WHY SSFs?

1
WHY SSFs?

• SSFs have fundamentally changed the landscape of
  derivative trading globally by allowing investors
  to
• easily and with minimum capital hedge their
  portfolio and exploit market opportunities to
  achieve
• maximum returns on their investment. South Africa
  currently hosts the largest single-stock futures
• market in the World, trading on average 700,000
  contracts daily. The SSF trading market in SA is
• hosted by SAFEX which when established in1999
  offered 4 leading shares but now covers over 250
• counters.
• THE INCREDIBLE BENEFITS WHEN YOU TRADE SSFs
• Impressive hedging capabilities - you are able to
  fully exploit market movement by selling short in
  falling markets and buying long in rising markets
• Highly capital efficient - they are highly geared
  investments giving exposure to a large amount of
  underlying shares for only a small initial
  deposit.
• Low brokerage costs - they incur lower brokerage
  costs than when trading in the underlying shares
• Very liquid - easily traded using PSG Onlines
  Direct Market Access platform
• Earn interest - your initial margin earns
  interest for the duration of the contract
• Benefit from Corporate Actions - corporate
  actions which affect the underlying share are
  also taken into account in pricing SSFs
• Cheaply diversify risk - you are able to leverage
  your funds on a number of investments due to the
  low cost of trading with SSFs
• Protect your Portfolio - hedge your risk by
  selling SSFs in the same companies
• Benefit from pairs trading - by entering into a
  trade one long and the other short in the correct
  ratios a net positive profit can be realised

2
Why SSFs Cont.

• The Higher The Risk The Greater The Reward
• Remember the higher the risk the greater the
  reward and SSFs are
• no exception to the rule. Due to the high degree
  of leverage in
• SSFs both profits and losses are felt immediately
  as they are
• realized on a daily basis, and therefore although
  there potential to
• earn significant returns on your investment is
  impressive, you may
• also incur severe losses.

3
WHAT ARE SSFs?

• By Definition
• Single-stock futures (SSFs) are a legally binding
  agreement (an exchange-traded contract) based on
  an underlying stock. This futures contract gives
  the holder the ability to buy or sell the
  underlying asset at a fixed price on a future
  date. Being futures contracts they are traded on
  margin, thus offering leverage. When purchasing
  SSFs there is no transmission of share rights or
  dividends. If you hold a SSF until expiration you
  either have to take delivery or make delivery of
  the underlying or you have to roll over the
  position into the next dated futures contract in
  the same underlying instrument.
• A futures contract is
• A standardised contract
• That is listed on the South African Futures
  Exchange (SAFEX), a subsidiary of the JSE
• Of a standard quantity (100) of a specific
  underlying asset , usually a listed share
• That expires on a predetermined future date,
  usually the third Thursday of every March, June,
  September and December
• At a price reflecting the ruling price of the
  underlying asset on the expiry date, including
  all relevant dividends and interest
• Remember that SSF contracts equate to100 shares
  of the underlying instrument and therefore orders
  for SSF contracts must be placed in multiples of
  100, e.g. 1 SSF contract 100 shares of the
  underlying. Because SSFs are created at the close
  of trading for all matched orders, all unmatched
  SSF orders expire at the end of the trading day.
  All partially matched orders i.e. orders for
  lots of 100 shares that have not filled 100
  shares of the underlying instrument will be
  cancelled at the end of the day.

4
HOW DO SSFs WORK?

• What This Means
• SSFs are contracts entered into between 2
  parties, where 1 party commits to buy a set
  quantity of stock and 1 party agrees to sell a
  set quantity of stock at a specified future date.
  This creates the right for the buyer to take
  delivery of that stock on the date of the
  contracts expiry, i.e. the buyer doesnt
  purchase the stock but rather a deposit, known
  as the initial margin is made and used as
  security against the right to take delivery of
  the stock at the specified contracts future
  date. Most clients do not, however, take delivery
  of SSFs rather clients close out positions
  every quarter or roll positions over to the next
  expiry date. A SSF contract is made up of 100
  shares of the underlying and the margin is geared
  at around 15 of the underlying instruments
  share price.
• An example

• INVESTOR A (Equity / Share Trader)
• Investor A is confident that Sasol Ltd shares
  will increase in the oncoming months.
• She has R35,000 which she can invest.
• Sasols share price is R350, therefore she buys
  100 shares.
• 3 months later the price has increased by 10 so
  she sells her shares to make a R3,500 profit. Her
  return on her investment is 10.

