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Bond Exchange of South Africa

TOPICS FOR DISCUSSION. BRIEF HISTORICAL JOURNEY OF BESAOUR REGULATORY STRUCTURECHARACTERISTICS OF AN EFFICIENT MARKETBONDS vs. EQUITY MARKETSDIFFERENCES AND SIMILARITIESKEY STRUCTURAL ISSUES FOR GROWTH OF BOND MARKETSLESSONS WE HAVE LEARNTPRACTICAL POINTS FOR YOUR CONSIDERATION IN DEVELOPIN

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Bond Exchange of South Africa

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    2. TOPICS FOR DISCUSSION BRIEF HISTORICAL JOURNEY OF BESA OUR REGULATORY STRUCTURE CHARACTERISTICS OF AN EFFICIENT MARKET BONDS vs. EQUITY MARKETS DIFFERENCES AND SIMILARITIES KEY STRUCTURAL ISSUES FOR GROWTH OF BOND MARKETS LESSONS WE HAVE LEARNT PRACTICAL POINTS FOR YOUR CONSIDERATION IN DEVELOPING A BOND MARKET

    3. BESA – BRIEF HISTORICAL JOURNEY 1987 Stals / Jacobs report 1989 Bond Market Association (BMA) formed 1995 Electronic settlement implemented 1996 Bond Exchange licensed 1997 T+3 rolling settlement = G30 compliance 1998 Primary dealer structure for auctioning of government bonds

    4. BESA – BRIEF HISTORICAL JOURNEY 1999 BESA starts ATS project (BATS) 2000 BATS implemented Total Return Index (TRI) implemented Risk management project started 2001 Big increase in corporate bonds listed Restructuring recommendation approved

    5. BESA – BRIEF HISTORICAL JOURNEY 2002 Restructuring proposal approved More corporate bonds listed Including:- 3 Securitisation issues (Credit cards, motor vehicles, commercial bank loan book) 2003 Commercial paper of banks issued

    6. MAJOR FEATURES OF SA MARKET Primarily a government bond market >90% turnover Electronic net settlement = T+3 (rolling) Guaranteed by settlement banks on settlement commitment Meets G30 guidelines Counterparty risk between participants Period between trade (T) and settlement commitment by settlement banks

    7. MAJOR FEATURES OF SA MARKET Very high turnover velocity (+/ - 10% of market cap / day) Very efficient, liquid (concentrated in few bonds) Huge buy / sell back (Repo) activity No defaults experienced – no claims on Guarantee Fund

    8. MAJOR FEATURES OF SA MARKET Floor closed in October 1998 Inter-dealer broker screens – Garban (ICAP), Tullet & Tokyo, Prebon Yamane - (matched principal & name give up) Telephone Automated trading system (BATS) is not used by members Only used for trade reporting To be replaced by new trade capture system and price dissemination system in 2004

    9. SETTLEMENT Electronic settlement since 1995 Outsourced to UNEXcor (Licensed clearing & settlement system – owned by custodian banks) Central Scrip Depository (CSD) 4 – Settlement Agents (Custodian banks) Daily settlement processes – 2 separate runs Net rolling – T+3 (since 1997) Gross – T+0 (Same day trades) BESA - settlement supervisors - settlement fines

    10. SA Bond Turnover (Total Nominal Traded)

    11. SA Bond Turnover (Total Trades)

    12. SPOT & REPO (Nominal Traded - Trillion)

    13. Bond Market Turnover (Billion Rand Nominal Traded)

    14. SPOT & REPO (Nominal Traded - Trillion)

    15. Nominal Outstanding by major issuer Groupings

    16. Total Bond Market Turnover Breakdown by Major Issuers (Nominal Traded) 1989-2003

    17. REGULATORY FRAMEWORK & MARKET STRUCTURE

    18. CHARACTERISTICS OF AN EFFICIENT MARKET Timely and accurate information is available Market has to be liquid The transaction costs must be low in relation to the value of the trade The prices rapidly adjust to new information All transactions and costs are transparent and are disclosed The market has integrity There is surveillance in the market

    19. BOND MARKETS vs EQUITY MARKETS EQUITIES Brokers are dominant players Strong retail presence Corporates – Generally vanilla issues 4. Exchange traded 5. ATS systems (exchange driven and run) – few floors left 6. Central single point of price discovery in ATS 7. Centralised risk management (Trade with impunity)

    20. BOND MARKETS & EQUITY MARKETS

    21. BOND MARKETS vs EQUITY MARKETS So what you might ask ? I will attempt to answer this in the last topic heading “points for your consideration”

    22. KEY ISSUES FOR GROWTH OF BOND MARKETS Sound monetary and fiscal framework Will and commitment of central government to develop markets Effective, appropriate and harmonised financial market legislation and regulations Money markets are a starting point – asset / liability matching / mismatches Role of pension fund legislation prescribed investments – promote but could also distort Do not force a structure onto a market

    23. LESSONS WE HAVE LEARNT Authorities and participants need a common objective Talk / talk and decide Leadership comes from both! Do not force a market structure on participants – recipe for disaster Remember bonds and equity markets are different but have some similarities Settlement is the same – cash / underlying Corporate actions very different for equities Trading – different trading methodologies Risk – concepts identical - management very different “One solution fits all” - Does not work! Size does matter – biggest balance sheet counts!! Intermediaries / speculators are important participants – do not squeeze them out!! Do not re-invent the wheel

    24. PRACTICAL POINTS FOR YOUR CONSIDERATION WILLING AND ABLE PARTICIPANTS THAT CAN BE INNOVATIVE AND CAN MAKE MONEY What are objectives of your market development Do you need your own market? (National airlines analogy) No easy answers to this question – business issues compared to economics It starts at the top Sound monetary and fiscal framework Will and commitment of central government Good financial market legislation and regulation Have few restrictions as possible – your competitors may not have them Harmonise laws and regulations with region Money markets are a key starting point – asset / Liability matching / mismatches

    25. PRACTICAL POINTS FOR YOUR CONSIDERATION A National Payment system is crucial for any market developments Bonds and equities are different but the participants may wish to use similar processes / structures to develop the bond markets Conversely they may not Get practical training/exposure from those who have done it before or do it now Regulators, banks, traders, Exchanges, settlement people Importing big trading systems and market structures from Europe may be completely inappropriate for you Is there a regional solution for settlements that makes sense – economics of scale?

    26. PRACTICAL POINTS FOR YOUR CONSIDERATION Be practical – if you do not have all the right things in place Botswana Bond Issue is a good example But have a plan! Start Small - if you cannot use / do not want to use regional systems Settlements can be run on Excel spreadsheets Use local banks as custodians, Central Bank Economies of scale Trading can be call auctions (2 - 3 / day) Appointing primary dealers is not necessarily the magic wand for take-off

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