JSE Derivatives Rules & Directives

Derivatives Rules and Directives

• The JSE (Johannesburg Stock Exchange) functions as a licensed exchange under the Financial Markets Act (FMA) of 2012, Act No. 19.
• The JSE has to maintain exchange rules that comply with section 17 of the Financial Markets Act
• JSE must comply with section 10 of FMA

Responsibilities

• JSE must supervise compliance by authorized users with the FMA and the relevant rules.
• JSE must enforce rules
• JSE may issue directives

Purpose of Derivatives Rules & Directives

• Achieve the objectives of the JSE: by establishing and regulating fair/efficient markets, as defined in its Memorandum and Articles of Association.
• Ensure the JSE's business operations are orderly.
• Achieve the objectives of the FMA (Financial Markets Act).

FMA Objectives include:

• Ensuring South African financial markets are fair, efficient, and transparent.
• Increase confidence in financial markets by requiring fair and transparent securities services and maintaining market stability.
• Promote the protection of regulated people, clients, and investors.
• Reduce systemic risk.
• Promote international and domestic competitiveness.

Binding Rules Pertain to

• All trading members, officers, and employees of members
• Anyone using a trading member's services, or concluding transactions through a trading member's JSE regulated activities.

Binding Directives Pertain to

• All trading members, officers and employees of members

Registration of Officers

• Only registered traders are allowed to trade for a trading member, or on behalf of clients.
• Trading members must register traders with the JSE as compliance officers.
• To be registered by the JSE, a trader must:
• Possess the JSE prescribed qualification (JSE CDM Dealers Examination).
• Meet general requirements in rule 3.20, officers of trading members must:
• Be of full legal capacity.
• Meet JSE’s criteria for good character/high business integrity.
• Not be an unrehabilitated insolvent.
• Not have been convicted of criminal offenses involving fraud, theft, dishonesty or market abuse.
• Not be held civilly/administratively liable for fraud, theft, dishonesty or market abuse.
• Not be have contravened legislation regarding market abuse, money laundering, or terrorist activity.
• Not be disqualified by a court from acting as a company director.
• Not be subject to formal investigation by regulatory/government agency.
• Not be expelled from any exchange or external exchange.
• Not be employed/associated with a trading member expelled from an exchange, where the person contributed to the expulsion.
• Not be declared a defaulting trading member of the JSE or any other exchange.
• Not be refused entry/expelled from any profession/vocation or been dismissed/asked to resign from any office/employment, or fiduciary position.

JSE Trading System

• Trading members can only access/use the JSE trading system with Market Controller approval.
• Trading members are subject to Market Controller instructions.
• Accessing the trading system requires entering/signing agreements, and adhering to JSE requirements/specifications.
• Trading members are bound by all offers, acceptances, or entries made under their name on the JSE trading system, regardless of authorization Responsibilities include
• Keeping codes, passes, passwords, and security devices confidential, granting access only to the compliance officer and designated registered trader.
• Ensuring only the JSE-approved registered trader or compliance officer uses their password to access the JSE trading system.
• Maintaining the resources required to have sent/received data from JSE systems does not interfere with the equity/commodity derivatives market efficiency/integrity, and that the JSE systems properly function.
• Market Controller may instruct a trading member to stop using/restrict a trading member's/client application which is pending resolution.

JSE Executive & Market Controller Powers

• The Market Controller and a JSE Executive member can close the commodity/equity derivatives market if a fair/realistic market doesn't exist.
• This is determined by considering the percentage of trading members without JSE trading system access, their impact on price formation, and the reasons of access.
• The JSE Executive may reduce/extend the hours of operation of the JSE trading system for a specific business day while aligning with the conditions.
• The JSE Executive may halt/close the JSE trading system for trading anytime and for any period.
• The JSE Executive may suspend automated trading.
• If a failure has occurred in the JSE trading system for any reason, the JSE Executive can declare a transaction executed through the JSE trading system to be void.
• This declaration binds trading members who entered into the transaction and clients on whose behalf the transaction was executed.
• The JSE Executive uses its powers and takes action as needed under the derivatives rules/directives to resolve issues arising from the closure, suspension, halt, or failure of the JSE trading system.
• The JSE Executive has the power to take any necessary steps to ensure a functional market.

