An introduction to trading via Online Share Trading

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• An introduction to trading via Online Share
  Trading

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Comment

• I know you believe you understand what you
  think I said, but I am not sure you realise that
  what you heard is not what I meant.
• Alan Greenspan former US Fed chief.

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Agenda

• What will we be covering tonight?
• Introduction
• Features and benefits
• What is a currency future?
• Pricing a currency future
• Margin
• Quarterly close-out
• Practical example
• Detailed cash flows
• Risks
• The Online Share Trading website

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Introduction

• Standard Bank is a leader in Listed Retail
  Derivatives on the JSE
• By retail we mean Derivatives for the private
  investor
• What is a listed derivative?
• A financial instrument, traded on an exchange,
  the price of which is directly dependent upon
  (i.e. "derived from") the value of one or more
  underlying securities.
• Examples of listed Retail Derivatives include
• Warrants
• Share Instalments
• Single Stock Futures
• CURRENCY FUTURES

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Features Benefits

• Allows RSA Citizens to hedge exposures to
  fluctuations in exchange rates, such as foreign
  holidays and off-shore investments or simply to
  speculate.
• Take a view on the currency in either direction
  (long or short)
• Liquidity provided by market makers
• The ability to input your own bids and offers
• Traded on a regulated exchange - SAFEX
• Reduced capital to trade (Initial margin /
  deposit only) thus offers gearing of up to 10
  times.
• Cost effective brokerage rates
• Only settles in rand, so no impact on your
  off-shore allowance of R2m
• Small contract size of only 1000 units of the
  underlying currency (eg 1,000)

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Asset class risk profile
Futures (SSFs currency)
You are Here
Warrants
Share Instalments
Return
Small cap Stock
Blue chip Stock
Cash
Risk
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What is a Currency Future?

• CFs are agreements between two parties, where
  one commits to buy a set
• quantity of currency and another to sell a set
  quantity of currency on a specified future date.

• Each CF is based on an underlying currency (eg
  US Dollars).
• Each contract is worth 1000 of the underlying
  currency (eg 1,000).
• As the underlying price goes up and down, so
  does the CF.
• Profits and losses on CFs are realised and
  settled on a daily basis.
• To trade in CFs you open a futures account and
  deposit funds -Margin
• The Margin deposited earns a rate of interest as
  set by SAFEX.
• Quoted in rands per foreign currency (eg R6.5254
  for USD1)
• Expiries March, June, September and December
• Cash settled at expiry
• NB no delivery of foreign currency!

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The FX Market

• Largest Market in the World
• April 2007 BIS survey USD 3.2 trillion per day
• Hedge funds and web based electronic trading has
  greatly increased volume
• In SA /- USD 10 billion a day, more than 10
  times the JSE trading volumes
• Operates 24 hours a day
• Locally Monday Friday 9am 5pm
• Always involves 2 currencies
• If you buy one then have sold the other

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Factors that influence FX Rates

• Exchange rate determined by demand and supply
• Demand and supply influenced by
• Economic Factors (eg Interest rates)
• Sentiment
• Technical Factors Micro-structure

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Base Currency vs Quoted Currency

• Exchange rate, ratio of exchange between two
  currencies

USD 1 ZAR 6.6345
Euro 1 ZAR 9.6142
Pound 1 ZAR 13.7839
Base currency
Quoted currency
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SSFs v Currency Futures
Standard Bank of South Africa commits to offer
liquidity by always offering a fair bid / offer
price
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Fair value of a currency future

• An importer needs 1m in 3 months time to pay
  for imports -

Buy now, by raising funds in Rand and place it
on deposit
Current spot rate USD/ZAR 7.1500 3m interest
rates - US 5.25 - RSA
11.50 Number of days 91
Today 1,000,000 R7,150,000 7.1500
3 months time 1,013,271 R7,354,999 7.2587
FV PV Int
At 360 days
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The Basis

• One of the differences in price between the CF
  and the underlying is called the Basis.
• The Basis reflects a number of factors,
  collectively called Carrying Costs (Interest).
• Narrows as we near the expiry.

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Margin

• Every trade that takes place on SAFEX is
  guaranteed by SAFEX.
• By a process known as novation, SAFEX guarantees
  the performance on each trade and removes the
  risk of counterparties not meeting their
  obligations.
• In order to protect itself against any particular
  party failing to meet its obligations SAFEX
  employs a process of margining.
• There are 3 types of margin
• Initial margin
• Variation margin
• Maintenance margin

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Initial Margin

• To ensure that you meet the obligations of your
  trade, SAFEX requires that you post (deposit)
  initial margin.
• Think of Initial margin as a good faith
  deposit.
• This money remains on deposit as long as the
  position is open.
• It earns a market related rate of interest.
• The initial margin is returned to the investor
  when the position is closed out, or the contract
  expires.
• Initial margin is about 10 of the underlying
  value of the position.
• It is meant to equal the highest loss that may
  occur in a two business day period.
• Brokers may require that clients deposit initial
  margin in excess of the minimum SAFEX
  requirements. Online Share Trading requires an
  extra 50. This is referred to as maintenance
  margin and is discussed later.

