Bond Exchange of South Africa

North African Emerging Capital

Markets
Cairo, Egypt

“Of bonds & the Bond Exchange”

30/3/04 – 01/4/04
 TOPICS FOR DISCUSSION

 BRIEF HISTORICAL JOURNEY OF BESA

 OUR REGULATORY STRUCTURE
 CHARACTERISTICS OF AN EFFICIENT MARKET
 BONDS vs. EQUITY MARKETS
 DIFFERENCES AND SIMILARITIES
 KEY STRUCTURAL ISSUES FOR GROWTH OF BOND
MARKETS
 LESSONS WE HAVE LEARNT
 PRACTICAL POINTS FOR YOUR CONSIDERATION IN
DEVELOPING A BOND MARKET
2
 BESA – BRIEF HISTORICAL JOURNEY

 1987 Stals / Jacobs report

 1989 Bond Market Association (BMA) formed
 1995 Electronic settlement implemented
 1996 Bond Exchange licensed
 1997 T+3 rolling settlement = G30 compliance
 1998 Primary dealer structure for
auctioning of government bonds

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 BESA – BRIEF HISTORICAL JOURNEY

 1999 BESA starts ATS project (BATS)

 2000 BATS implemented
Total Return Index (TRI) implemented
Risk management project started
 2001 Big increase in corporate bonds listed
Restructuring recommendation approved

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 BESA – BRIEF HISTORICAL JOURNEY

 2002 Restructuring proposal approved

More corporate bonds listed
Including:- 3 Securitisation issues (Credit
cards, motor vehicles, commercial bank
loan book)

 2003 Commercial paper of banks issued

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 MAJOR FEATURES OF SA MARKET

 Primarily a government bond market >90% turnover

 Electronic net settlement = T+3 (rolling)
 Guaranteed by settlement banks on settlement commitment
 Meets G30 guidelines
 Counterparty risk between participants
 Period between trade (T) and settlement commitment by
settlement banks

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 MAJOR FEATURES OF SA MARKET

 Very high turnover velocity (+/ - 10% of market cap /

day)
 Very efficient, liquid (concentrated in few bonds)
 Huge buy / sell back (Repo) activity
 No defaults experienced – no claims on Guarantee
Fund

7
 MAJOR FEATURES OF SA MARKET

 Floor closed in October 1998

 Inter-dealer broker screens – Garban (ICAP), Tullet &
Tokyo, Prebon Yamane - (matched principal & name
give up)
 Telephone
 Automated trading system (BATS) is not used by
members
 Only used for trade reporting
 To be replaced by new trade capture system and
price dissemination system in 2004
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 SETTLEMENT

 Electronic settlement since 1995

 Outsourced to UNEXcor (Licensed clearing & settlement system –
owned by custodian banks)
 Central Scrip Depository (CSD)
 4 – Settlement Agents (Custodian banks)

 Daily settlement processes – 2 separate runs

 Net rolling – T+3 (since 1997)
 Gross – T+0 (Same day trades)
 BESA - settlement supervisors
- settlement fines

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 SA Bond Turnover (Total Nominal Traded)

1989-2003
14,000

11671
11658
10798

10655
12,000

9510

9514
10,000

8,000
Rand (Billion)

6,000

4627
3405
4,000
2326
1903

2,000
746
551
239

255
186

0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

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 SA Bond Turnover (Total Trades)

1995 to 2003
700,000
604,735
600,000
494,558 498,448
454,749
500,000 432,290
397,369 395,105
400,000 355,741
305,722

300,000

200,000

100,000

1995 1996 1997 1998 1999 2000 2001 2002 2003

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 SPOT & REPO (Nominal Traded - Trillion)

1992 - 2003
Repo trades
BESA Turnover
Spot trades

R12

Nominal
R10
Traded
(trillion)
R8

R6

R4

R2

R0
1998 1999 2000 2001 2002 2003
Year
 Bond Market Turnover
(Billion Rand Nominal Traded)

1995-2003
(US$ = R exchange rates, average for year)

Nominal traded (billion) US$ = R exchange rate

14,000 12.00
13,000
12,000 10.00
11,000
10,000 11,671
9,000 8.00
8,000 11,658
7,000 10,798 6.00
6,000 9,514
5,000 9,510 10,655 4.00
4,000 4,627
3,000 3,405
2,000 2,326 2.00
1,000
0 0.00
1995 1996 1997 1998 1999 2000 2001 2002 2003
 SPOT & REPO (Nominal Traded - Trillion)

1998 -2003
Turnover Velocity
(total turnover/market capitalisation)

30

25

20
Velocity

15

10

0
1998
1999
2000
2001
2002
Year 2003
 Nominal Outstanding by major issuer Groupings

DECEMBER 2003
CENTRAL GOVERNMENT MUNICIPAL PUBLIC ENTERPRISE
WATER AUTHORITIES BANKS SECURITISATION
OTHER CORPORATES DUAL LISTINGS COMMERCIAL PAPER
1%
3% 3%
7%
4%

8%

1%

73%
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 Total Bond Market Turnover Breakdown by
Major Issuers (Nominal Traded) 1989-2003

