and registered clients. Trading JSE members may also be JSE members of the JSE.
.04 The Universal Exchange Corporation Limited (UNEXcor) is the recognised clearing house, which undertakes the clearing of bond trades and facilitates the settlement of all reported transactions. All BESA JSE members use the Bonds Automated Trading System (BATS) to match orders and report trades to BESA and to UNEXcor. One of the key responsibilities of the clearing house is to provide a comprehensive system of electronic settlement to JSE members, using the Central Depository for scrip settlement and the SARB for funds settlement. UNEXcor has merged with STRATE and is therefore effectively owned by the shareholders of STRATE.
.05 The Bond Exchange Rules require that all bond transactions be settled electronically, thereby ensuring both JSE members and investors of delivery versus payment. This electronic settlement process is managed by settlement agents, approved by the exchange, who use trading information reported to UNEXcor to perform net settlement of both funds and scrip on behalf of all market participants. The settlement agents have direct access to the Central Depository (CD) and have clearing accounts with the SARB.
.06 The Central Securities Depository, operated in terms of the Custody and Administration of Securities Act, is responsible for the immobilisation of bonds. It holds the immobilised bonds in safe custody and facilitates transfer of ownership electronically within the depository system. CD Ltd, which operates the CSD, has also merged with STRATE. Key functions of the CD include the immobilisation of scrip, payment of interest and capital, electronic net settlement of scrip and the electronic pledging of scrip.
.07 All trades executed on or reported to BATS are automatically submitted to the UNEXcor system for settlement after the trade has been executed.
.08 The bond market is a dual trading capacity market in that a trading JSE member may act as a principal (for its own account) or as an agent (concluding the trade on behalf of the client). The BESA Rules specify the way in which a trading JSE member must declare the capacity in which it is trading.
.09 CSA perform settlement electronically on behalf of their clients. Settlement is performed not only for JSE members but also for those clients that settle directly through a CSA rather than through a JSE member.
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.10 The CSA are the major clearing banks. Their money account systems and their scrip account systems are used to apply the debits and credits to the appropriate accounts on settlement day as advised by the UNEXcor system. Consequently, on settlement day a seller has its scrip account debited and its funds account credited, whilst the buyer has its scrip account credited and its fund account debited.
.11 If a client is in default then the JSE member with whom the client traded will be responsible for taking over the client’s position by unwinding the client’s trades and booking new trades with themselves as principal.
.12 If a JSE member is in default, then BESA will unwind all of the defaulting JSE member’s trades. JSE members may need to trade to settle their new positions. Any price movement losses arising from having to re-transact to settle their new positions may be claimed from the Bond Exchange’s Guarantee Fund.
Bond options
.13 A bond option gives the holder thereof the right, but not the obligation, to buy or sell a specified number of a specified type of bond, at a specified price during a specified period (American option) or at a specified date (European option).
.14 Bond option trading involves either member-to-member or member-to-outside counterparty dealing.
JSE members may act as principals or agents in these transactions.
.15 Bond option trades by JSE members are conducted OTC and are reported by the JSE members to the JSE via the Derivative Trade Reporting System for capital adequacy purposes.
.16 Settlement procedures are not governed by the JSE. Market practice is to settle premiums on the following working day. Exercised positions are settled on the value dates specified in the individual bond option contracts and are all scrip settled.
.17 Revenue earned by JSE members from option trading includes gains and losses from jobbing activities, spread income from trading options on a back-to-back basis, and premium income/fair value losses from writing options. In addition, profits in the underlying bonds are also derived where bond options are exercised in the spot market.
.18 A bond options register is required to be maintained by each JSE member. This register provides a record of the status of each option contract (i.e. sold, exercised, lapsed or held in safe custody) as well as full details of the terms of each option.
Futures and options on futures
.19 A futures contract is an exchange guaranteed agreement to buy or sell a standard quantity and quality of a specified asset (be it a commodity, a financial asset or a notional asset, e.g. a share index) on a specified date and time, at a price that is determined at the time of entering the contract.
.20 An option on a future gives the holder the right, but not the obligation, to buy or sell a specified futures contract at a specified price (the strike price), during a specified period. “SAFEX options” are options on futures traded through SAFEX.
.21 OTC options on SAFEX futures are traded over the counter, i.e. not through an exchange. It is illegal to trade option contracts identical to the SAFEX contracts outside the exchange. However, in reality, many OTC options on SAFEX futures are substantially the same as those traded through SAFEX, except that one or two details have been slightly altered, e.g. the expiry time.
.22 JSE members’ positions are marked-to-market at the end of each day, and the “variation margin”, being the profit/loss on the contract, is either settled by the clearing JSE member or paid to the clearing JSE member by noon the next day.
