## _wp09196

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---

### Introduction and purpose
- Examines the role of derivatives in South Africa and options for promoting derivatives markets in Sub-Saharan Africa.
- Purposes and observed benefits:
  - Facilitate management of financial risk, allow investors to unbundle and transfer financial risk, contribute to more efficient allocation of capital and cross-border capital flow, create diversification opportunities, facilitate risk transfer, price discovery, and more public information.
  - South Africa’s market developed primarily to “self-insure” against volatile capital flows and manage financial risk associated with high volatility of asset prices.

### Market structure and instruments
- Two broad categories: options and futures.
- Instruments include:
  - Warrants, equity futures and options, agricultural commodity futures and options, interest rate futures and options, currency futures, and fixed income derivatives.
  - Fixed income derivatives: bond futures, forward rate agreements (FRAs), vanilla swaps, and standard bond options.
- Exchange operations and key developments:
  - Equity Derivative Division of the Johannesburg Stock Exchange (JSE) operations since 1990: warrants, single stock futures (SSF), equity indices, and interest rate futures and options.
  - SSF are standardized by size, expiration, and tick movement and are traded via the South African Futures Exchange order matching platform (automated trading system, ATS).
  - Derivatives initially listed on 4 JSE-listed companies increased to 52.
  - SAFEX Agricultural Markets Division established January 1995 with start-up capital of 4.2 million rand; white and yellow maize listed May 1996; wheat November 1997; sunflower seeds early 1999; options on these agricultural contracts introduced in 1998.
  - JSE commenced trading rand currency futures on Yield-X on 18 June, 2007; underlying instruments: US$/rand, GBP/rand, and EUR/rand future contracts; trading commenced on the rand/US$ contract only as a retail product; minimum contract for qualifying individuals is US$1,000 with no limitations.
  - Interest rate derivatives approved for listing on the Bond Exchange of South Africa (BESA) in December 2004; BESA introduced bond futures, FRAs, vanilla swaps, and standard bond options; BESA-listed derivative instruments traded using both an electronic system and over the counter.
- Trading venues and segmentation:
  - JSE: warrants, equity futures and options, agricultural commodity futures and options.
  - BESA: fixed-income derivatives (bond futures, FRAs, vanilla swaps, standard bond options).
  - Interest rate futures and options: traded on both exchanges.
  - Currency futures and some fixed income derivatives: mainly concentrated in the OTC market.
  - Exchange-based trading on interest rate futures and options commenced in 2003 on BESA through Intersec; exchange-based trading on currency futures commenced on JSE Yield-X in 2007.
- Clearing and supervision:
  - Financial Services Board of South Africa (FSB) supervises nonbank financial institutions; Capital Markets Department supervises licensed exchanges, central securities depositories and clearing houses.
  - JSE and BESA are licensed exchanges supervised by the FSB.
  - SAFEX Clearing Company (under direction of the JSE) licensed to clear transactions in derivatives traded on the JSE.
- Transparency:
  - Organized exchanges (JSE and BESA) provide standardized and transparent trading.
  - OTC markets are privately negotiated and bilaterally arranged, with less transparency (except OTC arrangements on Intersec).

