Commodity Derivatives: opportunities from the ground up ! 27 June 2013| Chris Sturgess: Director Commodities | Johannesburg Stock Exchange

Agriculture in South Africa Agriculture down to 2,2% of GDP (but 40% of population dependant on agriculture) 10% of South African exports (by value) Major agric export earner = citrus, wine, chemical wood pulp, maize, grapes 13% of South Africa is arable land (only 20% is high potential) Major limiting resource is WATER RSA = 6% of African population 4% of African land area 25 – 30% of maize produced in Africa 10% of wheat produced in Africa 50 – 60% of maize produced in SADC

The evolution of the Commodity Derivatives Market Pre 1995 the SA grain market was regulated by Government Established in 1995 as a membership organisation of SAFEX (South African Futures Exchange) Introduced physically settled grain products: Potato and beef carcass contract White and Yellow Maize, Bread milling wheat, Sunflower Seeds, soya beans and sorghum Trade both futures and options on the above Physical delivery is facilitated via a warehouse receipt In 2001 bought out by the JSE In 2009 began introducing cash settled commodities that reference international markets eg CBOT corn, NYMEX WTI crude oil, COMEX gold and copper etc In 2011 introduced “quanto futures” and basis premium trading for physically settled grain contracts

Total contracts traded (Futures and Options)

Oct – record open interest at 190 000, up 5% from previous record 2012 Trading Statistics 2012 – new all time record of just under 3 million contracts, up 13,5% from previous year Oct – record open interest at 190 000, up 5% from previous record R510 billion in value traded Saw 3,4 million tons of grain (maize, wheat, soybeans etc) physically delivered, represents less than 2% of all futures contracts traded however about 24% of the total grain crop in South Africa Jan to May 2013 – 4% up on the number of contracts traded

We have been called many things in the past, however we REMAIN South Africa’s most transparent and effective price risk management platform !

Participants include hedgers (farmers and millers) and speculators Function of the market Provide a price risk management and price discovery platform to the South and Southern African grain market through standardised derivative instruments Participants include hedgers (farmers and millers) and speculators Currently have active 52 member firms servicing the commodities market 5 Clearing Members provide the underlying guarantee to the derivative transactions

What is a derivatives market A trading operation that provides market participants with a price determination mechanism and a price risk management facility through which they can manage their exposure to adverse price movements on the underlying physical market and where performance by both counterparties to the contract is guaranteed

Liquidity requires both hedgers and speculators Hedgers can be described as those market participants who use derivative contracts to manage price risk of a underlying commodity that is present in the physical market and who aim to pass on price risk Typically a farmer producing the grains we trade, a miller who processes the grain, a trader involved in grains market who could export or import the product, banks involved in providing financing to the grain market Speculators are those market participants who use derivative contracts, not to manage price risk, but with the purpose of benefiting from a directional move in the derivatives market, in other words who aim to take on risk Could be farmers who will not harvest the underlying crop as per their derivative position, traders, retail and institutional clients

Derivative instruments Futures contracts: a standardised contract for a future date that will allow a market participant to hedge their underlying exposure in the physical market 100tons, of WM1 grade white maize for JULY 2013 basis Randfontein Options contracts: Put Options provide the buyer the right but not the obligation to sell grain at a specific floor price. Sellers of put options are obligated to buy grain at the floor price Call Options provide the buyer the right but not the obligation to buy grain at a specific ceiling price. Sellers of call options are obligated to sell grain at the ceiling price Options expire 5 business days before moving into the delivery month

Money flows: one White Maize Contract-price falls Date Contract Contract Action Seller’s Buyer’s price value acc. acc. 8/3 R1550 R155000 init. margin R10000 R10000 11/3 R1545 R154500 var. margin R10500 Ü R500 Ü R10000 (R500) 12/3 R1547 R154700 var. margin R10300 Þ R200 Þ R10200 15/3 R1540 R154000 var. margin R11000 Ü R700 Ü R10000 (R700) 17/3 R1520 R152000 var. margin R13000 Ü R2000ÜR10000 (R2000) 18/3 R1510 R151000 var. margin R14000 Ü R1000 Ü R10000 (R1000) Seller receives margin plus profit R10000 + R4000 (R1550-R1510 x 100) from the futures market and R1510/t from the physical market. Buyer receives margin R10000, but has lost R4000 (which as a hedger will be compensated for by a lower physical purchase cost: R1510/t). Money flows: one White Maize Contract-price falls

An extract from the current trading platform - FUTURES

An extract from the current trading platform - OPTIONS

The local trading and clearing model Clearing House Clearing Member Clearing Member Broker/Member Trade Broker/Member Client A Client X Client B Client Y Client C Client Z

Physically settled grain products available Products (futures and options) 1 standardised contract = Exposure per contract Initial Margin requirements White and Yellow maize 100 metric tonnes R230,000 R12500/contract Bread milling wheat 50 metric tonnes R175,000 R7000/contract Soya beans 25 moving to 50 metric tonnes R131,250 R5000 or R10000/contract Sunflower seeds R280,000 R12000/contract Sorghum R285,000 R11000/contract Above based on pricing as at 26 June EXPIRY MONTHS AVAILABLE MARCH, MAY, JULY, SEPTEMBER, DECEMBER (All other months introduced on a rolling basis) JSE fees: Futures12cents/ton Options 6cents/ton

White and yellow maize price trend for the Jul13 expiry

Build your own commodity index ??