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Margin requirements
Effective 12 November 2007 Includes the
additional 50 requirement
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Other margins

• Variation Margin
• At day end, SAFEX calculates a closing price
  (mark-to-market MTM) for each CF.
• The profit or loss for the day for each position
  is calculated based on the MTM of the current day
  less the MTM of the previous business day.
• The profit or loss is referred to as the
  variation margin and is settled the next
  business day into your trading account.
• Online Share Trading does this calculation on a
  real-time basis during the course of the business
  day to give clients a real-time view of the
  status of the portfolio.
• Maintenance Margin  
• The minimum account balance you must maintain
  before your broker will force you to deposit more
  funds or close out your position.
• When this happens, it is known as a "margin
  call."
• First margin call when the available cash is
  exhausted simply a warning that positions are
  losing cash.
• Once the 50 extra initial margin is also
  exhausted the Auto Close-out occurs and the
  worst performing positions are closed out first
  to ensure that the available cash balance is once
  again a positive value.

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Quarterly close-out

• CF contracts expire 2 business days before the
  third Wednesday of March, June, September and
  December.
• Expire what does it mean?
• Any holder of a position at the close of business
  on each of these days that has not Rolled-over
  will have their position Closed out.
• The position will be sold at the MTM price of
  the expiry day and the initial margin will be
  returned.
• No delivery of the base currency.
• Roll-over
• The holder can request the broker to
  automatically convert the CF contract that is due
  for expiry into a CF contract that expires in the
  next period.
• E.g. close out the Dec-07 contract and enter into
  the Mar-08 contract.
• Usually 2 days before expiry.
• The holder thus maintains the exposure.
• Brokers usually offer this at a discounted
  costing.

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Practical Examples

• CFs are used Primarily to
• 1 - hedge (remove) the risk of existing or
  expected currency exposure.
• 2 - speculate when the belief is that currency
  rates will change.
• Hedging
• Family Planning an overseas trip,
• Approximate Cost 10,000.
• Buy 10 Contracts at R6.5000
• Deposit R6,300 only as the initial margin
• Before they fly out sell the contracts at R7.0000
• Initial margin of R6,300 is returned
• Profit on Hedge 10,000 x (R6.50 - R7.00)R5,000
• Buy Travellers Cheques at R7.00 cost R70,000
• Net Cost R65,000

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Practical Examples cont.

• Speculating
• Speculator expects rand to weaken.
• Buy 10 Contracts at R6.5000 an exposure of
  R65,000
• Deposit R6,300 only for the initial margin
• Sell contracts at R6.7500
• Profit 10,000 x (R6.75 R6.50) R2,500
• Initial margin of R6,300 is returned
• The R6,300 initial capital outlay has returned
  R2,500
• A return of 40 during a period in which the rand
  only weakened by 3.8.

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Daily cash flows speculative example
Summary of cash flows Initial Margin R0 (-6300
6300) Variation margin R2,500 (500 700 200
1500)
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Auto close out
10 /R DEC-07 Initial margin requirement R630
10 contracts R6,300 (R4,200 R2,100)
1 - At 1400 account is in auto close out R2200
needs to be recovered 2 - Margin balance R6,300
(10R630) thus 4 contracts will be sold to return
R2,520 (4R630) into the cash balance 3
Available cash balance now at R320
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Risks

• Gearing means we can lose significant amounts, if
  not more than the margin
• There are moments of illiquidity under stress
  conditions
• Bid offer spreads widen
• Market gaps
• Stop loss orders not fixed price guarantee

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Risks Trading hours

• Global currency markets open Monday at 5am in
  Sydney closing at 5pm on Friday in New York
• Local market only open Mon-Fri 9am-5pm
• Market could move against you while local market
  is closed and you will have to wait until the
  next days local opening to trade out

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Who may trade Currency Futures

• Qualifying Clients
• A Resident who is a natural person (no limits
  applicable)
• Non-resident clients (no limits applicable)
• Pension funds and long term insurance companies
  subject to their 15 foreign allocation allowance
• Asset managers and registered collective
  investment schemes subject to their 25 foreign
  allocation limits
• All corporate entities and trust accounts are
  prohibited from trading unless a valid exchange
  control approval (ECA) is granted by the South
  African Reserve Bank
• All authorized dealers, subject to the approval
  granted by the Exchange Control Department of the
  South African Reserve Bank, to act as market
  makers in the trading of currency derivatives

