THE BRICS SECURITIES AND DERIVATIVES MARKETS... · economies in Brazil, Russia, India and China. Since 2008, the BRIC leaders have met annually to discuss issues of global significance,

- 1 -

THE BRICS SECURITIES AND DERIVATIVES

MARKETS

By Research & Corporate Development 31 December 2012

The BRICS Exchange Alliance was announced in October 2011. Member exchanges

have begun cross-listing their respective benchmark equity index derivatives, and are

planning to develop new equity index products together. This paper briefly describes each

market in the alliance – the key exchanges and their market segments, product offerings,

and latest international cooperation initiatives.

The BRICS1 acronym refers to the five developing countries — Brazil, Russia, India, China

and South Africa — which have attracted attention because of their growth potential. In

October 2011, Hong Kong Exchanges and Clearing Limited (HKEx) in the Chinese economy

and exchanges from the other BRICS countries — BM&FBOVESPA from Brazil, Moscow

Interbank Currency Exchange (MICEX, now Moscow Exchange MICEX-RTS) from Russia,

BSE Limited (BSE) and the National Stock Exchange of India (NSE) from India, and the

Johannesburg Stock Exchange (JSE) from South Africa — announced the formation of

BRICS Exchange Alliance.

The alliance’s first initiative was the cross-listing of benchmark equity index derivatives on

one another’s trading platforms in March 2012. The initiative enables member exchanges to

expand their product offerings beyond their own markets and their investors to gain exposure

to the dynamic, emerging, and increasingly important BRICS economics. The alliance is

continuing to work on possible new product initiatives.

This article gives a brief description of each BRICS country’s securities and derivatives

markets (focusing on financial derivatives), profiling their respective positions in the world

economy and exchange markets. An overview is given of each market, followed by an

introduction to the key exchanges’ market segments and product offerings, and their other

international cooperation initiatives.

1. BRICS IN THE WORLD ECONOMY AND EXCHANGE MARKETS

According to the World Bank, the BRICS countries are middle-income economies2; the 108

middle-income economies in aggregate constituted one-third of the world’s Gross Domestic

Product (GDP) in 20113. The five BRICS economies enjoyed spectacular growth, more than

quadrupling their GDP from 2002 to 2011 in nominal terms while the rest of the world’s GDP

grew 84%. The BRICS economies accounted for one-fifth of global GDP in 2011

(compared with 9% in 2002) (see Table 1-1). Based on the World Federation of Exchanges

1 The acronym, BRIC, was coined by Jim O’Neill of Goldman Sachs in 2001 to refer to the rising emerging

economies in Brazil, Russia, India and China. Since 2008, the BRIC leaders have met annually to discuss

issues of global significance, such as development, peace and security, energy and climate change, and social

issues. In 2011, the leaders invited South Africa to join, thus becoming the BRICS. 2 Hong Kong is classified as a high-income economy.

3 Source: International Monetary Fund (IMF) statistics and World Bank classification.

The BRICS Securities and Derivatives Markets

- 2 - Research & Corporate Development, HKEx

31 December 2012

(WFE) statistics, exchanges from these five countries are among the top 20 in terms of market

value of domestic listed companies and contract volume of financial derivatives (see Figures

1-1 and 1-2).

Table 1-1. GDP in BRICS countries (2002 vs 2011)

Country GDP (current prices, US$ billion) % of global GDP

2002 2011 % change 2002 2011

China 1,454 7,298 402% 4.4% 10.4%

Brazil 506 2,493 393% 1.5% 3.6%

Russia 345 1,850 436% 1.0% 2.6%

India 510 1,827 258% 1.5% 2.6%

South Africa 111 409 267% 0.3% 0.6%

BRICS 2,926 13,877 374% 8.8% 19.9%

Rest of the world 30,428 56,022 84% 91.2% 80.1%

All countries 33,355 69,899 110% 100.0% 100.0%

Source: International Monetary Fund (IMF), World Economic Outlook Database, October 2012

Figure 1-1. Top 20 exchanges in terms of market value of domestic listed companies

(end of October 2012)

BRICS markets

Source: WFE monthly statistics

13,625

4,526

3,526 3,275 2,677 2,633

2,314 2,044 1,392 1,348 1,203 1,176 1,162 1,114 1,098 964 933 835 767 741

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Top 20 exchanges by market value of domestic listed shares (October 2012)



31 December 2012

Figure 1-2. Top 20 exchanges in terms of contract volume of financial derivatives

(January-October 2012)

BRICS markets

Source: WFE monthly statistics

2. BRAZIL

In Brazil, BM&FBOVESPA is the only exchange operator of securities and derivatives

markets. It is a publicly listed company created in 2008 through the integration of the São

Paulo Stock Exchange (BOVESPA) and the Brazilian Mercantile & Futures Exchange

(BM&F). The Brazilian financial market is under the regulation and monitoring of three

authorities — the National Monetary Council (CMN), the Brazilian Central Bank (BCB)

and the Brazilian Securities and Exchange Commission (CVM).

CVM is the direct regulator of BM&FBOVESPA; it directly regulates and oversees the

Brazilian capital markets, including the exchange markets and the organised over-the-counter

(OTC) markets, and the market participants. CMN is responsible for formulating monetary

and credit policies for the financial and capital markets. BCB is responsible for the

implementation of CMN’s policies. BCB also oversees the operation of financial institutions

in Brazil.

BM&FBOVESPA itself has incorporated a specific entity for self-regulation —

BM&FBOVESPA Market Supervision (BSM). The main responsibility of BSM is to

supervise the markets managed by BM&FBOVESPA to ensure compliance with applicable

laws, rules and regulations by market participants and by the exchange itself.

1,773 1,712

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31 December 2012

2.1 Market segments

BM&FBOVESPA operates two major market segments — BOVESPA and BM&F — for

securities and derivatives trading. Products traded on BOVESPA comprise: (1) equities —

including shares, Brazilian Depository Receipts (BDRs) representing shares of domestic and

foreign issuers, exchange-traded funds (ETFs) and warrants; (2) equity derivatives — mainly

stock options and index options; and (3) corporate debt securities. The BM&F segment

provides trading for commodity derivatives (agricultural, gold and energy), financial

derivatives (currency, interest rate and equity indices), spot foreign exchange (forex) and

public debt securities.

Besides exchange-traded products, BM&FBOVESPA runs the Organised OTC Market (the

only one in Brazil) for the trading of equities and derivatives. Derivatives products include

flexible options, forwards and swaps on equity indices, commodities, forex and interest rates.

For equities, there is a special trading segment of the Organised OTC Market, BOVESPA

Mais (meaning “BOVESPA Plus”), which provides a stepping stone for companies registered

with CVM to move to the listing segment. In addition, unsponsored BDRs4, which do not

involve the foreign companies that issue the shares underlying the BDRs, are available for

trading on the Organised OTC Market.

In Brazil, there is a Brazilian Commodities Exchange (BBM) which centralises the trading of

agricultural commodities and OTC agribusiness securities. It is a private mutualised entity

in which BM&FBOVESPA holds a majority membership interest.

The clearing and settlement of securities and derivatives are handled by BM&FBOVESPA’s

four clearing houses for different product types, which are in the process of integration, both

entity-wise and technology-wise. The post-trade process is integrated with BM&F

Settlement Bank (a wholly-owned subsidiary of BM&FBOVESPA), which provides

settlement, depository, registration and custody services to clearing houses and participants.

The existing four trading systems for the different securities and derivatives products are also

to be integrated. The trading system for BM&F derivatives and spot forex — PUMA

Trading System, which is jointly developed by BM&FBOVESPA and CME Group — will

replace the other three trading systems for securities and other derivatives products.

2.2 Securities market

BOVESPA has three special listing segments in addition to the traditional market — Novo

Mercado (meaning “New Market”), Corporate Governance (CG) Level 1 and CG Level 2.

These segments were launched in 2000 and adopt additional and more stringent corporate

governance requirements. BM&FBOVESPA itself is listed in Novo Mercado, which adopts

the highest corporate governance standards among all listing segments.

Brazil has the largest stock market in Latin America by market value, with 373 listed

companies and a total market capitalisation of US$1,223 billion at the end of 2011.