### Market statistics and growth
- OTC market daily averages (notional amount in millions of U.S. dollars; source: BIS, Triennial Central Bank Survey, 2007):
  - Currency derivatives: 2001 = 7,858; 2004 = 8,032; 2007 = 10,568; Growth Rate = 2.21
  - Interest rates derivatives: 2001 = 578; 2004 = 2,961; 2007 = 4,474; Growth Rate = 412.28
  - Total: 2001 = 8,436; 2004 = 10,375; 2007 = 15,042; Growth Rate = 22.98
  - Total emerging market: 2001 = 160,375; 2004 = 240,389; 2007 = 151,787; Growth Rate = 49.89
  - Share of emerging market (volume of South Africa daily trade in derivatives as a share of emerging markets, in percent): 2001 = 5.26; 2004 = 4.32; 2007 = 9.91
  - Note: Currency derivatives comprise outright forwards, foreign exchange swaps, currency swaps, and options. Interest rate derivatives include forward rate agreements, swaps, options, and other products.
- South Africa’s OTC market accounted for about 9.9 percent of OTC derivatives in emerging markets in 2007.
- Exchange-based composition (2001–2008 and 2008 snapshot):
  - 2008: futures contracts (interest rates, currency futures and fixed income derivatives) accounted for 49 percent of the volume of transactions; equities accounted for 46 percent.
  - 2001–2008: futures contracts accounted for about 47 percent of total volume; options on futures contracts accounted for 9 percent; individual equities accounted for 43 percent; agriculture commodity contracts accounted for 1 percent.
- Growth rates and contract-level statistics (2001–2008):
  - Average annual growth rate in the number of futures contracts: 82.7 percent.
  - Underlying value of futures contracts grew by 28.4 percent per year on average.
  - Number of options contracts increased by 10.4 percent (average).
  - Number of equity contracts increased on average by 94.3 percent between 2001 and 2008.
  - Number of agricultural commodity contracts increased on average by 19 percent between 2001 and 2008.
  - Activity in equity contracts on SSF on the JSE almost tripled in three consecutive years from 2005 to 2007.
  - Futures contracts accounted for the largest share of trading volume in 2008: Futures 47%, Equity 43%, Options 9%, Agriculture commodity 1%.
  - The underlying value of futures contracts is about 96 percent of the total (share of notional amount).
- Selected figures from Table 2 (number of contracts, notional amounts, open interest):
  - Futures contracts, Number of deals (2001, 2006, 2007, 2008, Total, Average): 174,018; 694,118; 1,038,911; 1,233,253; 4,670,557; 583,820.
  - Futures contracts, Number of contracts (2001, 2006, 2007, 2008, Total, Average): 11,333,675; 85,625,757; 296,885,064; 413,672,641; 884,670,528; 110,583,816.
  - Futures contracts, Notional amount (2001, 2006, 2007, 2008, Total, Average): 74,316; 415,958; 693,572; 502,557; 2,305,596; 288,199.
  - Futures contracts, Open interest (2001, 2006, 2007, 2008, Total, Average): 18,758; 1,771,316; 4,762,455; 1,599,326; 8,706,356; 1,088,295.
  - Options on future contracts, Number of contracts (2001, 2006, 2007, 2008, Total, Average): 24,317,784; 17,552,862; 30,455,493; 37,804,393; 179,202,486; 22,400,311.
  - Options on future contracts, Notional amount (2001, 2006, 2007, 2008, Total, Average): 9,848; 13,867; 15,105; 19,266; 91,429; 11,429.
  - Equity contracts (number of contracts) (2001, 2006, 2007, 2008, Total, Average): 6,840,323; 75,423,583; 279,760,204; 391,329,595; 818,169,690; 102,271,211.
- Table 3 percent changes (2001–2008 excerpts):
  - Futures Contracts, Number of contracts: –9.5 (2002); 143.4 (2006); 246.7 (2007); 39.3 (2008); average 82.7.
  - Futures Contracts, Underlying value: –11.2 (2002); 93.1 (2006); 66.7 (2007); –27.5 (2008); average 28.4.
  - Options on future, Number of contracts: –21.4 (2002); 21.8 (2006); 73.5 (2007); 24.1 (2008); average 10.4.
  - Options on future, Underlying: –34.4 (2002); 93.4 (2006); 3.9 (2007); 8.9 (2008); average 27.5.
  - Equity contracts: 51.0 (2002); 176.4 (2006); 270.9 (2007); 39.9 (2008); average 94.3.
  - Agriculture commodity contracts: 96.7 (2002); 9.5 (2006); 23.8 (2007); 10.2 (2008); average 19.0.
- Table 4 economic and capital market growth rates (2001–2008 averages):
  - GDP/capita percent growth rate (2001, 2006, 2007, 2008, Average 2001–2008): 0.78; 4; 3.8; 1.9; 2.6.
  - Capital market percent change in value of equity (2001, 2006, 2007, 2008, Average 2001–2008): 31.7; 21.2; 47.9; –13.5; 20.6.
  - Capital market percent change in value of bond (2001, 2006, 2007, 2008, Average 2001–2008): 70.7; 40.8; 18.4; 29.5; 14.1.
  - Future contracts, percent change (2001, 2006, 2007, 2008, Average 2001–2008): 138.1; 67.1; 68.2; –53.7; 41.2.
- Table 5 notional amount of exchange-traded derivatives (millions of U.S. dollars):
  - Financial futures and options on futures: 429,842 (2006); 708,678 (2007); 521,823 (2008, January–October).
  - Warrant: 1,004 (2006); 396 (2007); 488 (2008).
  - Agriculture commodity futures and options: 23,673 (2006); 41,498 (2007); 38,673 (2008).
  - Interest rates derivatives: 4,591 (2006); 5,727 (2007); 12,809 (2008).
- Table 6 (World Bank Doing Business Report 2009 rankings for selected indicators):
  - South Africa: Ease of Doing Business 2; Protecting Investors 1; Enforcing Contracts 13; Paying Taxes 3.
  - Kenya: Ease of Doing Business 5; Protecting Investors 14; Enforcing Contracts 19; Paying Taxes 36.
  - Mauritius: Ease of Doing Business 1; Protecting Investors 2; Enforcing Contracts 10; Paying Taxes 2.
  - Nigeria: Ease of Doing Business 12; Protecting Investors 6; Enforcing Contracts 16; Paying Taxes 25.
  - Congo, Dem Rep.: Ease of Doing Business 46; Protecting Investors 32; Enforcing Contracts 44; Paying Taxes 33.