Emergency Provisions

• The JSE may restrict/suspend trading in any/all derivative securities in emergencies.

Emergency Circumstances Include

• Closing another exchange
• State of war/threatening hostilities
• State actions affecting the market/trade performance
• Changes in law affecting the market/trade or position performance
• Any other situation affecting a fair/orderly derivatives market.
• If trading ceases in any security/commodity on any exchange/market, the JSE Executive considers ceasing trading in associated derivative securities.
• In the event of these circumstances, the Chief Executive Officer notifies the Registrar and cooperates to restore and maintain a fair/orderly market.

Insider Trading

• The FMA addresses criminal offenses and civil liability related to insider trading.
• "Inside information" is specific or precise information that hasn't been made public, obtained/learned as an insider, and would impact the price/value of security if published.
• An "insider" includes:
• A director, employee, or shareholder of a regulated market issuer related to the inside information.
• Someone with access to information through employment, office, or profession.
• Anyone knowing the direct/indirect source of the information was a person above.
• Insider trading offences apply to the JSE CDM, where "... any security listed on a regulated market...” includes agricultural product securities.
• Example: Crop estimates not made public by the National Crop Estimates Committee that materially impact agricultural product security price, is inside information.
• Persons with access to inside information is considered an insider (example, a committee relative or a JSE trader).
• Its not an offense to simply be an insider or possess insider information
• An offense occurs when action is taken when one is an insider

Liability occurs when:

• An insider deals agricultural product securities for their account using inside information, unless they became an insider after giving the instruction to deal/the instruction was not changed since becoming an insider/acted in the transaction while all parties have the insider information.
• An insider deals agricultural product securities for another person unless the insider is a trading member/trader acting on client instructions, ignorant of the client's insider status .
• Insiders declare insider information to another person, unless the disclosure enables proper work performance.
• An insider encourage/cause others to deal/discourage/stop dealing in agricultural product securities.

Liability Resulting from Insider Trading

• Those violating section 78 of the FMA are liable to an administrative sanction including
• The equivalent profit made or loss avoided.
• An amount up to R1 million or adjusted value.
• Interest
• Court and investigation costs.
• Commissions or consideration received for disclosure, encouragement, or discouragement is only applicable if section 78 (4) / (5) is violated.

Prohibited Practices

• Section 80 of the FMA outlines prohibited practices, adaptated and contextualized in the derivative rules:

Manipulative or Deceptive Transactions:

• A trading member may not use manipulative/deceptive trading practices in an agricultural product security, which create a false/misleading appearance or artificial value.
• Trading members must consider client orders before entering them, being responsible for order integrity.
• Trading members/employees cannot place orders that create a false/misleading appearance of trading activity or an artificial agricultural product security value.

The following is defined as manipulative/deceptive trading:

• Approving/entering orders to buy/sell an agricultural product security when there is knowledge of an opposite order of significantly the same size being entered at substantially the same time and price.
• Entering orders to buy agricultural product security at successively higher prices or to sell at successively lower prices with a view of affecting the agricultural product security's market price or maintain it, where the main purpose to change
• An order at or close to market with intention for changing/maintaining closing price
• Orders during the pre-opening period cancelled immediately prior to market opening to create a false/misleading appearance of supply/demand.
• Buy/sell orders with no change in the beneficial ownership of the agricultural product security.
• Reported transactions violating 8.7.1.1 above.
• Effecting/assisting a market corner.
• Maintaining, the artificial price of an agricultural product security.
• Employing any artifice/device/scheme to defraud through the JSE trading system.
• Engaging in any deceptive/misleading act/practice regarding trading in an agricultural product security.

