The JSE’s capital markets division is working hard to increase participation in its recently introduced diesel futures contract, which would, in time, justify making it a deliverable contract.
The product would also make the energy market more accessible for smaller players.
Chris Sturgess, the JSE’s director of commodities and key client management, says if the contract was deliverable, which means that at expiry participants could either take cash or delivery of diesel, it would give the contract 100% price convergence. Currently these contracts are settled only in cash, based on the European gasoil price.
The exchange has held workshops with industry participants and is proposing that delivery could be taken at any of 26 points along the established pipeline network.
The JSE has offered cash-settled crude oil contracts for several years. The volumes of trade are about R3.8bn so far this year.
Sturgess says the diesel futures contract should attract not only speculators, who take short-term positions, but also hedgers seeking longer-term cover, since the JSE lists contracts for 12 calendar months. Hedgers would typically be transport companies or petrol wholesalers and distributors, who could increase their profits by locking in a price and avoiding exposure to future price movements.
The futures contracts traded on the JSE are guaranteed by the JSE Clearing House, with RMB as the market maker. A forward contract, which is entered into directly between a buyer and a seller, carries the risk of default by one party.
One of the features of futures contracts that can be a deterrent to new investors is the margin call. A participant has to put down about 10% of the value of the contract and if the market moves against that position, the participant has to add to the margin. If a futures market participant does not exit a loss-making contract quickly enough, it is possible to ratchet up significant losses.
In highly volatile markets, risk-averse hedgers prefer options to futures.
An option is a product to "put" (sell) or "call" (buy) a volume of diesel at a future date. If the option is out of the money when it matures (for example it was to buy diesel at $60/barrel when the market price is $40/barrel) then the participant does not exercise the option and the only loss is the amount paid for the option.
Brokers can structure products to manage different kinds of risk, but Sturgess says the JSE’s advice to participants is "don’t trade something you don’t understand".
Each standardised diesel futures contract is for 5,000l. Sturgess says the JSE is consulting potential stakeholders, including major oil companies, to secure their support and hopes they will participate in future.
"By listing the various energy products locally on the JSE, we believe we have reduced the access costs for the smaller market participants who have exposure to these products, rather than trying to participate in the global markets," he says.
The exchange is also improving its grain market by adding price transparency around the basis premiums, which refers to the value of grain at different delivery points.
Through the JSE’s dedicated trading screen for products delivered into a futures contract, buyers and sellers can trade grain in various delivery sites at a premium. Buyers can source product from their preferred sites while sellers can get additional premiums.
"This same functionality could be extended to other commodities, provided we are able to ensure a liquid futures contract," Sturgess says.
"At one point we explored this for the coal market. However, we could not resolve a number of delivery concerns raised by the risk takers. It is this same technology the JSE is exploring for a deliverable diesel contract."
The JSE is working on establishing a local market to trade carbon credits. There are potentially huge opportunities for developers of green projects to sell carbon credits to businesses that need to reduce emissions, either for tax reasons or to satisfy offshore customers.
Sturgess says the JSE continues to research what proportion of its deliverable grains derivative market consists of speculators and how much is hedgers, based on the size of the contracts traded, and has concluded that participants are overwhelmingly hedgers at present.
But this work is ongoing, and the JSE is exploring reporting requirements for clients that would entail more regular disclosure by clients of their hedging or speculative activity.
As the JSE wants to increase activity in the diesel and crude oil contracts, the need to differentiate hedgers and speculators from a reporting point of view has not reached the same intensity.