### Drivers of growth and recent trends
- Economic and capital market contributions:
  - GDP per capita grew averagely by 2.6 percent between 2001 and 2008.
  - Underlying value of equities appreciated by 20.6 percent per annum (average 2001–2008).
  - Underlying value of bonds appreciated by 14.1 percent per annum (average 2001–2008).
  - Underlying value of futures contracts experienced an average increase of 41.2 percent (average 2001–2008).
- Turnover dynamics:
  - Turnover grew steadily in 2007 and declined in 2008 (notional amounts in 2008 are from January to October).
  - Currency futures bolstered by exchange control reforms.
  - Agricultural commodity derivatives rose due to high local grain prices, tight supply conditions, and high global demand (notably maize demand for bio-fuel production in the United States).
  - Turnover in warrants weakened in 2008 compared with 2006.

### Risks, constraints, and policy implications
- Benefits:
  - Supported capital inflows, helped participants price, unbundle and transfer risk, and facilitated risk management.
- Risks and constraints:
  - Misuse of derivatives can lead to financial crisis, accelerate capital outflows, and amplify volatility.
  - Tight regulations on asset allocations by insurance and pension funds to prevent excessive risk taking can constrain potential benefits to the local derivatives market.
  - OTC markets have lower transparency compared with exchange-based markets, raising concerns about counterparty risk and information availability.
- Institutional investor ceilings for currency futures:
  - Pension funds and long-term insurance companies subject to their 15 percent foreign allocation allowance.
  - Asset managers and registered collective investment schemes subject to their 25 percent foreign allocation limits.
  - Individuals and foreigners: no limits applicable.
  - Corporates, banks, and trusts require a valid JSE or BESA control approval number or approval from the South African Reserve Bank.
- Supervision and capacity constraints:
  - The FSB faces challenges in staff training and recruitment to meet supervisory demands.
  - Hedge funds are barred in the currency futures market by the South African Reserve Bank (SARB) until the industry is regulated; barring affects marketability and liquidity but effective regulation is a pre-requisite.
  - Certain investment restrictions have affected unit trusts’ involvement in interest rate futures; pension funds and banks remain active in different maturity segments (banks: one-to-five-year; pension funds: five-year and above).
- Transparency, governance, and infrastructure gaps:
  - Need for clear accounting standards and prudential guidelines aligned to international financial reporting standards and generally acceptable accounting principles.
  - Harmonize tax codes for cash and derivatives trading and ensure easy payment systems for derivatives market activities.
  - Enhance risk management capabilities via symmetric information, prompt disclosure, and adoption of Basel-type guidelines for capital adequacy for derivative instruments; consider capital insurance.
  - Investec and OTC derivatives markets can be enhanced by greater disclosure, information symmetry, and information on credit standing of trading parties.
- Behavioral and incentive issues:
  - Set appropriate incentives for investment managers to avoid excessive tail risk taking and herding; compensation structures should not be exclusively tied to returns.
  - Adopt a risk management approach to financial regulation, including judicious monetary policy and macro-prudential measures.

