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

2. 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 % of African land area – 30% of maize produced in Africa 10% of wheat produced in Africa – 60% of maize produced in SADC

3. 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

4. Total contracts traded (Futures and Options)

5. 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 , 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

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

7. 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

8. 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

9. 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

10. 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

11. Money flows: one White Maize Contract-price falls
Date Contract Contract Action Seller’s Buyer’s price value acc acc.
8/3 R R init. margin R R10000
11/3 R R var. margin R10500 Ü R500 Ü R10000
(R500)
12/3 R R var. margin R10300 Þ R200 Þ R10200
15/3 R R var. margin R11000 Ü R700 Ü R (R700)
17/3 R R var. margin R13000 Ü R2000ÜR (R2000)
18/3 R R var. margin R14000 Ü R1000 Ü R (R1000)
Seller receives margin plus profit R 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

12. An extract from the current trading platform - FUTURES

13. An extract from the current trading platform - OPTIONS

14. 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

15. 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

16. White and yellow maize price trend for the Jul13 expiry

17. Build your own commodity index ??

18. 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)

19. 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

20. Trading the spread between gold and platinum

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

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

23. 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

24. 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

25. 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

26. LAST TRADING DAY FOR FUTURES & OPTIONS
Expiry Process
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

27. Range of Quanto commodities available

28. Price chart for the brent crude oil quanto

29. 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

30. 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:

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