Currently, more than 80 BDRs are available for trading and 70 of them are unsponsored

BDRs on foreign stocks which include big names such as Coca-Cola, Exxon Mobil, General

4 BDRs can be classified into sponsored and unsponsored BDRs. Sponsored BDRs involve the issuer of

underlying shares which has an agreement with the depository bank.



31 December 2012

Electric and Microsoft. In 2011, the total value of share trading was US$931 billion (see

Figure 2-1) and the average daily trading value was US$3.7 billion. Almost all securities

trading came from stocks (95% in 2011); options exercise contributed another 4%; other

products such as investment funds, structured products and fixed-income securities

contributed only 1% of the total trading value (see Figure 2-2).

Figure 2-1. Domestic stock market capitalisation, annual share trading value and

no. of listed companies on BM&FBOVESPA (2002 – 2011)

Sources: BM&FBOVESPA monthly operational data and WFE monthly statistics

Figure 2-2. Trading value by security type on BOVESPA (2011) (excluding equity derivatives)

Notes:

(1) Numbers may not add up to 100% due to rounding.

(2) Trading in round-lot market, odd-lot market and auction market is classified as trading in “Stocks”.

(3) “Others” includes structured products, investments certificates and fixed-income securities.

Source: BM&FBOVESPA annual statistics

399

369358

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Domestic stock market capitalisation, annual share trading value and

no. of listed companies on BM&FBOVESPA (2002 - 2011)

No. of listed companies

Market capitalisation

Share trading value

Sources: BM&FBOVESPA & World Federation of Exchanges (WFE)

Stocks

95%

Options exercise

4%

Investment funds

1%

Others

0.04%

Trading value by security type on BOVESPA segment (2011)

(excluding equity derivatives)

Notes:


(2) Trading in round-lot market, odd-lot market and auction market is classified as "Stocks".

(3) "Others" includes structured products, investments certificates and fixed-income securities.

Source: BM&FBOVESPA



31 December 2012

The significant growth of market capitalisation over the past decade shown in Figure 2-1,

however, was not accompanied by a corresponding increase in number of listings. In fact,

primary market activities were not very active except in 2007. In 2011, BOVESPA saw 24

new listings and US$4 billion of funds raised through initial public offerings (IPOs),

compared to the peak levels of 71 new listings and US$30 billion IPO funds raised in 2007

(see Figure 2-3).

Figure 2-3. IPO funds raised and no. of newly listed companies

on BM&FBOVESPA (2002 – 2011)

Note: IPO funds raised figures for 2002 and 2003 are not available.

Source: BM&FBOVESPA monthly operational data

2.3 Financial derivatives market

Both market segments of BOVESPA and BM&F offer trading in financial derivatives. The

key products on BOVESPA are stock (including ETF) options and IBOVESPA options (the

only index options offered by BOVESPA segment). BM&F offers a much wider range of

financial derivatives, including futures and options (F&O) on interest rates, forex and equity

indices, and futures on sovereign debt securities. Of all product types on BM&FBOVESPA,

stock options are the dominant volume contributor, accounting for 56% of the total derivatives

trading volume (including OTC contracts) in 2011. They are followed by F&O on interest

rates (32%) and on forex (8%). Other derivatives (including agricultural and energy

products) account for only a small fraction (4%). In terms of open interest, the top three are

still interest rate derivatives (64%), stock options (26%), and forex derivatives (8%). (See

Figure 2-4.)

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IPO funds raised and no. of newly listed companies on BM&FBOVESPA (2002 - 2011)

IPO funds raised

No. of newly listed companies

Note: IPO funds raised figures for 2002 and 2003 are not available

Source: BM&FBOVESPA



31 December 2012

Figure 2-4. Derivatives trading volume and open interest by product type

on BM&FBOVESPA (2011)

(a) Trading volume

(b) Open interest

Notes:


(2) “Other derivatives” comprise: (i) BOVESPA options on ETFs and IBOVESPA; and (ii) BM&F F&O on equity indices,

gold, agricultural products and energy.

Source: Futures Industry Association (FIA) monthly statistics

In the BRICS Exchange Alliance, futures on IBOVESPA, the benchmark index of the

Brazilian stock market, is the cross-listed product. The monthly trading volume of

IBOVESPA futures on BM&FBOVESPA has been quite stable over the past decade. The

average daily contract volume was the lowest (in terms of the current contract size) at 42,775

contracts in September 2002 and reached a high of 151,119 contracts in August 2007. (See

Figure 2-5.) The average daily volume for the year 2011 was 86,948 contracts.

Figure 2-5. IBOVESPA daily closing and monthly trading volume of IBOVESPA futures

on BM&FBOVESPA (2002 – 2011)

Note: The contract size of IBOVESPA futures was reduced to one-third since 17 April 2006. For comparison, the trading

volumes of IBOVESPA futures from FIA for Jan 2002 to Apr 2006 were multiplied by 3.

Sources: Reuters and FIA

BOVESPA stock

options

56%

BM&F interest rate

F&O

32%BM&F forex F&O

8%

Other derivatives

4%

BM&FBOVESPA — Derivatives market trading volume by product type (2011)

Notes:

(1) Numbers may not add up to 100 per cent due to rounding.



Source: Futures Industry Association (FIA)

Total: 1.5 billion contracts

BOVESPA stock

options

26%

BM&F interest rate

F&O

64%BM&F forex F&O

8%

Other derivatives

2%

BM&FBOVESPA — Derivatives market open interest by product type (2011)

Notes:

(1) Numbers may not add up to 100 per cent due to rounding.




Total: 52 million contracts

0

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8

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12

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20,000

30,000

40,000

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60,000

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IBOVESPA daily closing and monthly trading volume of IBOVESPA futures (2002 - 2011)

IBOVESPA futures monthly volume

IBOVESPA daily closing

Note: The contract size of IBOVESPA futures was reduced to one-third since 17 April 2006. For comparison, the trading

volumes of IBOVESPA futures from FIA for Jan 2002 to Apr 2006 were multiplied by 3.

Sources: Reuters and Futures Industry Association (FIA)

73516 (2008/05/20)

29435 (2008/10/27)

13872 (2002/01/02)

8370

(2002/10/16)

56754 (2011/12/29)



31 December 2012

2.4 Other international cooperation initiatives

BM&FBOVESPA partnered with CME Group in the development of the PUMA Trading

System and a derivatives order routing arrangement. This routing arrangement allows

BM&FBOVESPA customers to trade CME Group’s products through the PUMA system.

Similarly, customers of CME Group can access the Brazilian derivatives market through the

CME Globex platform. This was further strengthened by the signing of a cross-listing

agreement in March 2012 involving S&P 500 Index futures and BOVESPA Index futures, the

benchmark futures products of the two exchanges. Besides CME Group, NASDAQ OMX

has provided technologies to BM&FBOVESPA for market data and market surveillance.

Separately, BM&FBOVESPA formed an alliance with Chi-X Global in 2012 to launch

Chi-FX Brazil, a new trading platform for overseas investors to trade BM&FBOVESPA-listed

stocks in their local currencies.

Furthermore, BM&FBOVESPA has signed memoranda of understanding (MOU) with a

number of exchanges, including the Toronto Stock Exchange (TSX, now part of TMX Group),

the Santiago Stock Exchange in Chile, the Colombian Stock Exchange (BVC), the Mexican

Exchange (BMV), the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange

(SZSE).

3. RUSSIA

In Russia, the principal exchange operator is Moscow Exchange MICEX-RTS (“Moscow

Exchange”). It was formed in December 2011 when the two principal exchange operators at

that time — MICEX Group and RTS Group — merged. Besides the Moscow-based

exchange, the group has exchange centres in regions like Ural, Volga and Siberia.

There are a few regional exchanges which are not part of the Moscow Exchange Group.

These include the St. Petersburg Currency Exchange, the Samara Currency Interbank

Exchange and the St. Petersburg Exchange (in which Moscow Exchange has a minority

shareholding). The first two exchanges, as implied by their names, focus on currency

trading while the St. Petersburg Exchange mainly trades commodities and related derivatives.