### Policy recommendations and actions suggested
- Strengthen exchange control regulations judiciously while expanding the base of local institutional investors.
- Maintain investment restrictions for foreign institutional investors until supervisory capacity and regulatory frameworks are strengthened.
- Allow hedge funds only after effective regulation and supervisory capability are in place.
- Review investment restrictions on unit trusts to deepen participation in fixed income derivatives once regulation and supervision permit.
- Align investment manager incentives to avoid tail risk taking and herding; diversify compensation metrics beyond short-term returns.
- Adopt a risk-management approach to regulation, including macro-prudential measures and monetary policy tools.
- Improve investor education (including use of “caveat emptor” warnings) and conduct face-to-face marketing and education for agricultural market participants.
- Strengthen corporate governance, transparency, accounting standards, prudential guidelines, tax uniformity, and payment systems for derivatives activities.
- Enhance risk assessment capabilities of regulators and adopt Basel-type capital adequacy guidelines for derivative exposures; consider capital insurance mechanisms.
- Promote greater disclosure and transparency in OTC markets and facilitate information on counterparties’ creditworthiness.
- Self-regulation should be accompanied by stronger government-supported sanctions where appropriate.

### Lessons for other Sub-Saharan African countries
- Derivatives markets can help SSA countries “self-insure” against volatile capital flows and reduce overdependence on bank credit.
- Introducing currency futures and relaxing exchange controls can increase liquidity, but must be accompanied by proper regulation and supervisory capacity.
- Commodity futures can help manage seasonal risks in agriculture-dependent economies; South Africa’s experience demonstrates the value of agricultural commodity futures and commodity exchanges.
- Increased interest from external investors enhances liquidity but can destabilize shallow markets; proper rules are necessary to manage “hot money” flows.
- Development of derivatives markets provides alternatives to bank credit and can help create more stable local currency funding.
- Consider regional cooperation and regional derivatives market listings to achieve scale for small markets; FSB has memoranda of understanding with 45 jurisdictions and plans securities familiarization programs.
- Strengthen macroeconomic policies and political fundamentals to attract and sustain foreign investor interest.
- Use derivatives markets to broaden domestic investment opportunities, stimulate domestic savings, and enhance portfolio diversification.
- Enhance investor protection through explicit warnings (e.g., “caveat emptor”) and investor education.
- Retain the government bond yield curve as benchmark by developing local government bond markets to improve benchmark liquidity.

### Conclusion
- South Africa’s derivatives market has grown rapidly, supporting capital inflows and enabling participants to price, unbundle, and transfer risk across OTC markets and regulated exchanges.
- Tight regulations on asset allocations for insurance and pension funds aim to prevent excessive risk taking but may limit potential market benefits.
- Misuse of derivatives could precipitate financial crisis, accelerate capital outflows, and amplify volatility; strong regulation and enhanced supervisory capacity are necessary for the market to yield its ultimate benefit.
- The principal benefit for SSA countries is the ability to self-insure against capital flow volatility, reduce reliance on bank credit, and better manage seasonal risk via commodity futures, provided appropriate regulation, supervision, and regional cooperation are pursued.

*Source: _wp09196 - References*

### References..............................................................................................................

### _wp09196 - References

### Introduction and purpose
- Examines the role of derivatives in South Africa and discusses options for promoting the development of derivatives markets in Sub-Saharan Africa.
- Derivatives markets can facilitate management of financial risk, allow investors to unbundle and transfer financial risk, contribute to a more efficient allocation of capital and cross-border capital flow, create diversification opportunities, facilitate risk transfer, price discovery, and more public information (Tsetsekos and Varangis, 1997; Ilyina, 2004).
- South Africa’s market developed primarily to “self-insure” against volatile capital flows and manage financial risk associated with high volatility of asset prices.