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Client procedure to get started

• A Client registration
• New clients
• All non-existing OST clients to register as OST
  client first securities.standardbank.co.za gt
  Open an Account (see slide)
• Once registered and FICAd, apply for Futures
  trading account (see slide)
• Existing Clients
• Apply for Futures trading account (see slide)

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The Website
How to register for an OST account
                                     

• Go to securities.standardbank.co.za
• Click on Open an account
• Complete the registration as an INDIVIDUAL only.
• No CF trading for non-individuals

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The Website
How to register for CF trading account
                                     
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The Website
How to find a currency future
                                     
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The Website
Currency Futures gt Quote Page
                                     
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The Website
Currency Futures gt Trade Page
                                     
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The Website
Futures gt Portoflio
                                   
A
C
B
F
H
D
E
G
J
K
I
 
                               
                   
 
                   
L
M
N
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The Website cont.
Futures gt Portoflio
                                     

• A Contract name eg /R Dec-07 means the
  underlying currency is USD and the contract will
  expire on the 3rd Monday in December 2007.
• B Contracts held 3 contracts long i.e. exposed
  to USD3,000 . Will profit if the rand weakens.
• C Cost Price Initial CF price at which the 3
  /R Dec-07 traded.
• D Futures Exposure B x C. The value of the
  exposure of this position when initially traded.
• E MTM price The previous days official /R
  Dec-07 closing price as calculated published by
  the JSE.
• F Current live SSF Bid or Offer price. The Bid
  price is shown for a long position as its the
  price at which a long position holder will sell
  at to close a position. Visa versa for a short
  position.
• G Futures Exposure B x F. Current exposure
  based on the live bid or offer CF prices.

                               
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The Website cont.
Futures gt Portoflio
                                     

• H Daily PL The daily profit or loss on this
  position
• B x (F C) if transacted today.
• B x (F E) for positions brought forward
• I Total PL G C. The total profit or loss
  on this position since purchase.
• J Initial Margin Amount withdrawn from your
  cash and deposited with the JSE as a Good Faith
  deposit.
• K On expiry Default is roll over, but you can
  select to expire.
• L Daily PL The amount used in the cash
  calculation is similar to the amount as
  calculated in the portfolio.
• M Available trading funds Amount that can
  currently be used to trade (equity or SSFs or
  CFs). When this reaches NIL, you will be
  informed via SMS e-mail.
• N value available before auto close out M
  (R2827 / 3). If the portfolio reduces by this
  value, all SSF positions will be closed out.

                               
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OST information and trading website costs

• Get more information
• Help and education section of the site
• Subscribe to the rand futures daily
  publication. See Special announcement section to
  subscribe
• Or go to Buy and Sell ideas gt Latest research
  reports
• Trading and monthly costs
• Monthly subscription fee R47.50
• Equity trade costs 0.70 (min R70)
• CF trade costs R20/contract (min R70)
• Single stock futures costs 0.4 (extra R70)
• Excl VAT

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OST contacts

• Website securities.standardbank.co.za
• 0860 121 161
• E-mail securities_at_standardbank.co.za
• Kurt Pagel
• Ridwaan Moolla
• Raoul Carelse

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Wealth warning
Trading currency futures can offer significant
returns BUT also subject you to significant
losses if the market moves against your position.
You may, in a relatively short time, sustain more
than a total loss of the funds placed by way of
initial margin. You may be required to deposit a
substantial additional sum, at short notice, to
maintain your margin balance. If you do not
maintain your margin balance your position may be
closed out at a loss and you will be liable for
any resulting deficit.
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Questions
?
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Disclaimer

• The information and opinions stated in this
  document are of a general nature, have been
  prepared solely for information purposes and do
  not constitute any advice or recommendation to
  conclude any transaction or enter into any
  agreement. It is strongly recommended that every
  recipient seek appropriate professional advice
  before acting on any information contained
  herein. Whilst every care has been taken in
  preparing this document, no representation,
  warranty or undertaking, express or implied, is
  given as to the accuracy or completeness of the
  information or representations. All information
  contained herein is subject to change after
  publication at any time without notice. The past
  performance of any investment product is not an
  indication of future performance. Online Share
  Trading is operated by Standard Financial Markets
  Proprietary Limited Reg. No. 1972/008305/07, a
  subsidiary of the Standard Bank Group Limited and
  authorised user of the JSE Limited.