Exotic options listing on JSE expected to precipitate more ETPs

The first exotic currency options have been listed on the Johannesburg Stock Exchange as market participants anticipate moves towards on-exchange trading

JSE lists exotic currency options

The Johannesburg Stock Exchange (JSE) has listed its first exotic currency options in a move that should open up the market for more trading on exchange.

The options are based on the dollar-rand exchange rate and are knock-out barrier options up-and-out and down-and-out. The listing – in partnership with Absa Capital – resulted from a direct fund-of-funds request for the ability to trade these options on exchange rather than over the counter.

"Because of mandates to do more things via exchange, they have requested to bring this structure to the exchange. Within three days we were able to put it on exchange, list it and trade it," says Warren Geers, general manager, derivatives trading at the JSE.

"It is giving clients the flexibility to do on exchange what traditionally they would have done OTC. They are structures that were never previously reserved for exchange business."

Although there are currently no regulations requiring options to be traded on exchange, Geers says many participants are monitoring developments in other countries.

"People are aware that regulation is going to come," he says. "If they have the ability to trade on exchange and eliminate the credit risk from counterparties, sooner rather than later they will start to transact on exchange."

These are not the first options to be traded on the JSE. The exchange has been listing equity options since 2006 and earlier this year listed the first any-day-expiry currency contracts enabling investors to hedge a specific date.

This latest listing is expected to open up the market to new structures, however. "I have just got off the phone with another client and we have priced up another butterfly option structure that we would never have seen before," says Geers.

"The client that precipitated this first trade has committed to us in writing that it is the first of many, so we hope to see many more of these structures coming to the exchange. As long as we can value it with our models, we will list it."

Geers says there would be restrictions around listing a product with a bond component because the exchange does not have the infrastructure to price fixed income. However, exchange-traded notes and exchange-traded commodities are already listed on the exchange.