100%

80%

60%

40%

20%

0%
1989 1991 1993 1995 1997 1999 2001 2003

RSA ESKOM TELKOM TRANSNET OTHER

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 REGULATORY FRAMEWORK &
MARKET STRUCTURE
Pension Funds Financial Markets
Act Control Act
Banks Insurance Unit Trust Stock Exchanges
Act Act Control Act Control Act

Minister of Finance

Registrar of Banks
Registrar of
Financial
(Bank Supervision)
Institutions (FSB)

Fund Securities
Banks Insurance
Management trading
Companies
companies firms

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 CHARACTERISTICS OF AN EFFICIENT MARKET

 Timely and accurate information is available

 Market has to be liquid
 The transaction costs must be low in relation to the value
of the trade
 The prices rapidly adjust to new information
 All transactions and costs are transparent and are
disclosed
 The market has integrity
 There is surveillance in the market

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 BOND MARKETS vs EQUITY MARKETS

DIFFERENCES
BONDS
2. Banks are dominant players
3. Weak retail presence
4. Government / Utilities / Municipals /
Corporate Issuers – Many variations
of issues
5. Predominantly OTC market
6. Largely telephones / IDB screens
8. Multiple points of price discovery
10. Bi-lateral risk management – seldom
centralised (Big vs Small)
EQUITIES
2. Brokers are dominant players
3. Strong retail presence
4. Corporates – Generally vanilla issues
4. Exchange traded
5. ATS systems (exchange driven and
run) – few floors left
6. Central single point of price discovery
in ATS
7. Centralised risk management (Trade
with impunity)

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 BOND MARKETS & EQUITY MARKETS

SIMILARITIES
Both regulated
Bonds – Bank Supervision and / or market regulator (even if OTC)
Equities – Exchange as SRO – under own legislation

Common Membership
Banks in bonds; Subsidiaries as brokers in equities
Banks in money markets and Forex

Settlements
Can be settled by same entity (bonds, equities, money markets,
OTC)
(Ignoring competitive & monopolistic issues)

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 BOND MARKETS vs EQUITY MARKETS

DIFFERENCE / SIMILARITIES

So what you might ask ?

I will attempt to answer this in the last topic

heading
“points for your consideration”

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 KEY ISSUES FOR GROWTH OF BOND MARKETS

WILLING AND ABLE PARTICIPANTS THAT CAN BE

INNOVATIVE AND CAN MAKE MONEY
 Sound monetary and fiscal framework
 Will and commitment of central government to develop markets
 Effective, appropriate and harmonised financial market
legislation and regulations
 Money markets are a starting point – asset / liability matching /
mismatches
 Role of pension fund legislation
 prescribed investments – promote but could also distort
 Do not force a structure onto a market

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 LESSONS WE HAVE LEARNT

 Authorities and participants need a common objective

 Talk / talk and decide
 Leadership comes from both!
 Do not force a market structure on participants – recipe for
disaster
 Remember bonds and equity markets are different but have some
similarities

 Settlement is the same – cash / underlying

 Corporate actions very different for equities
 Trading – different trading methodologies
 Risk – concepts identical - management very different
 “One solution fits all” - Does not work!
 Size does matter – biggest balance sheet counts!!
 Intermediaries / speculators are important participants – do not
squeeze them out!!
 Do not re-invent the wheel 23
 PRACTICAL POINTS FOR YOUR CONSIDERATION

WILLING AND ABLE PARTICIPANTS THAT CAN BE

INNOVATIVE AND CAN MAKE MONEY

 What are objectives of your market development

 Do you need your own market? (National airlines analogy)
 No easy answers to this question – business issues compared to
economics
 It starts at the top
 Sound monetary and fiscal framework
 Will and commitment of central government
 Good financial market legislation and regulation
 Have few restrictions as possible – your competitors may not have
them
 Harmonise laws and regulations with region
 Money markets are a key starting point – asset / Liability matching /
mismatches

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 PRACTICAL POINTS FOR YOUR CONSIDERATION

 A National Payment system is crucial for any market developments

 Bonds and equities are different but the participants may wish to use similar
processes / structures to develop the bond markets
 Conversely they may not
 Get practical training/exposure from those who have done it before or do it now
 Regulators, banks, traders, Exchanges, settlement people
 Importing big trading systems and market structures from Europe may be
completely inappropriate for you
 Is there a regional solution for settlements that makes sense – economics of
scale?

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 PRACTICAL POINTS FOR YOUR CONSIDERATION

 Be practical – if you do not have all the right things in place

 Botswana Bond Issue is a good example
 But have a plan!
 Start Small - if you cannot use / do not want to use regional systems
 Settlements can be run on Excel spreadsheets
 Use local banks as custodians, Central Bank
 Economies of scale
 Trading can be call auctions (2 - 3 / day)
 Appointing primary dealers is not necessarily the magic wand for take-off

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THANK YOU FOR YOUR ATTENTION

SEE HANDOUTS FOR SOME

MARKET STATISTICS
TOM LAWLESS

TEL: (+27 11) 215-4000

FAX: (+27 11) 215-4250

tomlawless@besa.za.com

www.besa.za.com