The principal regulator of the exchanges and the capital market in Russia is the Federal

Service for Financial Markets (FFMS). The Central Bank of Russia (CBR) is responsible

for regulating Russia’s banking industry and forex market and is the organiser of the

government securities market. The Federal Anti-monopoly Service (FAS) and the Ministry

of Finance (MOF) are two other important supervisory bodies in Russia’s regulatory

framework, with authority over the maintenance of competition in the financial market and

the issuance of public debt securities respectively.



31 December 2012

3.1 Market segments

Products of Moscow Exchange can be classified into forex, corporate securities, government

securities and derivatives (financial and commodity). Moscow Exchange also extends its

offering of commodity products through its associate, National Mercantile Exchange

(NAMEX). Besides on-exchange products, Moscow Exchange operates an OTC market

which has several systems for reporting OTC trades. One function of the OTC market is to

facilitate trading in securities of foreign issuers, including depository receipts (DRs) on these

securities.

The post-trade processing of transactions on Moscow Exchange is handled by its five

subsidiaries — National Clearing Centre (NCC), RTS Clearing Centre (RTS-CC), National

Settlement Depository (NSD), Depository Clearing Company (DCC) and RTS Settlement

Chamber (RTS-SC) — for different securities market sectors (see below) and asset classes.

NCC and RTS-CC are the clearing houses for the forex market and derivatives market

respectively. They also provide clearing services for different sectors of the securities

market. Settlement and depository services for the securities market are provided by NSD

and DCC. RTS-SC is a non-banking credit institution which provides settlement services to

trading participants on Moscow Exchange. As the post-trade facilities of a merged exchange,

these five institutions are in the process of integration.

3.2 Forex market

Forex trading is a significant business segment of Moscow Exchange, given that MICEX was

founded in 1992 as a currency exchange. In 2011, total trading volume on the on-exchange

currency market reached RUB86.8 trillion (US$3 trillion), representing 29% of the aggregate

turnover on the regulated markets of Moscow Exchange. The electronic currency trading

system of MICEX supports trading (including currency swaps) in US dollar, euro, Ukrainian

hryvnia, Kazakhstan tenge, Belarusian rouble and, since December 2010, Chinese renminbi

(RMB). Similar to the global market, forex trading on MICEX has been dominated by US

dollar and euro, which account for almost 100% of the trading volume.

3.3 Securities markets

Corporate securities listed on Moscow Exchange comprise equities (including Russian

depository receipts (RDRs)), corporate debt securities and investment funds, and are traded on

three sectors — Main Market (formerly under MICEX), Standard, and Classica (formerly

under RTS-SE). The Main Market is the most liquid sector, accounting for over 80% of

equity turnover and more than 99% of bond trading volume in the Russian securities market.

Figure 3-1 shows the market capitalisation of domestic listed companies and the annual

securities turnover on MICEX from 2002 to 2011.



31 December 2012

Figure 3-1. Domestic stock market capitalisation and annual securities turnover of MICEX

(2002 – 2011)

* Turnover of stocks, RDRs and investment funds

Sources: Moscow Exchange and WFE

Securities that have gone through the listing procedure are admitted to trading on any one of

the five quotation lists — A1, A2, B, V and I — depending on the requirements satisfied by

the securities (A1 has the most stringent requirements while V and I have the least).

Alternatively, securities can go through a simplified procedure for admission to trading

without being listed. In 2011, both MICEX and RTS-SE had two newly listed companies

through IPOs, raising capital of US$2 billion in total5.

Moscow Exchange operates the Innovation and Investment Market (IIM), created jointly

with the Russian State Corporation of Nanotechnologies (ROSNANO), to help growth

technology companies attract investment. This sector consists of three segments: (1) the

Innovation and Growth Companies (IGC) sector to allow IPOs of eligible companies; (2) a

private placement platform; and (3) the IPOBoard (an online information and trading system)

to facilitate fund raising by non-public technology companies.

Securities trading constituted 51% of total cash market trading value of MICEX in 2011. Of

this, about half was in bonds and bond repurchase agreements (repos) (see Figure 3-2) in

which government securities play an important role. GKO, OFZ (two types of government

bonds — zero-coupon treasury bills and coupon-bearing bonds respectively) and CBR bonds

are the main instruments of this segment. MICEX calculates the Russian Government Bond

Indices (RGBI) and yield indicators based on the prices of these instruments. Notably, repo

trading on stocks is also popular, constituting 17% of total cash market trading of MICEX.

5 Figures are from WFE annual statistics, which may include dual-listings.

59

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Domestic stock market capitalisation and annual securities turnover of MICEX (2002 - 2011)


Securities turnover*

* Comprising stocks, RDRs and investment funds

Sources: Moscow Exchange and World Federation of Exchanges (WFE)



31 December 2012

Figure 3-2. Trading volume of securities, bonds and currencies on MICEX (2011)

Source: Moscow Exchange


Derivatives products of Moscow Exchange are traded on FORTS and MICEX Derivatives.

FORTS (abbreviation for “Futures and Options on RTS”) is the main derivatives market of

Moscow Exchange in terms of volume (99% of the total in 2011). Products on FORTS are

futures on shares (including RDRs), stock indices, bonds, currencies, interest rates and

commodities, and options on futures (except interest rates). MICEX Derivatives offers

financial futures on currencies, interest rates, a stock index (MICEX Index) and Russian

stocks with fewer contract types than FORTS.

Figure 3-3 shows that financial derivatives are the dominant products on Moscow Exchange’s

derivatives market in terms of both trading volume and open interest. In 2011, index futures,

stock futures and forex futures are the most actively traded products, contributing 35%, 33%

and 24% of the total derivatives trading volume respectively.

Figure 3-3. Derivatives trading volume and open interest by product type

on Moscow Exchange (2011)

(a) Trading volume

Total no. of contracts: 1,099 million

(b) Open interest

Total no. of contracts: 3.2 million

* Agricultural products, energy and metals

Note: Numbers do not add up to 100% due to rounding

Source: FIA

Stocks, investment

funds and RDRs

9%

Stock repos

17%

Bonds

3%

Bond repos

22%

Currency

49%

Trading volume of securities, bonds and currencies on MICEX (2011)

Source: Moscow Exchange

Total: US$5,909 billion

Index futures

35%

Stock futures

33%Forex futures

24%Interest rate futures

0.7%

Index options

3%

Stock options

0.8%

Forex options

0.1%

Commodity F&O*

4%

MICEX-RTS derivatives trading volume by product type (2011)




Index futures

12%

Stock futures

23%

Forex futures

45%

Interest rate futures

5%

Index options

7%

Stock options

2%

Forex options

2%

Commodity F&O*

3%

MICEX-RTS derivatives open interest by product type (2011)






31 December 2012

The first cross-listed product of Moscow Exchange for the BRICS Alliance is futures on the

MICEX Index, the benchmark index of the Russian stock market. Trading in MICEX Index

futures in the local market was relatively inactive in the first two years after launch in 2007

and the monthly volume even dropped to zero in November 2008. In early 2009, MICEX

introduced a number of measures to boost the liquidity in its equity derivatives market,

including reduction of the minimum price fluctuation, commission fee and margin deposit

rates for this product. Subsequently, the trading volume picked up rapidly and reached the

peak of 46,990 contracts on an average daily basis in October 2010. (See Figure 3-4.) The

average daily volume for the year 2011 was 10,805 contracts, compared to 1,523,571

contracts for the most active RTS Index futures.

Figure 3-4. MICEX Index weekly closing and monthly trading volume of MICEX Index

futures on Moscow Exchange (2002 – 2011)

Note: MICEX Index futures were launched in June 2007



Before merging with RTS Group, MICEX Group signed memoranda of cooperation with a

number of overseas counterparts, including Chicago Mercantile Exchange (CME), Deutsche

Börse (DB), HKEx, the London Stock Exchange (LSE), NASDAQ Stock Market, the New

York Stock Exchange (NYSE), the SHSE, the SZSE and Tokyo Stock Exchange (TSE). In

addition, NASDAQ OMX is a partner of both MICEX Group and RTS Group in the area of

market data services.

