Simon Segal
THE great seven-year haggling game between divergent interest groups around the establishment of a regulated bond market appears at last to be moving towards a resolution.
Last week the Bond Market Association (BMA) submitted its application to the Financial Services Board (FSB) to be licensed as South Africa’s bond market exchange. The FSB is expected to grant a licence next month.
To be called the Bond Exchange (and probably referred to as Bondex), this will be South Africa’s third official exchange — the Johannesburg Stock Exchange (JSE) trades equities and the South African Futures Exchange (Safex) trades futures and options.
Bonds are currently traded on both the JSE and between banks in an over the counter (informal) market in a ludicrious situation where bond transactions are settled anywhere up to two weeks after the deal, compared with the international norm of three days.
Also, until recently, traders have not had to comply with any capital adequacy requirements. The Capital Adequacy Directive for securities trading firms has now been introduced.
Last October the BMA introduced electronic settlement that includes delivery and clearance mechanisms.
All this makes for a more secure and transparent, hence more liquid and efficient, bond market. It will also result in better data on the size and profile of South Africa’s bond market.
A formal bond market will have major implications for futures and options trade in South Africa. The world over, volumes in fixed-interest futures dwarf those of equity futures. Not in South Africa where the lack of a formal, regulated bond market exchange has prevented trade in bond futures. Safex’s three equity-linked futures contracts account for more than 95% of Safex’s total trade.
The BMA hopes to introduce exchange traded options. At present, all bond options are traded over the counter.
There will probably be three fixed-interest futures contracts listed on Safex — in the five-year, 10-year and long-term areas.
The BMA reckons bond volumes in 1995 totalled R2 326-billion (R1 821-billion in 1994). The first three months of 1996 saw R940-billion traded, 8% accounted for by foreigners (7% in 1995). Bondex will list some 464 bonds from 12 issuers, the largest being government. Other major issuers include Eskom, Transnet, the Post Office, Development Bank, Land Bank, etcetera.
Trade in government bonds accounts for 80% of the market, the most dominant being the long R150 and R153 stocks.
The BMA expects to issue 70 to 80 seats (it presently has 70 members) at R65 000. But in June this will be increased to R125 000.
It has six categories of members — issuers, insurers (only two), commercial banks, trading banks, JSE brokers (with 28 this is the largest grouping) and other smaller operators.
With the JSE moving towards automated screen trade, probably making its existing trading floor obsolete, Bondex could be the last remaining trading floor in South Africa. But it, too, will eventually move towards automated screen trade. At present, some 25% of bond trading volume is done on the floor.