### Market structure and instruments
- Two broad categories: options and futures.
- Instruments include:
  - Warrants, equity futures and options, agricultural commodity futures and options, interest rate futures and options, currency futures, and fixed income derivatives.
  - Fixed income derivatives include bond futures, forward rate agreements (FRAs), vanilla swaps, and standard bond options.
- Equity Derivative Division of the Johannesburg Stock Exchange (JSE) operations since 1990: warrants, single stock futures (SSF), equity indices, and interest rate futures and options.
  - SSF are standardized by size, expiration, and tick movement and are traded via the South African Futures Exchange order matching platform (automated trading system, ATS).
  - Derivatives initially listed on 4 JSE-listed companies increased to 52.
  - Market participants: retail investors, professional traders, asset managers, and short-term equity traders.
- Agricultural futures:
  - SAFEX Agricultural Markets Division established January 1995 with start-up capital of 4.2 million rand.
  - Flagship contracts: white and yellow maize listed in May 1996; wheat introduced November 1997; sunflower seeds in early 1999.
  - Options introduced on these agricultural contracts in 1998.
  - Market grew from five active brokers to 52 brokers with about 12,000 clients.
  - Average daily trading volume of 200,000 tons of maize.
  - Since 1996, more than 1.8 million contracts have traded.
- Currency futures on Yield-X:
  - JSE commenced trading rand currency futures on Yield-X on 18 June, 2007 as part of exchange control reforms announced in the 2007 budget.
  - Underlying instruments: US$/rand, GBP/rand, and EUR/rand future contracts.
  - Trading commenced on the rand/US$ contract only as a retail product.
  - Minimum contract for qualifying individuals is US$1,000 with no limitations.
- Institutional investors’ ceilings for currency futures:
  - Pension funds and long-term insurance companies subject to their 15 percent foreign allocation allowance.
  - Asset managers and registered collective investment schemes subject to their 25 percent foreign allocation limits.
  - Individuals and foreigners: no limits applicable.
  - Corporates, banks, and trusts require a valid JSE or BESA control approval number or approval from the South African Reserve Bank.
- Interest rate derivatives:
  - Approved for listing on the Bond Exchange of South Africa (BESA) in December 2004.
  - BESA introduced bond futures, FRAs, vanilla swaps, and standard bond options.
  - BESA-listed derivative instruments traded using both an electronic system and over the counter.
- Trading venues and segmentation:
  - Warrants, equity futures and options, agricultural commodity futures and options: traded on the JSE.
  - Fixed-income derivatives (bond futures, FRAs, vanilla swaps, standard bond options): traded on BESA.
  - Interest rate futures and options: traded on both exchanges.
  - Currency futures and some fixed income derivatives mainly concentrated in the OTC market.
  - Exchange-based trading on interest rate futures and options commenced in 2003 on BESA through Intersec.
  - Exchange-based trading on currency futures commenced on the JSE currency futures exchange platform (Yield-X) in 2007.
- Clearing and supervision:
  - Financial Services Board of South Africa (FSB) supervises nonbank financial institutions; Capital Markets Department supervises licensed exchanges, central securities depositories and clearing houses.
  - JSE and BESA are licensed exchanges supervised by the FSB.
  - SAFEX Clearing Company (under direction of the JSE) is licensed to clear transactions in derivatives traded on the JSE.
- Transparency:
  - Organized exchanges (JSE and BESA) provide standardized and transparent trading.
  - OTC markets are privately negotiated and bilaterally arranged, with less transparency (except OTC arrangements on Intersec).

### Market statistics and growth
- OTC market growth and composition (daily averages; notional amount in millions of U.S. dollars; source: Bank for International Settlements, Triennial Central Bank Survey, 2007):
  - Currency derivatives: 2001 = 7,858; 2004 = 8,032; 2007 = 10,568; Growth Rate = 2.21
  - Interest rates derivatives: 2001 = 578; 2004 = 2,961; 2007 = 4,474; Growth Rate = 412.28
  - Total: 2001 = 8,436; 2004 = 10,375; 2007 = 15,042; Growth Rate = 22.98
  - Total emerging market: 2001 = 160,375; 2004 = 240,389; 2007 = 151,787; Growth Rate = 49.89
  - Share of emerging market (volume of South Africa daily trade in derivatives as a share of emerging markets, in percent): 2001 = 5.26; 2004 = 4.32; 2007 = 9.91
  - Notes: Currency derivatives comprise outright forwards, foreign exchange swaps, currency swaps, and options. Interest rate derivatives include forward rate agreements, swaps, options, and other products.
- South Africa’s OTC market accounted for about 9.9 percent of OTC derivatives in emerging markets in 2007 (Figure 1).
- Exchange-based derivatives (2008 and 2001–2008 composition):
  - In 2008: futures contracts (interest rates, currency futures and fixed income derivatives) accounted for 49 percent of the volume of transactions; equities accounted for 46 percent (Figure 2).
  - Between 2001 and 2008: futures contracts accounted for about 47 percent of the total volume of transactions traded; options on futures contracts accounted for 9 percent; individual equities accounted for 43 percent; agriculture commodity contracts accounted for 1 percent (Table 2).
- Growth rates (2001–2008):
  - Average annual growth rate in the number of futures contracts: 82.7 percent.
  - Underlying value of futures contracts grew by 28.4 percent per year on average.
  - Number of options contracts increased by 10.4 percent.