Moscow Exchange also has several joint ventures in Ukraine and Kazakhstan. In 2008, RTS

Group cooperated with a group of brokers in Ukraine to establish the Ukrainian Exchange,

and provided the new exchange with equity and derivatives trading systems. Currently,

Moscow Exchange has a 43% stake in the Ukrainian Exchange. Moscow Exchange was

also the majority shareholder in the PFTS Stock Exchange in Ukraine and the Evraziyskaia

Trading System (ETS) Commodity Exchange in Kazakhstan as at the end of 2011.

0.0

0.4

0.8

1.2

1.6

2.0

0

500

1,000

1,500

2,000

2,500

2002/01 2003/01 2004/01 2005/01 2006/01 2007/01 2008/01 2009/01 2010/01 2011/01

Fu

ture

s tr

ad

ing

vo

lum

e (m

il c

on

tra

cts)

MIC

EX

In

dex

wee

kly

clo

sin

g (

po

ints

)

Year/month

MICEX Index weekly closing and monthly trading volume of MICEX Index futures

(2002 - 2011)

MICEX Index futures monthly volume

MICEX Index weekly closing

Note: MICEX Index futures were launched in June 2007

Sources: Reuters and Futures Industry Association (FIA)

1943 (2008/05/18)

256 (2002/01/06)

513 (2008/10/26)

1402

(2011/12/30)



31 December 2012

4. INDIA

There are over 20 stock exchanges and over 20 commodity exchanges in India. Among the

stock exchanges, the National Stock Exchange of India (NSE) and BSE Limited (BSE) are

the most prominent. These two exchanges offer trading in stocks, ETFs, bonds and financial

derivatives. The commodity exchanges offer trading in commodity futures while trading in

commodity options is still prohibited. Among them, Multi Commodity Exchange of India

(MCX), which became India’s first exchange to get listed on the BSE in March 2012, has the

lion’s share by trading volume.

The principal regulator in the Indian securities market (in legislative terms, “securities”

includes financial derivatives) is the Securities Board of India (SEBI). It regulates stock

exchanges, market intermediaries and other service providers and their activities, and

promotes investor education and training of market intermediaries. The market for domestic

government securities (G-secs), which are traded both OTC and on exchange, is developed

and managed by the Reserve Bank of India (RBI), the nation’s central bank. It also issues

G-secs on behalf of the Indian Government.

At the policy level, the Ministry of Finance (MOF) is responsible for formulating polices and

administering the relevant Acts for the regulation and development of the securities market;

and the Ministry of Corporate Affairs (MCA) is primarily responsible for administering the

Acts governing the corporate sector.

4.1 Key exchanges

The NSE and the BSE are the most prominent stock exchanges in India — almost all cash

market trading (equities and other securities, excluding financial derivatives) is done on the

two exchanges, with the NSE having the lion’s share (81% in 2011/126). These two

exchanges are also the only exchanges in India offering equity derivatives, in which trading

volume is also dominated by the NSE (97%). Currently, only the NSE, MCX Stock

Exchange (MCX-SX) and the United Stock Exchange of India (USE) offer currency

derivatives, in which the NSE has again the largest share by trading volume (47% in 2011/12),

followed by MCX-SX (37%). (See Figure 4-1.)

The NSE offers the trading of shares, warrants, mutual funds (including ETFs), fixed income

securities (include G-sec), futures and options contracts on equities, equity indices and

currencies, and interest rate futures. The National Securities Clearing Corporation Limited

(NSCCL), the NSE’s wholly-owned subsidiary, clears and settles the transactions of equity

and financial derivatives.

The BSE’s product offering is similar to the NSE’s except that the BSE does not offer trading

of interest rate futures and has suspended the trading of currency futures since April 2010.

BOI Shareholding Limited (BOISL, 49% owned by the BSE) is the BSE’s clearing house for

funds and securities while Indian Clearing Corporation Limited (ICCL), the BSE’s

subsidiary, provides clearing and settlement services for the BSE’s mutual funds and

corporate debt segments.

6 The financial year in India is from April to March the following year (the same convention is used for this

India section of the article).



31 December 2012

The two exchange groups operate the only two authorised securities depositories in India —

the National Securities Depository Limited (NSDL), the NSE’s associate/affiliate company,

and the Central Depository Services (India) Limited (CDSL) which is 54% owned by the

BSE. Securities settlement is not yet fully dematerialised — net settlement is conducted by

electronic delivery of securities at NSDL and CDSL while physical settlement is provided for

on a trade-for-trade basis.

Figure 4-1. Turnover of cash market securities and selected financial derivatives on all

Indian stock exchanges (Apr 2011 – Mar 2012)

(a) Cash market turnover value

(b) Equity derivatives trading volume

(c) Currency derivatives trading volume

Notes:

(1) Cash market turnover value is converted to USD using period-end exchange rate (source: RBI).

(2) Other exchanges had eligible trading value/volume.

Sources: SEBI annual reports and bulletins

NSE

US$549 bil

(81%)

BSE

US$130 bil

(19%)

Cash market turnover on all Indian stock exchanges (Apr 2011 - Mar 2012)

Total: US$680 bil

NSE

1,205 mil

(97%)

BSE

32 mil

(3%)

Contract volume of exchanged-traded equity derivatives in India

(Apr 2011 - Mar 2012)

Total: 1,237 mil contracts

NSE

973 mil

(47%)

MCX-SX

770 mil

(37%)

USE

315 mil

(15%)

Contract volume of exchanged-traded currency derivatives in India

(Apr 2011 - Mar 2012)

Total: 2,058 mil contracts



31 December 2012

4.2 Cash market

Figure 4-2 shows the growth of the cash markets operated by the NSE and the BSE in the past

decade. Although the BSE has a much larger number of listed companies than the NSE

(5,133 vs 1,646 as at the end of March 2012), they have similar equity market capitalisation

(US$1,192 billion for the NSE vs US$1,215 billion for the BSE) given that most of the

companies listed on the NSE are dual-listed on the BSE. NSE’s total cash market turnover

has grown to 4 times that of BSE by 2011/12 (US$549 billion vs US$130 billion).

Figure 4-2. Market capitalisation, turnover value and number of listed companies

in the NSE’s and the BSE’s cash market segment (2002/03 – 2011/12)

Notes:

(1) Market capitalisation and turnover are converted to USD using period-end exchange rates (source: RBI).

(2) The reporting year covers April each year to March the following year.

(3) The significant decrease in the number of listed companies in the BSE from 2003/04 to 2004/05 is partly

due to the delisting of 552 companies in July 2004 because of their non-compliance with the BSE’s listing

agreements.

Sources: NSE statistics and SEBI Bulletins

818

909 970

1,069

1,228

1,381 1,432

1,470

1,574 1,646

113

258

362

631 773

1,215

568

1,331 1,501

1,192

130 253 261

352

446

888

540

917

801

549

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

No

. o

f li

sted

co

mp

an

ies

Ma

rket

ca

pit

ali

sati

on

/ c

ash

ma

rket

tu

rno

ver

(U

S$

bil

lio

n)

Preiod-end Market capitalisation, cash market trunover and no. of listed companies on NSE (2002/03 - 2011/12)



Cash market turnover

Reporting year

5,650

5,528

4,731

4,781

4,821 4,887

4,929 4,975

5,067 5,133

120

277

388

677

813

1,285

606

1,366

1,532

1,215

66 116 119 183

219

395

216

305 247

130 4,200

4,400

4,600

4,800

5,000

5,200

5,400

5,600

5,800

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

No

. o

f li

sted

co

mp

an

ies

Ma

rket

ca

pit

ali

sati

on

/ c

ash

ma

rket

tu

rno

ver

(U

S$

bil

lio

n)

Preiod-end Market capitalisation, cash market trunover and no. of listed companies on BSE (2002/03 - 2011/12)



Cash market turnover

Reporting year

BSE

NSE



31 December 2012


The NSE is not only the largest exchange in India in terms of contract volume of financial

derivatives but also a prominent derivatives exchange in the world. It ranked 3rd

in terms of

aggregate derivatives volume in 2011, behind Korea Exchange (KRX) and CME Group7.