.23 JSE members may deal in futures and options on futures either as an agent for their clients or as principal for their own account. If a client fails to pay a margin on a contract, the JSE member has the authority to close the position without the client’s permission, even if the JSE member was acting as an agent.
.24 The JSE currently lists futures and options on futures on the JSE indices, and individual shares and bonds on its financial derivatives market. It also lists futures and options on futures on certain agricultural commodities on its agricultural products market.
Traded equity options
.25 An equity option gives the holder the right, but not the obligation, to buy or sell a specified number of a listed equity at a specified (strike) price, during a specified period (American Option) or on a specified date (European Option). There are two basic types of option – a call option, which gives the holder the right to buy, and a put option, which gives the holder the right to sell.
.26 When an option is purchased, the purchaser (holder) of the option pays an upfront premium to the seller (writer) of the option. This is paid irrespective of whether or not the option is finally exercised.
.27 On exercising an equity option, the party receiving the underlying security becomes entitled to any incidental accruals that may have arisen during the period of the option. Incidental accruals are those rights, events and other incidental accruals that flow from the ownership of securities that accrue to the underlying listed equity during the period of the option and prior to the exercise date.
.28 Trading by JSE members in OTC equity options takes place over the telephone. JSE members then report details of all such transactions through the JSE Derivative Trade Reporting system. Scrip-settled OTC equity options are exercised through SETS as reported trades, and the delivery of the underlying securities is then effected via STRATE.
.29 The requirement for JSE members to report all OTC derivative transactions through the JSE Derivative Trade Reporting system enables those transactions to be automatically incorporated in the JSE members’ capital adequacy calculations as computed by the JSE. It also enables the Surveillance Division to determine whether the exercise of an option reported to SETS meets the criteria to qualify as a report-only transaction in that it originates from a genuine OTC option transaction.
.30 For all OTC equity options the holder is exposed to the risk of the writer defaulting during the period of the contract, prior to exercising. Equity options are not evidenced by prescribed standard contracts, although some form of contract must be entered into between the parties.
.31 A JSE member may trade as agent or principal in OTC equity options.
.32 JSE members may act as agent in trades in off-market OTC equity options between willing counterparties, who enter into individual contracts with specific terms. The exercise of these options could take place directly between the buyer and the seller, which would effectively result in an off-market trade in the underlying shares between the purchaser and the writer of the option.
Kruger-Rands
.33 Kruger-Rands are gold coins struck by the SA Mint and are produced in sizes of 1oz, ½oz, ¼oz and 1/10 oz. Kruger-Rands are legal tender, which means the SARB is obliged to buy the coin back, based on the Rand value of the coin's gold content.
.34 The primary market for Kruger-Rands comprises the issue of new coins by the SARB. Sales are by way of tender, with only banks being permitted to tender.
.35 The JSE is the largest most liquid secondary market for Kruger-Rands in South Africa. Kruger-Rands are traded in the same way as any listed equity, with prices being quoted on all four sizes of coins.
.36 Three principal factors affect the Krugerrand price, namely:
• the gold price in US Dollar terms;
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• the Rand/Dollar exchange rate; and
• country risk (the political and social situation).
.37 Krugerrand trading on the JSE and the settlement of Krugerrand transactions between JSE members is governed by the JSE rules and directives, particularly Rule 5.260.
.38 The commission charged by a JSE member when carrying out a Krugerrand transaction for a client is at a negotiated rate as for an equities transaction. Jobbing profits are earned from principal dealings.
.39 The settlement of Krugerrand transactions is dealt with as follows:
• Deliveries of Kruger-Rands are effected directly between JSE members on any business day of the new settlement period.
• When making delivery, two delivery slips produced by the BDA System and stamped by the delivering JSE member accompany the delivery. Upon acceptance of the Kruger-Rands, the receiving JSE member countersigns and stamps the delivery slips and retains one copy for its records.
• Payment in respect of the deliveries shall be effected either by bank cheque or the electronic transfer of funds, as arranged between the delivering and receiving JSE members.
• Acceptance of the coins by the receiving JSE member or client constitutes acknowledgement that the coins are genuine, unless held in safe custody, in which case acceptance will only be effective on receipt of the coins by the client out of safe custody.
• Upon acceptance of the coins, payment will be made either by the JSE member to the client, in the case of a sale, or direct to the JSE member, in the case of a purchase.
• A Kruger-Rands register must be maintained to record all coin movements and balances. This is separate to the equities register.
• Kruger-Rands purchased on behalf of clients must be allocated as soon as possible after coming into the possession of the JSE member and either be delivered or offered for delivery (provided the coins have been fully paid for).
.40 JSE members may not deal in Kruger-Rands on behalf of non-residents. The import and export of gold coins is controlled by the Exchange Control Regulations and requires the prior approval of the Exchange Control Department of SARB.
