Derivatives markets can facilitate the management of financial risk exposure so as to allow investors to reduce and transfer financial risk. South Africa’s derivatives markets was established to improve the financial system, enhance liquidity, mitigate risks and meet the challenges of globalization.
Structure of the derivatives market
South Africa’s derivatives market was the first to be established in Sub-Sahara Africa and comprises of two broad categories; options and futures. Within the categories is a wide range of underlying assets like; warrants, equity futures and options, interest futures and options, agricultural futures and options, currency futures and fixed income derivatives (made up of bond futures, forward rates agreements, standard bond options and vanilla swaps).
The South African Futures Exchange grew out of an informal market in April 1987, a period when Rand Merchant Bank started an informal finance market. Options contracts were later introduced in 1992, agricultural futures in 1995 and a functional automated trading system in May 1996.
There four key agencies involved in South Africa’s derivatives market are;
- The Financial Services Board of South Africa(FSB)
- The Johannesburg Securities Exchange(JSE)
- Bond Exchange of South Africa( BESA). JSE and BESA are licensed exchanges trading in the instruments and are supervised by the FSB.
- South Africa Futures Exchange (SAFEX) Clearing company
Below is the performance of the South African Derivatives Market as of the year 2018:
| Exchange-traded Derivatives Market | 2018 volume in USD Millions |
| Stock Options | 9.0 |
| Single Stock Futures | 139 |
| Single Index Futures | 4 |
| Short term interest rates futures | 20 |
| Currency options | 10 |
| Currency futures | 21 |
| Commodities futures | 48 |
| Total | 251 |
Growth of the derivatives market
The rapid growth of the derivatives market is attributed to South Africa’s economic and capital market growth.
Secondly, the deregulation of the agricultural sector led to the success of the derivatives market in South Africa as the government was no longer involved in fixing prices for the agricultural commodities hence creation of the agricultural commodities market on JSE.
Finally, the success of the market over the years has been due to the ease of doing business in the country. South Africa is ranked 82 out of 190 countries in ease of doing business and number 23 in protecting minority investors thus encouraging foreign investments in the derivatives market.
Other African countries can learn from JSE’s success and understand that a derivatives market can be a tool to self insure against volatility of capital flows.
The derivatives market can reduce a country’s over-dependence on bank credit as a source of funding and improve the countries’ management in seasonal risks and albeit with appropriate regulation and supervision.
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