Among the various product types, index options are the most actively traded, surpassing

currency futures in 2011/12 — contributing 40% of the NSE’s total derivatives volume,

compared to 32% for currency futures (see Figure 4-3). In respect of trading activity by

underlying, option contracts on the S&P CNX Nifty Index were the most active in the year

2011, contributing 39% of the total8. It was followed by futures contracts on US dollar (US$)

against Indian Rupee (32%), option contracts on US$ against Indian Rupee (11%) and futures

contracts on the S&P CNX Nifty Index (6%). Stock futures and stock options accounted

for 7.3% and 1.5% respectively of the total (see Table 4-1).

Table 4-1. Top 5 derivatives products by contract volume on NSE (2011)

Rank Derivatives Contract volume % of total

1 S&P CNX Nifty Index Options 868,684,582 39.5%

2 US Dollar/Indian Rupee Futures 697,825,411 31.7%

3 US Dollar/Indian Rupee Options 252,807,126 11.5%

4 S&P CNX Nifty Index Futures 123,144,880 5.6%

5 EUR/Indian Rupee Futures 18,065,186 0.8%

- All individual stock futures 160,878,260 7.3%

- All individual stock options 33,172,963 1.5%

- Others 45,788,242 2.1%

All NSE products 2,200,366,650 100.0%

Source: FIA statistics

Although the BSE is the first exchange to offer equity derivatives in India (SENSEX futures

in 2000), it captured only a 1%-3% market share in equity derivatives each year in the past

decade. In view of this lacklustre performance, the BSE introduced a series of Liquidity

Enhancement Incentive Programmes (LEIPS) in late September 2011 to boost lasting

liquidity in the segment. As a result, total trading volume in the BSE derivatives market

increased from 6,000 contracts in 2010/11 to 32 million contracts in 2011/12 contributed

mainly by equity derivatives — 77% in 2011/12 by index options and 22% by index futures

products (mainly SENSEX Index futures). (See Figure 4-3.)

7 Source: FIA statistics. It should be noted that the contract sizes of the NSE’s products are much smaller

than the US standards. For example, the multiplier of the NSE’s S&P CNX Nifty Index futures/options is

INR100 (US$1.9 as of end-2011) per index point, with a contract size of US$8,324, compared with US$50

per index point for CME’s E-mini S&P 500 Index futures, with a contract size of US$62,880 as of end-2011;

the contract size of the NSE’s US dollar/Indian Rupee futures/options is US$1,000, compared with €125,000

(US$162,156) for CME’s Euro FX futures. 8 Source: FIA statistics



31 December 2012

Figure 4-3. Contract volume of all financial derivatives on the NSE and the BSE

(2002/03 – 2011/12)

Notes:

(1) The reporting year covers April each year to March the following year.

(2) Contract volume figures of the NSE’s interest rate futures and the BSE’s stock options are too small to be

identifiable in the chart.

(3) The volume of the BSE’s products grew very strongly in 2011/12 after the launch of a series of Liquidity

Enhancement Incentive Programmes in late September 2011.

Sources: NSE statistics and SEBI Bulletins

In the BRICS Exchange Alliance, futures on SENSEX, one of the benchmark indices of the

Indian stock market, is the cross-listed product. Figure 4-4 shows the monthly trading

volume of SENSEX Index futures on the BSE from January 2011 to June 2012 (where data is

available) and the daily closing of the underlying index for the past decade. The average

daily volume was 57,433 contracts in 2012 up to June.

81 157 210

(30%) 178 165 146 81 105

204

(48%)

222

(32%) 146 186 158

55

212

(31%) 341

(32%)

651

(36%)

864

(40%) 14

33

36

33

379

(36%)

712

(40%)

701

(32%)

37

272

(12%)

[17] [57] [77] [158]

[219]

[425]

[690]

[1,058]

[1,784]

[2,179]

0

500

1,000

1,500

2,000

2,500

2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

Nu

mb

er o

f co

ntr

act

s (m

illi

on

)

Contract volume of financial derivatives in NSE (2002/03 - 2011/12)

Index Futures Stock Futures Index Options

Stock Options Currency Futures Currency Options

[ ] Total contract volume

( ) % share

Reporting year

2

7

(96%) 7

(22%)

25

(77%)

[0.1] [0.4] [0.5] [0.0002]

[1.8]

[7.5]

[0.7] [0.009] [0.006]

[32]

0

5

10

15

20

25

30

35

2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

Nu

mb

er o

f co

ntr

act

s (m

illi

on

)

Contract volume of financial derivatives in BSE (2002/03 - 2011/12)

Index Futures Stock Futures Index Options Currency Futures

[ ] Total contract volume

( ) % share

Reporting year

NSE

BSE



31 December 2012

Figure 4-4. Daily closing of SENSEX Index and monthly trading volume of

SENSEX Index futures on the BSE (2002 – 2012H1)

Note: Volume figures of SENSEX Index Futures are available since January 2011 and those before late 2011

are too small to be identifiable in the chart.



Alliances that the Indian exchanges have reached with their overseas counterparts are mainly

in the area of derivatives product development.

The NSE has established a cross-listing relationship with CME Group for the listing of futures

contracts on the NSE’s S&P CNX Nifty Index in the US and futures and options contracts on

the two US indices S&P 500 Index (S&P 500) and Dow Jones Industrial Average (DJIA) in

India. The NSE has also partnered with Singapore Exchange (SGX) in the listing of futures

and options contracts on S&P CNX Nifty Index in Singapore. Launched in 2000, SGX’s

S&P CNX Nifty Index futures achieved a significant trading volume — 14.7 million contracts

in 2011, representing 20% of SGX’s total derivatives volume. On the other hand, the

mini-futures contracts on the index launched by CME Group in 2010 had only about 46,000

contracts traded in 2011.

Reciprocally, the NSE launched S&P 500 futures and options and DJIA futures in August

2011, which achieved average daily volumes of 1,846 contracts, 99 contracts and 2,464

contracts respectively in the first half of 2012. The next attempt of the NSE to offer trading

of futures and options on foreign indices in India was made in May 2012 when it partnered

with FTSE Group (part of LSE Group) to launch FTSE 100 Index futures and options

contracts. These products achieved average daily volumes of 5,064 contracts and 830

contracts respectively up to June 2012. The NSE, which has signed a “letter of support” on

the BRICS Exchange Alliance, has not joined the other alliance members in the cross-listing

of benchmark equity index products.

0

1

2

3

4

0

5,000

10,000

15,000

20,000

25,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Fu

ture

tra

din

g v

olu

me

(mil

lio

n c

on

tra

cts)

SE

NS

EX

In

dex

da

ily

clo

sin

g (

po

ints

)

SENSEX daily closing and monthly volume of SENSEX Index futures (2002 - 2012H1)

SENSEX Index futures monthly volume

SENSEX Index daily closing

3264 (2002/01/01)

21005 (2010/11/05)

17430 (2012/06/29)

2834 (2002/10/28)



31 December 2012

The BSE, whose shareholders include DB and SGX (5% each), partnered with Eurex of the

DB Group to launch SENSEX Index futures and options in Germany in October 2010.

However, little or no trading has been recorded since then. In addition, the BSE agreed with

the US International Securities Exchange (ISE) of the DB Group for the introduction of

derivatives based on ISE’s indices in India. However, such products are not yet launched.

Separately, the BSE signed a MOU with the Osaka Securities Exchange (OSE) in April 2011

for the development of financial markets in India and Japan.

To promote sustainable investment practices in its market, the BSE joined in October 2012 the

Sustainable Stock Exchange Initiative which is promoted by five global exchanges —

NASDAQ OMX, BM&FBOVESPA, the JSE, Egyptian Exchange and the Istanbul Stock

Exchange.

5. CHINA/HONG KONG

Mainland China and Hong Kong operate independent securities and derivatives markets,

under different rules and regulations and with different market infrastructure. In Mainland

China, there are two stock exchanges ― the Shanghai Stock Exchange (SHSE) and the

Shenzhen Stock Exchange (SZSE); one financial derivatives exchange ― China Financial

Futures Exchange (CFFEX); and three commodities exchanges ― Shanghai Futures

Exchange (SHFE), Dalian Commodity Exchange (DCE) and Zhengzhou Commodity

Exchange (ZCE) which offer futures trading on commodities. Apart from that, there is a

national off-exchange (over-the-counter) trading system ― the Agency Share Transfer System

― for the trading of delisted stocks and for technology growth companies.9 In Hong Kong,

HKEx is the dominant exchange operating both the securities and the derivatives market.