.41 Where a JSE member is authorised to hold Kruger-Rands in safe custody on behalf of a client, the JSE member must:
• have an approved mandate signed by the client, unless one exists in respect of other securities held in safe custody;
• seal and mark the coins, and deposit them with a financial institution or alternatively they may be kept in a suitable container in the JSE member's safe or in the JSE member’s safe in a strong room; and
• maintain a register of mandates and a safe custody ledger of Kruger-Rands.
.42 Delivery of Kruger-Rands by a JSE member to a purchasing client shall only be effected against positive identification of the purchaser or its duly authorised representative. Delivery shall take place personally to the purchaser or its authorised representative against the issue of an official receipt or, alternatively, by registered post with the JSE member retaining the postal slip, subject to the purchaser consenting to this form of delivery in writing and acknowledging full responsibility for the risk involved.
Money Market
.43 The "Money Market" comprises:
• the placement and borrowing of funds, either on call or on fixed deposit (sometimes called
"term deposit");
• the trading of money market instruments such as banker's acceptances, negotiable certificates of deposit, treasury bills and commercial paper.
.44 This Guide will use the term "money broking activities" to refer to that part of a JSE member's money market operation that involves the placement of funds on behalf of clients.
.45 Although money market activity does not fall within the scope of the JSE’s business, some JSE members are materially involved in this area and there are JSE rules that deal specifically with how JSE members should conduct their money broking and money market instruments activities.
Money broking
.46 JSE members conducting money broking activities may either open an account at a bank in the name of the JSE member, which is maintained by the JSE member, or they may open an account in the name of the client.
.47 If the account is in the name of the client, then the bank should forward statements of account directly to the client and the JSE member merely needs to ensure that the statement contains certain relevant information relating to deposits and withdrawals, the terms of the deposit and the fee charged by the JSE member. As this type of arrangement is totally transparent to the client, the rules regulating such accounts are fairly limited.
.48 Where the JSE member opens and maintains an account in the name of the JSE member, the JSE member is effectively “pooling” client funds, and the JSE member is responsible for reporting to its clients. This type of arrangement requires more stringent controls, and the rules dealing with this type of activity are far more extensive.
.49 JSE members’ authority to pool client funds in the money market is derived from a special dispensation granted to JSE members in the Banks Act. The conditions under which JSE members may pool clients’ money market funds are contained in a schedule to the Banks Act issued under Government Notice R1202 of 22 September 1998 in Government Gazette 19283. The JSE rules (Rule 5.270.4) then state that the JSE member must comply with the conditions in the Government Notice.
Auditors therefore need to refer to the Government Notice to familiarise themselves with the relevant conditions.
.50 Some of the key requirements in the Schedule to the Banks Act are that:
• the arrangement between the JSE member and its client shall be set out in a prescribed mandate (refer Annexure to Banks Act Schedule);
• the JSE member shall operate a separate bank account/s for money broking transactions, which shall be reconciled daily and shall bear interest if not zeroed daily;
• the JSE member shall monthly furnish each client with a statement produced by the BDA system or such other system as the Director: Surveillance may approve, and which reflects certain information relating to amounts invested and withdrawn, names of the banks with whom transactions have been concluded, rates of interest received by the JSE member, amount of interest paid to the client and the fee charged by the JSE member; and
• the JSE member shall balance borrowers (banks) to lenders (clients) on a daily basis.
.51 In terms of Rule 5.270.1, prior written approval from the JSE Committee is required for a JSE member to conduct money broking activities.
.52 JSE members may only act as agents for their clients in their money broking activities. This means that they must place clients’ funds with a bank on the day they are received. Rule 5.200.1 prohibits a JSE member from holding a client's funds in the firm's account overnight. If unable to deposit the money with a bank on the client’s behalf on the day it is received, the JSE member must deposit the funds with JSET. If within three business days the funds have still not been deposited with a bank, they must be returned to the client.
48 Money market instruments
.53 Trading in money market instruments normally takes place over the telephone, with deals usually being confirmed in writing. Settlement is made directly between the parties concerned and takes place on the same day the transaction is confirmed. It is relevant for risk management purposes to note that these products are not exchange traded, and as a result counterpart risk should be appropriately addressed as part of normal audit procedures. JSE Rule 5.280 regulates transactions in money market instruments by JSE members. Some of the key conditions are that:
• JSE members may only trade as principal in money market instruments with institutional, governmental, public and corporate clients that meet certain criteria;
• the syndication of monies for the purpose of purchasing a money market instrument is not permissible;
• money market instruments held by a JSE member on behalf of a client shall be held in a safe
• money market instruments held by a JSE member on behalf of a client shall be held in a safe