### Risks, constraints, and policy implications
- Benefits: Supported capital inflows, helped market participants to price, unbundle and transfer risk, and facilitated risk management.
- Risks and constraints:
  - Misuse of derivatives can lead to financial crisis, accelerate capital outflows, and amplify volatility.
  - Tight regulations on asset allocations by insurance and pension funds to prevent excessive risk taking can constrain potential benefits to the local derivatives market.
  - OTC markets have lower transparency compared with exchange-based markets, raising concerns about counterparty risk and information availability.
- Regional policy implication:
  - Small Sub-Saharan African countries with nascent local securities markets could derive particular benefit from listing and trading derivative instruments on a regional derivatives market; regional cooperation in derivatives market listings is a policy option to explore.

*Source: _wp09196 - References*

### 8.5 per cent per year. The number of equity contracts and agricultural commodity contracts

### 8.5 per cent per year. The number of equity contracts and agricultural commodity contracts

### Key findings and market dynamics
- The number of equity contracts increased on the average by 94.3 per cent between 2001 and 2008.
- The number of agricultural commodity contracts increased on the average by 19 per cent between 2001 and 2008.
- Activity in equity contracts on SSF on the JSE almost tripled in three consecutive years from 2005 to 2007.
- Futures contracts accounted for the largest share of trading volume in 2008: Futures 47%, Equity 43%, Options 9%, Agriculture commodity 1%.
- The underlying value of futures contracts is about 96 percent of the total (share of notional amount).
- Futures and equity contracts have been rising since 2001, with higher open interest reported for futures.

### Major statistics (market size, turnover, and open interest)
- Table 2 (selected figures, actual annual, notional amount in millions of U.S. dollars):
  - Futures contracts, Number of deals (2001, 2006, 2007, 2008, Total, Average): 174,018; 694,118; 1,038,911; 1,233,253; 4,670,557; 583,820.
  - Futures contracts, Number of contracts (2001, 2006, 2007, 2008, Total, Average): 11,333,675; 85,625,757; 296,885,064; 413,672,641; 884,670,528; 110,583,816.
  - Futures contracts, Notional amount (2001, 2006, 2007, 2008, Total, Average): 74,316; 415,958; 693,572; 502,557; 2,305,596; 288,199.
  - Futures contracts, Open interest (2001, 2006, 2007, 2008, Total, Average): 18,758; 1,771,316; 4,762,455; 1,599,326; 8,706,356; 1,088,295.
  - Options on future contracts, Number of deals (2001, 2006, 2007, 2008, Total, Average): 19,701; 16,534; 21,137; 23,723; 129,020; 16,128.
  - Options on future contracts, Number of contracts (2001, 2006, 2007, 2008, Total, Average): 24,317,784; 17,552,862; 30,455,493; 37,804,393; 179,202,486; 22,400,311.
  - Options on future contracts, Notional amount (2001, 2006, 2007, 2008, Total, Average): 9,848; 13,867; 15,105; 19,266; 91,429; 11,429.
  - Options on future contracts, Open interest (2001, 2006, 2007, 2008, Total, Average): 210,855; 324,257; 867,785; 578,964; 3,402,441; 425,305.
  - Equity contracts (number of contracts) (2001, 2006, 2007, 2008, Total, Average): 6,840,323; 75,423,583; 279,760,204; 391,329,595; 818,169,690; 102,271,211.
- Table 3 (percent changes, 2001–2008):
  - Futures Contracts, Number of contracts: –9.5 (2002), 143.4 (2006), 246.7 (2007), 39.3 (2008), average 82.7.
  - Futures Contracts, Underlying value: –11.2 (2002), 93.1 (2006), 66.7 (2007), –27.5 (2008), average 28.4.
  - Options on future, Number of contracts: –21.4 (2002), 21.8 (2006), 73.5 (2007), 24.1 (2008), average 10.4.
  - Options on future, Underlying: –34.4 (2002), 93.4 (2006), 3.9 (2007), 8.9 (2008), average 27.5. (Note: table layout reflects these figures.)
  - Equity contracts: 51.0 (2002), 176.4 (2006), 270.9 (2007), 39.9 (2008), average 94.3.
  - Agriculture commodity contracts: 96.7 (2002), 9.5 (2006), 23.8 (2007), 10.2 (2008), average 19.0.
- Table 4 (economic and capital market growth rates, 2001–2008 averages):
  - GDP/capita percent growth rate (2001, 2006, 2007, 2008, Average 2001–2008): 0.78; 4; 3.8; 1.9; 2.6.
  - Capital market percent change in value of equity (2001, 2006, 2007, 2008, Average 2001–2008): 31.7; 21.2; 47.9; –13.5; 20.6.
  - Capital market percent change in value of bond (2001, 2006, 2007, 2008, Average 2001–2008): 70.7; 40.8; 18.4; 29.5; 14.1.
  - Future contracts, percent change (2001, 2006, 2007, 2008, Average 2001–2008): 138.1; 67.1; 68.2; –53.7; 41.2.
- Table 5 (Notional Amount of Exchange-Traded Derivatives, in millions of U.S. dollars):
  - Financial futures and options on futures: 429,842 (2006); 708,678 (2007); 521,823 (2008, January–October).
  - Warrant: 1,004 (2006); 396 (2007); 488 (2008).
  - Agriculture commodity futures and options: 23,673 (2006); 41,498 (2007); 38,673 (2008).
  - Interest rates derivatives: 4,591 (2006); 5,727 (2007); 12,809 (2008).
- Table 6 (World Bank Doing Business Report 2009 rankings for selected indicators):
  - South Africa: Ease of Doing Business 2; Protecting Investors 1; Enforcing Contracts 13; Paying Taxes 3.
  - Kenya: Ease of Doing Business 5; Protecting Investors 14; Enforcing Contracts 19; Paying Taxes 36.
  - Mauritius: Ease of Doing Business 1; Protecting Investors 2; Enforcing Contracts 10; Paying Taxes 2.
  - Nigeria: Ease of Doing Business 12; Protecting Investors 6; Enforcing Contracts 16; Paying Taxes 25.
  - Congo, Dem Rep.: Ease of Doing Business 46; Protecting Investors 32; Enforcing Contracts 44; Paying Taxes 33.