This section focuses on the stock exchanges and the financial derivatives exchanges in the

China/Hong Kong markets, although the Mainland exchanges are not yet members of the

BRICS Exchange Alliance.

The China Securities Regulatory Commission (CSRC) is the securities and futures market

regulator in Mainland China. It regulates the exchanges and clearing houses, market

intermediaries, investment fund companies and other service providers in the market. The

People’s Bank of China (PBOC, the Central Bank) and the China Banking Regulatory

Commission (CBRC) are responsible for the regulation of the banks which provide services

for the securities and futures market. The China Insurance Regulatory Commission (CIRC)

is responsible for regulating the insurance companies, including their scope and degree of

participation in the securities and futures markets. In the process of gradual market opening,

the CSRC works with the other two regulators and other government authorities, including the

State Administration of Foreign Exchange, in formulating related policies and regulations.

9 There are also numerous local equity or property rights exchanges in the Mainland, which provide trading

venues for the shares and assets of non-listed companies. These are outside the scope of the current article.



31 December 2012

In Hong Kong, the Securities and Futures Commission (SFC) is the securities and

derivatives market regulator while the Hong Kong Monetary Authority (HKMA) is the

frontline regulator of banks which conduct securities and futures businesses.

5.1 Securities market

Of the exchanges in the China/Hong Kong markets, only HKEx is currently a member of the

BRICS Exchange Alliance. It operates a Main Board and the Growth Enterprise Market

(GEM). Listed securities include equities, equity warrants, derivative warrants, Callable

Bull/Bear Contracts (CBBCs)10

, debt securities and funds (including ETFs). Clearing and

settlement is performed by the Hong Kong Securities Clearing Company (HKSCC) on an

immobilised basis. Securities registration is performed at the share registrars.

On the Mainland, the SHSE operates a Main Board while the SZSE operates a Main Board, a

Small and Medium sized Enterprise (SME) Board (launched on 24 June 2004) under the Main

Board, and a separate board, ChiNext, for growth enterprises (launched on 30 October 2009).

Listed securities on the SHSE and SZSE include equities, government bonds, corporate bonds

(including convertibles), equity warrants, investment funds (including ETFs) and bond

repurchases. Securities clearing, settlement and registration is performed by the China

Securities Depository & Clearing Corporation (SD&C)11

in electronic book-entry form as

the Mainland securities market is already dematerialised.

The Mainland securities market is partly opened to foreign investors through the Qualified

Foreign Institutional Investor (QFII) scheme for investment in A shares and through the

specialised equity product, B shares, which are traded in foreign currencies. The investment

of QFIIs is subject to authorised investment quota controlled by the Mainland Government.

B shares were originally designed for foreign investors but were subsequently opened to

domestic residents in February 2001. The Hong Kong market, on the other hand, is an open

market without restriction on investor participation and fund flows.

The Hong Kong market and the Shanghai market have comparable market size by value of

listed companies while the Mainland markets have higher turnover value. Figure 5-1 shows

the trend in market capitalisation and turnover for the three markets in the past decade. As at

the end of 2011, the market capitalisation of HKEx was US$2,258 billion and that of the

SHSE was US$2,355 billion. Among the three, the SHSE has the largest average daily

turnover value (US$30 billion in 2011 vs US$13 billion for the SZSE and US$9 billion for

HKEx) while the SZSE has the highest equity turnover ratio (227% in 2011 vs 160% for

SHSE & 69% for HKEx).

10

CBBCs are a kind of structured product issued by a third party, usually an investment bank, that tracks the

performance of an underlying asset without requiring investors to pay the full price required to own the

actual asset. 11

SD&C is the securities central clearing house established by the two exchanges, which operates two branch

companies in Shanghai and Shenzhen to serve the respective markets.



31 December 2012

Figure 5-1. Equity market capitalisation and total market turnover value

on SHSE, SZSE and HKEx (2002 - 2011)

Source: Monthly statistics of SHSE amd SZSE, HKEx Fact Books 2002-2011.

Figure 5-2 shows the trading composition by type of security on the markets. Securities

trading on the SHSE is contributed almost equally by equities and debt securities while that

on the SZSE is dominated by equities. A significant proportion of HKEx’s securities trading

is contributed by structured products including derivative warrants and CBBCs.

Figure 5-2. Trading composition by security type on SHSE, SZSE and HKEx (2011)

Source: Monthly statistics of the respective exchanges.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

To

tal

ma

rket

tu

rno

ver

va

lue

(TV

)

Eq

uit

y m

ark

et c

ap

itali

sati

on

(M

C)

Equity market capitalisation and total market turnover value on SHSE, SZSE & HKEx

(2002 - 2011)

SHSE TV SZSE TV HKEx TV

SHSE MC SZSE MC HKEx MC

US$bn US$bn

2,209

3,066

7,215

2,355

2,258

1,054

US$1,554 bn

(70%)

US$77 bn

(4%)

US$577 bn

(26%)

US$2,922 bn

(95%)

US$89 bn

(3%)

US$55 bn

(2%)

US$3,770 bn

(52%)

US$3,344 bn

(46%)

US$46 bn (1%)

US$55 bn (1%)

Trading composition by security type on SHSE, SZSE and HKEx

(2011)

Equities Debt securities Funds Structured products

Total (US$bn)

SHSE 7,215

SZSE 3,066

HKEx 2,209



31 December 2012

Figure 5-3 shows the new listing activities on the markets. SZSE, which offers a listing

platform for smaller companies, has attracted the most number of listings since 2007. Funds

raised by newly listed companies on HKEx has been the highest among the three exchanges

since 2009.

Figure 5-3. Number of and funds raised by newly listed companies (NLC) on

SHSE, SZSE and HKEx (2002 - 2011)

Source: Monthly statistics of the respective exchanges.


HKEx, a member of the BRICS Exchange Alliance, offers trading in various products,

comprising equity index futures and options, single-stock futures and options, and other

products12

on its derivatives market. In the Mainland, CFFEX is the only exchange

offering financial derivatives. The only product currently available for trading is the CSI300

Index futures, which started trading since 16 April 2010. In February 2012, CFFEX

commenced simulated trading in government bond futures which has been suspended since

May 1995 after serious market malpractices. In 2011, the average daily contract volume on

HKEx and CFFEX was 572,275 contracts and 206,606 contracts respectively.

Figure 5-4 shows the trading composition by product type on the two exchanges.

Derivatives trading on HKEx in terms of number of contracts is dominated by options

products, mainly stock options (53% in 2011). Equity index futures contributed 36% —

16% by Hang Seng Index futures standard contracts, the cross-listed product in the BRICS

Exchange Alliance. Figure 5-5 shows the monthly trading volume of this contract on HKEx

over the past decade. The average daily trading volume for the product was 94,036 contracts

in 2011, 4 times that ten years ago.

12

Other products are interest rate futures, fixed income futures and gold futures. Their volumes are minimal.

15.1

60.3

10.7

18.4

28.7

16.1

2.1

5.94.4

9.2

45.5

28.7

42.9

37.5

8.5

32.0

57.8

33.5

13

25

6 9

26

39

52

101

7190

321

243

62 84

35

69

101

89

0

50

100

150

200

250

300

350

0

10

20

30

40

50

60

70

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

No. of

new

ly l

iste

d c

om

pan

ies

(NL

C)

Fu

nd

s ra

ised

(F

R)

by N

LC

s

Number of and funds raised by newly listed companies on SHSE, SZSE & HKEx

(2002 - 2011)

SHSE FR by NLC SZSE FR by NLC HKEx FR by NLC

SHSE NLC SZSE NLC HKEx NLC

US$bn



31 December 2012

Figure 5-4. Trading composition by derivatives product type on CFFEX and HKEx

(No. of contracts) (2011)

Source: Annual statistics of CFFEX, HKEx Fact Book 2011.

