In a panel at the JSE SA Trade Connect conference in Cape Town, South Africa, panellists explored the ways in which the South African derivatives market can grow through international clients, improved products and better fees, as well as the lessons that can be learned from global markets.
For growth to occur, panellists expressed that South Africa’s general investment universe needs to grow, weighted global indices need to improve, and exchanges need to get bigger and more liquid.
“We all have a role to play in trying to maintain our weight and relevance in global markets. We need to look at markets holistically and think how we’re going to boost supply and demand in our market,” said Helina Sumbhoolaul, head of SA delta one trading and head of dealing at JP Morgan.
“The derivatives market is more liquid than the underlying equity market. Volume in that market is driven by a big investor base and it’s also driven a lot by electronic market making. Looking at the supply side of our market, the most effective way of boosting liquidity is to encourage market makers to participate in the market by some sort of incentive scheme.
“On the demand side, we need to promote a diverse set of the investor base with a strong focus on foreigners and enhancing retail participation.”
Low touch trading was also noted by panellists as a key driver of increased volumes in general globally. To keep South Africa’s relevance in relation to other markets, panellists argued that local exchanges should continue to invest in tech that attracts interest from firms that execute using low touch, high frequency, algorithmic trading strategies.
Elsewhere, moving to T+2 settlement within South Africa was highlighted as something that could help increase efficiency within the local market and remove costs associated with dealing with varying settlement cycles – ultimately improving the attractiveness of the South African market.
Panellists also emphasised the need for South Africa to set itself apart from other markets to help improve the growth of its derivatives market. However, issues within the country were noted as factors limiting this growth.
“The headwinds of economic growth, electricity issues and grey listings have not made it easy,” said Roberto Pharo, head of derivatives at Peresec.
“Those are largely out of our control, but what is in our control is liquidity to some degree, price dissemination and central order book activity. There’s still only one instrument that really trades on the central order book. That’s something that we as a collective need to rectify.”
Extending central clearing counterparty (CCP) services was also noted by Matthias Kempgen, chief information and operating officer at JSE Clear, as an area that South Africa was falling behind in. Kempgen highlighted that the bonds market and equity market’s move to a CCP model will add a lot of value to those markets in terms of protecting investors.
“Another key element is technology programmes and the modernisation of our platforms. It is inevitable that we have to replace technology, but we need to do so in a manner that the market is able to absorb that change at an acceptable pace,” concluded Kempgen.