### Drivers of growth and recent trends
- South Africa’s economic and capital market growth contributed to rapid growth of the derivatives market:
  - GDP per capita grew averagely by 2.6 percent between 2001 and 2008.
  - Underlying value of equities appreciated by 20.6 percent per annum (average 2001–2008).
  - Underlying value of bonds appreciated by 14.1 percent per annum (average 2001–2008).
  - Underlying value of futures contracts experienced an average increase of 41.2 percent (average 2001–2008).
- Turnover grew steadily in 2007 and declined in 2008 (notional amounts in 2008 are from January to October).
- Currency futures were bolstered by exchange control reforms; agriculture commodity derivatives rose due to high local grain prices, tight supply conditions, and high global demand (notably maize demand for bio-fuel production in the United States).
- Turnover in warrants continued to weaken in 2008 compared with 2006.

### Current issues affecting the future of the market (policy and regulatory considerations)
- Need to consider further strengthening of exchange control regulations while expanding the set of institutional investors.
  - Tighter regulations could stipulate limits for institutional and corporate qualified participants in the currency futures market to prevent excessive risk taking by insurance and pension funds, but such limits may constrain demand and limit potential benefits.
- Concerns about vulnerability to swings in market sentiment and risk aversion as global financial turmoil persists.
- Need to maintain investment restrictions on institutional investors, especially foreign investors such as insurance and pension funds, while expanding the set of local institutional investors to deepen the market.
- Strengthening of supervision and regulatory capacity is required:
  - The Financial Services Board (FSB) faces challenges in staff training and recruitment to meet supervisory demands.
  - Hedge funds are barred in the currency futures market by the South African Reserve Bank (SARB) until the industry is regulated; barring affects marketability and liquidity but effective regulation is a pre-requisite.
  - Certain investment restrictions have affected unit trusts’ involvement in interest rate futures; pension funds and banks remain active in different maturity segments (banks: one-to-five-year; pension funds: five-year and above).
- Risk management and incentive alignment:
  - Set appropriate incentives for investment managers to avoid excessive tail risk taking and herding.
  - Compensation structures should not be exclusively tied to returns to prevent incentives for tail risks or herding.
  - A risk management approach to financial regulation should be adopted, including judicious monetary policy and macro-prudential measures.
- Market development, transparency, and infrastructure:
  - Agricultural commodities market operators are conducting in-depth education for farmers and millers on free-market tools.
  - Improve corporate governance and transparency through better laws, legal and regulatory frameworks, supervision, contract enforcement, and minority rights protection.
  - Need for clear accounting standards and prudential guidelines aligned to international financial reporting standards and generally acceptable accounting principles.
  - Harmonize tax codes for cash and derivatives trading and ensure easy payment systems for derivatives market activities.
  - Enhance risk management capabilities of financial institutions and regulators via symmetric information, prompt disclosure, and adoption of Basel-type guidelines for capital adequacy for derivative instruments; consider capital insurance.
  - Investec and OTC derivatives markets can be enhanced by greater disclosure, information symmetry, and information on credit standing of trading parties.
- Self-regulation should be accompanied by stronger government-supported sanctions where appropriate.

