“The Johannesburg Stock Exchange [JSE] launched the Quanto Futures around commodity products last year and they have traded very successfully so as an entity that is able to trade currency futures against the rand, we’ve been trying to get in touch with the most popular global currency in the world which is the euro/dollar,” Warren Geers, general manager of bonds and financial derivatives at the JSE told CNBC Africa.
Due to South Africa’s strict exchange control regulations, the JSE aren’t allowed to list two different currency pairs trading against each other, such as the euro/dollar, which is the world’s most actively traded currency pair.
As a result, the JSE introduced Quanto derivatives to the South African market, which allows an underlying product traded to follow the movement of a foreign asset but the instrument itself is traded in another currency.
Quanto futures mirror the underlying movement on a one for one basis. For instance, if the price of the euro/dollar increases by 20 per cent in dollar terms, then the value of the investor's rand position in euro/dollar will also increase by 20 per cent.
“Basically what the Quanto does it gives us the ability to mimic the euro/dollar but call it a Quanto so whatever happens in the underlying market will be derived and you do exactly the same thing, making exactly the same amount of money but you’re not sending the money off shore,” explained Geers.
Since private investors won’t be using their foreign offshore allowance to trade Quanto derivatives, they no longer have to go through the Reserve Bank for permission to trade offshore.
“Normally if you will trade or speculate with an entity or asset management company, the foreign currency itself is in an offshore market so you have to send the money offshore and to do that you have to go to the Reserve Bank to get permission but with this product, you don’t have to,” he added.
The JSE’s expansion into Quanto Currency Futures is an attempt to encourage private investors, specifically retail investors, to embrace currency derivatives trading.
The JSE will be hosting a road show around the country to educate the market about Quanto Futures products.
“JSE will educate the market and they will educate the end users directly,” said Geers.