Figure 5-5. Hang Seng Index (HSI) daily closing and monthly trading volume

of HSI futures on HKEx (2002 - 2011)

Source: Reuters and HKEx Fact Books 2002-2011.

50.4m

(100%)

50.3 m

(36%)

15.4 m

(11%)

0.4

(0%)

74.3m

(53%)

Trading composition by derivatives product type on CFFEX and HKEx

(No. of contracts) (2011)

Equity index futures Equity index options Single-stock futures Single-stock options

Contracts

HKEx 140,493,472

CFFEX 50,411,860

0

1

2

3

4

5

6

7

8

0

5000

10000

15000

20000

25000

30000

35000

2002/01 2003/01 2004/01 2005/01 2006/01 2007/01 2008/01 2009/01 2010/01 2011/01

Tra

din

g v

olu

me

(mil

co

ntr

act

s)

HS

I d

ail

y c

losi

ng (

po

ints

)

Year/month

Hang Seng Index (HSI) daily closing and monthly trading volume of HSI futures (2002 - 2011)

HSI futures monthly volume

HSI daily closing

31638.22 (2007/10/30)

11015.84 (2008/10/27)

11350.85 (2002/01/02)

8409.01(2003/04/25)

18434.39 (2011/12/30)

Sources: Reuters and HKEx Fact Book, 2002-2011



31 December 2012


The SHSE so far has signed cooperative MOUs or agreements with 37 overseas exchanges or

markets, including ASX, SGX, the NYSE, TSX, the LSE, Borsa Italia, Nasdaq Stock Market,

OMX, Euronext, DB, Chicago Board Options Exchange (CBOE) and the CME. The SZSE

has also signed MOUs with nearly 30 overseas exchanges. It has also signed an MOU with

the International Finance Corporation (a member company of the World Bank Group) on

corporate governance training and another one with Standard & Poor’s on index development

and product listing.

Among the Mainland futures exchanges, the SHFE has signed MOUs on cooperation with a

number of overseas counterparts, including those in Korea, Australia, the US and Japan. The

DCE has signed MOUs with Dubai Gold & Commodities Exchange (DGCX), KRX and

NASDAQ OMX in the second half of 2012. CFFEX signed MOUs on cooperation with

CBOE, CME, DB and NYSE Euronext in May 2012. However, no specific trading or listing

cooperation has been established between the Mainland exchanges and overseas counterparts,

except with HKEx on the regulation of H shares with A shares listed in the Mainland.

Apart from MOUs on cooperation with the SHSE and SZSE, HKEx has signed MOUs with a

number of overseas exchanges, including KRX, Hanoi Stock Exchange, Taiwan Stock

Exchange (TWSE) and GreTai Securities Market, and Kazakhstan’s exchange; and with the

four futures exchanges, the CSRC and other financial market authorities in the Mainland. It

had also signed regulatory agreements with the U.S. National Association of Securities

Dealers (NASD, now the Financial Industry Regulatory Authority (FINRA)) to facilitate the

launch of a Pilot Programme in 2000 for trading seven Nasdaq stocks on its market; however,

little trading in this segment has been recorded.

6. SOUTH AFRICA

The Johannesburg Stock Exchange (JSE) is the only full-service securities and derivatives

exchange in South Africa. It was listed on the Main Board of its stock market in June 2006.

The former South African Futures Exchange (SAFEX) and Bond Exchange of South Africa

(BESA), which offered trading in derivatives and interest rate products respectively, are now

part of the JSE corporate group. The JSE has a 45% equity interest in Strate Ltd, the central

securities depository (CSD) in South Africa, where “Strate” originally stands for the “Share

Transaction Totally Electronic System”.

The Financial Services Board (FSB) is the regulator responsible for overseeing the South

African non-banking financial service industry. As a self-regulatory organisation, the JSE

regulates issuers and investors and is supervised by the FSB. The fiscal policies of the

country are managed by the National Treasury under the Ministry of Finance, which finances

the government’s budget deficits by issuing various types of public debt instruments. The

banking industry, which participates in the bond market, is regulated by the central bank —

the South African Reserve Bank. The Reserve Bank is a privately owned bank whose

shares are traded on an Over-the-Counter Share Transfer Facility (OTCSTF) market

coordinated within the bank itself. There is no OTC market for securities listed on the JSE.



31 December 2012

6.1 Market segments

The JSE provides issuance, trading and post-trade services across the markets of equities,

interest rate products and derivatives. Equity products include ordinary and preference

shares, ETFs, warrants, real estate investment trusts (REITs), South African Depository

Receipts (SADRs) on foreign shares and some less typical products (Krugerrand gold coins

and carbon credit notes). The interest rate market offers spot trading and repo trading in

corporate and government bonds and their related futures products. Other derivatives

available are futures and options on equities, currencies and commodities (including metals,

crude oil and agricultural products) which are traded on the Yield-X business segment of the

JSE. Yield-X is in the process of merging its interest rate product segment with BESA after

the JSE’s acquisition of the latter in 2009.

Equity market trading is conducted on the LSE’s latest technology platform, Millennium

Exchange. Interest rate and derivatives products are traded on the Nutron Trading System.

The equity clearing system is the Broker Deal Accounting (BDA) System, the back-office

system that JSE members must use for maintaining their accounting and client records.

Electronic securities settlement is conducted on a T+5 cycle by Strate for dematerialised or

immobilised securities, including bonds. Derivatives products are cleared by the SAFEX

Clearing Company (SAFCOM), a wholly owned clearing house of the JSE.

6.2 Equity market

The JSE’s equity products are traded on two markets — Main Board and Alternative

Exchange (AltX). The latter caters for smaller companies which are not yet able to list on

the Main Board. There was a third market — Africa Board — for the listing of African

companies domiciled outside South Africa but it was closed in April 2012, with the listings

moved to the Main Board. Over 70 Main Board-listed companies are also dually listed on

overseas exchanges, including Australian Stock Exchange (ASX), the LSE, Nasdaq Stock

Market and the NYSE. Figure 6-1 shows the growth in market capitalisation of all listed

companies and annual turnover on the JSE equity markets in the past decade.

Figure 6-1. Equity market capitalisation and turnover on JSE (2002 – 2011)

Sources: Monthly statistics of JSE and WFE

96 113

183 202

301

436

349380

452407

188

268

456

565

715

834

486

805

1,013

856

0

200

400

600

800

1,000

1,200

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Eq

uit

y m

ark

et c

ap

ita

lisa

tion

/ E

qu

tiy

tu

rno

ver

(U

S$

bn

)

Equity market capitalisation and turnover on JSE (2002 - 2011)

Equity turnover value

Equity market capitalisation

Sources: Monthly statistics of JSE and WFE



31 December 2012

Figure 6-2 shows key statistics on the JSE’s primary market activities in the same period.

During this period, there were not many newly listed companies — the largest number of

listings, 62, was observed in 2007 before the global financial crisis. Alongside, equity

capital raised through means that require publication of a prospectus (including IPOs) was

rarely recorded — the biggest amount was recorded in 2003 (17% of total capital raised).

Figure 6-2. Equity capital raised and number of newly listed companies on JSE (2002 – 2011)

Source: JSE monthly statistics

6.3 Interest rate market

Various types of cash debt instruments, including vanillas, commercial papers, consumer price

index (CPI)-linked instruments, credit-linked notes and equity structured notes, are available

on the JSE’s interest rate market. Compared to the equity market, the bond market is much

more active in terms of turnover — constituting 87% of total market turnover value in 2011

(see Figure 6-3) — despite a much smaller market capitalisation (some 20% that of equities).

As at the end of September 2011 (the latest available statistics), there were 1,137 bonds listed

on the JSE, with a total market capitalisation of ZAR1,414 billion (US$176 billion). The

majority of these bonds were issued by corporates (mostly by banks) but in value terms it was

dominated by government and public organisation issues (see Figure 6-4). In 2011, there

were 733 newly issued bonds, with a nominal value of ZAR378 billion (US$47 billion).