Products (futures and options) 1 standardised contract = Cash settled Commodity Derivative products available referencing the international markets Products (futures and options) 1 standardised contract = Exposure per contract Above based on pricing as at 26 June Initial Margin requirements COMEX Gold 10 troy ounces R126,000 R8500/contract COMEX Copper 2500 pounds R78,375 R5700/contract COMEX Silver 500 troy ounces R95,225 R10700/contract NYMEX Platinum R135,020 R9500/contract NYMEX WTI Crude Oil 100 barrels R95,340 CBOT Corn 100 metric tonnes R250,000 R21000/contract CBOT Soybeans R565,500 R33000/contract KCBT Hard Red Winter Wheat 50 troy ounces R125,650 R10000/contract EXPIRY MONTHS AVAILABLE MARCH, JUNE, SEPTEMBER, DECEMBER (ALIGNED TO CURRENCY FUTURES EXPIRY DATES)

Foreign referenced commodity derivatives available JSE fees range from R10 –R15/contract Active market makers competing: ABSA Capital, CJS Securities, Standard Bank, Rand Merchant Bank All products are CASH SETTLED under licence from the CME Group

Trading the spread between gold and platinum

Something new to the commodity mix……. Think back 30 years to 1982

Quanto Futures and Options Think back 30 years to 1982 $1 = R1

Quanto Futures and Options New to South Africa, not new internationally JSE providing access to the international commodity markets A Quanto Future is a rand denominated commodity investment product that delivers the same payoff as a pure dollar denominated commodity investment, allowing investors immunity from exchange rate fluctuations between the rand and dollar Quanto Futures are cash settled Keep it simple – take a view on the underlying commodity only, no currency view required As an example: if you expect the price of Brent Crude to go up 15% in dollar terms, then the value of your investment in the rand position via the Quanto product will also increase by 15%. The movement of the rand relative to the dollar plays no part on determining the investor’s return

Products (futures and options) 1 standardised contract = Quanto Futures available referencing the international markets (all cash settled) Products (futures and options) 1 standardised contract = Exposure per contract Above based on pricing as at 26 June Initial Margin requirements COMEX Gold 100 troy ounces R125,400 R7400/contract COMEX Copper 25000 pounds R76,562 R6700/contract COMEX Silver 5000 troy ounces R92,675 R12700/contract NYMEX Platinum R133,210 R10000/contract Brent Crude Oil 1000 barrels R100,450 R93700/contract Other products: Sugar, Coffee, Cotton, Cocoa, Corn, Natural Gas, Heating Oil, Palladium, Gasoline EXPIRY MONTHS AVAILABLE FEBRUARY, MAY, AUGUST, NOVEMBER (check the underlying reference month) See the full list on www.jse.co.za/quantofutures

Reference months for market making and expiry process Expiry date will be the 15th business day prior to the first business day of the reference month, with the exception of the QGLD Feb and Aug expiries which will reference a further dated month but continue to expire on the same calendar day as all other Quanto’s. Should the day fall on a national holiday in either South Africa or US, or a weekend, the first business day prior to this will be referenced: JSE LISTED EXPIRY CME GROUP REFERENCE MONTHS FOR MARKET MAKING BRENT CRUDE OIL COPPER GOLD FEB Mar Apr MAY Jun AUG Sep Oct NOV Dec

LAST TRADING DAY FOR FUTURES & OPTIONS Expiry Process www.jse.co.za/quantofutures select Trading Calendar Final cash settlement takes place on Clearance Day EXPIRY MONTH LAST TRADING DAY FOR FUTURES & OPTIONS CLEARANCE DATE May 2013 13/05/2013 14/05/2013 Aug 2013 12/08/2013 13/08/2013 Nov 2013 11/11/2013 12/11/2013

Range of Quanto commodities available

Price chart for the brent crude oil quanto

How to access the products Register as a client with a Safex Derivatives Member on the JSE Many member firms offer online trading platforms that provide clients with direct market access (check out for the flag on the member list) All transactions, provided they through a registered client account, are guaranteed by the Clearing House (SAFCOM) Transaction costs are negotiable with the member firm Appreciate trading derivatives

Risk disclosure statement The risk disclosure statement in the client agreement is made pursuant to the rules. The risk of loss arising from trading in futures and options can be substantial. You should carefully consider whether such investments are suitable for you in the light of your circumstances and financial resources. Ensure you aware of the 8 points referenced in the client agreement: www.jse.co.za

Thank you for your interest! Web: www.jse.co.za/commodities | Email: commodities@jse.co.za |Tel: +27 11 520 7299

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