### Policy recommendations and actions suggested
- Strengthen exchange control regulations judiciously while expanding the base of local institutional investors.
- Maintain investment restrictions for foreign institutional investors until supervisory capacity and regulatory frameworks are strengthened.
- Allow hedge funds only after effective regulation and supervisory capability are in place.
- Review investment restrictions on unit trusts to deepen participation in fixed income derivatives once regulation and supervision permit.
- Align investment manager incentives to avoid tail risk taking and herding; diversify compensation metrics beyond short-term returns.
- Adopt a risk-management approach to regulation, including macro-prudential measures and monetary policy tools.
- Improve investor education (including use of “caveat emptor” warnings) and conduct face-to-face marketing and education for agricultural market participants.
- Strengthen corporate governance, transparency, accounting standards, prudential guidelines, tax uniformity, and payment systems for derivatives activities.
- Enhance risk assessment capabilities of regulators and adopt Basel-type capital adequacy guidelines for derivative exposures; consider capital insurance mechanisms.
- Promote greater disclosure and transparency in OTC markets and facilitate information on counterparties’ creditworthiness.

### Lessons for other Sub-Saharan African (SSA) countries
- Derivatives markets can help SSA countries “self-insure” against volatile capital flows and reduce overdependence on bank credit.
- Introducing currency futures and relaxing exchange controls can increase liquidity, but must be accompanied by proper regulation and supervisory capacity.
- Commodity futures can help manage seasonal risks in agriculture-dependent economies; South Africa’s experience demonstrates the value of agricultural commodity futures and commodity exchanges.
- Increased interest from external investors enhances liquidity but can destabilize shallow markets; proper rules are necessary to manage “hot money” flows.
- Development of derivatives markets provides alternatives to bank credit and can help create more stable local currency funding.
- Consider regional cooperation and regional derivatives market listings to achieve scale for small markets; FSB has memoranda of understanding with 45 jurisdictions and plans securities familiarization programs.
- Strengthen macroeconomic policies and political fundamentals to attract and sustain foreign investor interest.
- Use derivatives markets to broaden domestic investment opportunities, stimulate domestic savings, and enhance portfolio diversification.
- Enhance investor protection through explicit warnings (e.g., “caveat emptor”) and investor education.
- Retain the government bond yield curve as benchmark by developing local government bond markets to improve benchmark liquidity.

### Conclusion
- South Africa’s derivatives market has grown rapidly, supporting capital inflows and enabling participants to price, unbundle, and transfer risk.
- A range of derivative instruments are traded across OTC markets and regulated exchanges, with tight regulations on asset allocations for insurance and pension funds to prevent excessive risk taking.
- Despite regulatory constraints that may limit potential benefits, misuse of derivatives could precipitate financial crisis, accelerate capital outflows, and amplify volatility; thus strong regulation and enhanced supervisory capacity are necessary for the market to yield its ultimate benefit.
- The main benefit for SSA countries is the ability to self-insure against capital flow volatility, reduce reliance on bank credit, and better manage seasonal risk via commodity futures, provided appropriate regulation, supervision, and regional cooperation are pursued.

*Source: Johannesburg Stock Exchange; South African Reserve Bank Quarterly Bulletin, June 2009; South African Reserve Bank Quarterly Bulletin, Sept. 2007; South African Reserve Bank Quarterly Bulletin, Dec. 2008; The World Bank Group, Doing Business Report, 2009.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09196.pdf_