Market Integrity

• Maintain fair, efficient, transparent and stable agricultural product securities markets, JSE may
• Declare a void transaction.
• The JSE Executive can declare transactions through the JSE trading system void if there is a JSE systems failure/the JSE system closes, halts, or suspends.
• The declaration is binding on the trading member who entered into the transaction and on the clients with whom or on whose behalf the transaction was effected.
• The Director of Market Regulation may declare the transaction void if the director deems that a lack of published information available at time of transaction, resulted in the trading member trades in unreasonable quality and/pr price.
• Declare a trading halt.

Director: Market Regulation In Conjunction with the CEO may declare a trading halt in agricultural product security, relating to any of the following determinants:

• Trading is or could be from someone possessing unpublished price-sensitive data about the agricultural product security or the underlying product.
• Trading is influenced by manipulative/deceptive trading practices.
• May otherwise give rise to an artificial price in that agricultural product security
• A trading member may not trade an agricultural security after a trade halt.

Transactions in Agricultural Product Securities

• All agricultural product securities transactions by a trading member must be conducted through the central order book, except for reported transactions conducted and reported to the JSE trading system.
• CDM members are allowed to enter and report principle assignment trades, exchange for physical (EFP) and exchange for risk (EFR) trades directly onto the Automated Trading System (ATS) with no required prior referral to the exchange.

"Off Book" Trading Criteria

• The directives/rules now address Off ATS transactions. CDM members can enter/report these transactions directly on the ATS system, based on meeting the Off ATS criteria, consisting of:
• EFP and EFR trades must have physical/OTC derivative transaction supporting documents; available upon request.
• EFP/EFR futures contracts quantities must be within 5% of the quantities specified in the physical/OTC contract.
• If reported EFP/EFR trade price falls outside specified parameters, the price must be specified in a corresponding contact, and prior clearing member approval required prior to detailing the transaction on ATS.

Exchange for Physical Trade

• exchange for physical trade: a futures transaction linked to an EFP, where the parties have entered into a written contract by which the buyer contracts to sell the material to the seller.
• delivery in both months, for a physical or expiry commodity is required within two months.
• physical contracts occur at/after the future product contract is entered into.
• The physical is inline with the conditions provided in the SAGOS or similar agreement.

Exchange for Risk Trades

• Exchange for risk trade: where the parties have pre existing OTC derivative contract that underlies the product being traded.
• OTC is in the form of International Swaps and Derivatives Association (ISDA) agreement or comparable.
• OTC is unwound at or the same time as being reported to the JSE.

Client Agreement and Registration

• A trading member cannot trade for a client unless
• The client has a agreement with the trading member
• The trading member has registered them

Price Limits

• All trading in agricultural product securities is subject to price limits. Two types of price limits exist:
• Standard (everyday) limits.
• Extended limits.

Applicability of Price Limits and Triggers

• Price limits and triggers apply to all open interest hedging months, excluding the spot month.

Extended Limits Trigger

• Extended limits: When two/more hedging months are marked-to-market (MTM) at a specific agricultural product security’s everyday limit for two consecutive days in identical market direction.
• Extended limits are applied until everyday limits are triggered.
• It is necessary that there are two expiries within a contract range that are MTM at or above the everyday limit in a specific agricultural product security.

Everyday Limits Return Trigger

• Everyday price limits return trigger: The majority of all hedging months, regardeless of market direction, equal to or below a everyday market limit.
• Above 65% majority of all hedging months must fall where price limits are applicable.

Position Limits

Delta Option Trade

• Transactions in option which are reported in terms after being agreed upon.
• Needs to be reported, and comply on a contract directive basis
• Details include conditions on the delta hedge

Speculative Position Limits

• A trading member or client of a trading member limit amount that the ypurchase or sell.
• All needs to have been listed in a directive
• A written statement is required in case of excessive speculative trading, within two business days of the statement.
  • The same applies to JSE.
• All futures and options positions need to be determined, by JSE, if there are limits in place.

Trading Times & Periods

• The CDM operates on a given schedule, per Table 8.5 to be a listed derivatives security.