[11,988]

[3,395]

[7,424]

[12,953][12,405]

[18,268]

[8,200]

[14,528]

[12,222]

[10,844]

9 8

17 19

37

62

23

1014 16

0

40

80

120

160

0

5,000

10,000

15,000

20,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

No

. o

f n

ewly

lis

ted

co

mp

an

ies

Ca

pit

al

rais

ed (

US

$m

)

Equity capital raised and number of newly listed companies on JSE (2002 - 2011)

Capital raised via prospectus

Capital raised via other means

No of newly listed companies

[ ] : Total capital raised




31 December 2012

Figure 6-3. Market share of equity products, bonds and bond repos

in turnover value on JSE (2011)

* Equity products include ordinary shares, debentures, DRs, ETFs, ETNs, funds, warrants and REITs.


Figure 6-4. Distribution in number and market capitalisation of bond listings

on JSE by type (Sep 2011)

(a) No. of listings

Total: 1,137

(b) Market capitalisation

Total: US$176 billion

* SPVs are special purpose vehicles, which are backed by single assets or pools of assets.

^ “Others” includes bonds issued by non-resident organisations.

Note: Numbers may not add up to 100% due to rounding.

Source: JSE Quarterly Review of Interest Rate Market, 2011Q3


The JSE derivatives market is dominated by financial derivatives, the underlying assets of

which are equities, currencies and interest rates. Among them, equity derivatives are the

most actively traded. Almost 99% of the total derivatives trading volume and open interest

in 2011 came from financial derivatives and over 88% is attributable to equity derivatives.

Single-stock futures and options (available for both domestic and foreign stocks) had a 57%

dominant share in equity derivatives trading volume, in which single-stock futures had a

bigger share than single-stock options (49% vs 8%). Notably, single-stock dividend futures

Equity products*

13%

Bonds

29%Bond repos

58%

Market share of equity products, bonds and bond repos in turnover value on JSE (2011)

Total turnover value: US$3,216,719m

* Equity products include ordinary shares, debentures, depository receipts, ETFs, ETNs, funds, warrants and REITs.


Central government

7%

Municipal government

1%

State-owned enterprises

4%

Water authorities

1%

Corporates

57%

SPVs*

27%

Others^

3%

No. of bond listings on JSE by type (Sep 2011)

* Special purpose vehicles (SPVs) are backed by single assets or pools of assets.

^ Others include bonds issued by non-resident organisations.

Source: JSE Quarterly Review of Interest Rate Market

Total no. of listings: 1,137

Central government

60%

Municipal government

1%

State-owned

enterprises

13%

Water authorities

2%

Corporates

19%

SPVs*

6%

Others^

1%

Market capitalisation of bond listings on JSE by type (Sep 2011)

* Special purpose vehicles (SPVs) are backed by single assets or pools of assets.

^ Others include bonds issued by non-resident organisations.

Note: Numbers do not add up to 100% due to rounding.

Source: JSE Quarterly Review of Interest Rate Market

Total market cap: US$176 billion



31 December 2012

also had a substantial share (27%). Index futures (including volatility index futures) and

options accounted for only 15% of the equity derivatives trading volume with the majority

(9%) came from a single product — futures on the FTSE/JSE Top 40 Index, the benchmark

index of the South African stock market. (See Figure 6-5.)

Although the JSE does not operate an OTC market, it seeks to incorporate the flexibility of

OTC derivatives into listed derivatives by introducing “Can-Do” futures and options, which

allow investors to negotiate the contract terms in respect of the underlying asset and expiry

date. The underlying asset may be a single stock, an index or a basket of shares. Similar to

many OTC derivatives, Can-Do futures and options are not suitable for general retail

investors given the considerable minimum contract size of ZAR10 million. They

contributed only 1% of the equity derivatives trading volume in 2011.

Figure 6-5. Distribution of JSE derivatives trading volume and open interest

by product type (2011)

(a) Trading volume

Total no. of contracts: 167,503,211

(b) Open interest


(c) Trading volume of equity derivatives

by underlying asset


* Agricultural products, crude oil and metals

^ Including International Derivatives (IDX), which are futures on internationally listed shares

Note: Numbers may not add up to 100% due to rounding.


Equity futures

79%Equity options

10%

Currencies F&O

9%

Interest rate F&O

1%

Commodities F&O*

2%

Derivatives market trading volume of JSE by product type (2011)





Equity futures

72%

Equity options

17%

Currencies F&O

6%

Interest rate F&O

4%

Commodities F&O*

1%

Derivatives market open interest of JSE by product type (2011)




Single-stock futures^

49%

Single-stock options

8%

Single-stock dividend

futures^

27%

FTSE/JSE Top 40 Index

futures

9%

Other index F&O

6%

Can-do F&O

1%

Equity derivatives trading volume of JSE by underlying asset (2011)

^ Including International Derivatives (IDX), which are futures on internationally listed shares





31 December 2012

Futures contract on FTSE/JSE Top 40 Index is the first cross-listed product of the JSE for the

BRICS Alliance. This index was launched in June 2002 by the JSE and FTSE (now part of

LSE Group) to replace JSE’s benchmark index at that time. Figure 6-6 shows the daily

closing and the monthly futures trading volume of this index from 2002 to 2011. Since the

index futures is a quarter-month contract, it assumes a 3-month pattern of exceptionally high

volume at quarter-end months when roll-over takes place. In 2011, this futures product

constituted 72% of the total trading volume of all index futures on the JSE, with an average

daily trading volume of 53,070 contracts.

Figure 6-6. Daily closing and monthly futures trading volume of FTSE/JSE Top 40 Index

on JSE (2002 – 2011)



The JSE is one of the ten member exchanges of the Committee of SADC Stock Exchanges

(COSSE). SADC is the Southern African Development Community, the aim of which is to

create a community providing for regional peace and security, and an integrated regional

economy. COSSE seeks to contribute to the establishment of a regional common market by

facilitating regional integration in the finance and investment field. To enhance regional

cooperation, the JSE has signed MOU on cooperation with a number of regional exchanges,

including exchanges in Namibia, Kenya, Nigeria, Ghana, Mauritius and Egypt. In Asia, the

JSE signed a MOU with the TWSE in 2003.

LSE Group has been an important technology and business partner of the JSE since 2002

when the latter launched the SETS trading system provided by LSE Group. The JSE’s SETS

system was replaced by another LSE platform — TradElect — in April 2007. In July 2012,

the system was further upgraded to the Millennium Exchange platform of LSE Group. The

LSE and JSE also reached an agreement in 2002 on dual listing, remote access and marketing

0

1

2

3

4

5

6

7

0

5000

10000

15000

20000

25000

30000

35000

2002/01 2003/01 2004/01 2005/01 2006/01 2007/01 2008/01 2009/01 2010/01 2011/01

Fu

ture

s tr

ad

ing

vo

lum

e (m

il c

on

tra

cts)

Da

ily

in

dex

clo

sin

g (

po

ints

)

Year/month

Daily closing and monthly futures trading volume of FTSE/JSE Top40 Index

(2002 - 2011)

Monthly index futures volume

Daily index closing

31315

(2008/05/22)

15905

(2008/11/20)

10336

(2002/01/02)

6763

(2003/04/25)

28469

(2011/12/30)




31 December 2012

activities. As for the cooperation on derivatives products, the JSE has signed licensing

agreements with CME Group to launch futures on corn, precious metals and crude oil.

Before BESA was acquired by the JSE, it formed a partnership with NASDAQ OMX to

launch BondClear, a new clearing house for OTC interest rate derivatives in South Africa.

NASDAQ OMX initially had a 20% stake in BondClear but the stake was subsequently sold

to the JSE. BondClear is now wholly owned by the JSE and is awaiting a clearing house

licence from the FSB.

The JSE has been an active promoter of socially responsible investment (SRI) among South

African listed companies. A further step was taken in June 2012 when the JSE, NASDAQ

OMX, BM&FBOVESPA, Istanbul Stock Exchange and Egyptian Stock Exchange announced

their joint commitment to promote long-term sustainable investment and improved

environmental, social and corporate governance disclosure and performance among their

listed companies.

* * *

Disclaimer

The analysis and framework of this paper are developed by Research & Corporate Development Department

based on the information derived from sources believed to be reliable. Any views and comments in this paper

captured within the framework do not necessarily represent those of HKEx.

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