• INVESTOR B (SSFs Trader)
• Investor B is confident that Sasol Ltd shares
  will increase in the oncoming months.
• Sasols share price is R350, therefore he buys a
  Long Sasol SSF contract.
• The initial margin set by the broker is R5,250
  which is paid by the buyer.
• After 3 months the price has increased by 10
  and the investor closes out his position and
  sells out of the Sasol SSF contract he is
  holding. His profit is R3,500 but his return on
  his investment is 67.

Essentially, SSFs allow investors the ability to
benefit from the price movement of the underlying
share but require a much smaller capital
investment to gain the same exposure when equity
trading.
5
TERMINOLOGY

• Going Long is when an investor buys a SSF
  contract to benefit from an increase in the
  underlying shares price.
• Going short is when an investor sells a SSF
  contract to benefit from a decrease in the
  underlying shares price.
• Closing a position this is when investors
  choose to sell the position if they hold a long
  SSF contract or buy the position if they hold a
  short SSF contract.
• Expiry date the date at which the SSF contract
  is set to expire. SSF contracts expire
  automatically every quarter on the third Thursday
  of March, June, September and December of every
  year. Therefore, contracts bought in January 2009
  will automatically expire in March 2009. All
  contracts are automatically rolled over to the
  next valid expiry date unless investors
  specifically arrange otherwise with PSG Online in
  writing.
• Initial margin the deposit made in order to
  secure the SSF contract. The exact amount is
  specified as a cents per share amount and fixed
  by SAFEX, but it usually equates to about 15 of
  the value of the contract.
• Variation margin the daily process through
  which the unrealised profits and losses are
  processed onto the clients cash account. Should
  this account move into a negative balance, the
  client will be required to settle that negative
  balance through either depositing a cash amount
  or closing positions to the value of the
  unrealised loss.
• Rolling a position the quarterly process
  through which a SSF contract is automatically
  closed and then re-opened with the next dated
  expiry date for a SSF contract in the same
  underlying instrument. This is the default option
  for all SSF contracts.
• Underlying instrument SSFs are derivatives
  because they derive their value from the
  underlying instrument. These will be mostly
  shares listed on the JSE and certain Exchange
  Traded Funds (ETFs).

6
HOW TO GO LONG

• A PRACTICAL EXAMPLE
• Assume that Sasol Ltd shares are trading at R410
  and the SSF price is R413.
• You have heard that a hurricane is predicted to
  hit oil rigs in the Gulf of Mexico in the ensuing
  week, which may affect output rates due to the
  damage. You believe that this will cause the
  price of oil to increase as supply decreases. You
  decide to buy a Long SSF and purchase one DEC08
  SOLQ contract which gives you the equivalent
  exposure of 100 Sasol shares.
• The contract value is R41,300 and the initial
  margin is R6,195. This amount will be taken from
  your SSF account and deposited in a trust with
  SAFEX, which earns interest at the specified
  rate. Your exposure is now 1 contract.
• The hurricane hits oil rigs in Mexico and this
  has affected the price of oil causing the share
  price to increase by 20, from R413 to R495. You
  believe that the share price wont increase much
  further and so decide to close out your position
  and sell out the one DEC08 SOLQ contract you are
  holding.
• At this point your initial margin along with the
  difference between the value of the underlying
  shares when you opened and closed the contract is
  refunded which is 100 shares x (R495 R413)
  R8200 which equates to a profit of 132 for an
  initial capital outlay of R6,195.
• The realised profit and initial margin returned
  are available for new positions immediately, even
  though the cash will only be processed onto the
  trading account at the conclusion of the trading
  day.

7
HOW TO GO SHORT

• A PRACTICAL EXAMPLE
• Assume that Standard Bank shares are trading at
  R94 and the SSF price is also R95.
• You have been doing some research and have found
  that most economists argue that inflation data
  soon to be released will be worse than predicted.
  You believe these arguments to be true and know
  that this news will create negative sentiment in
  the financial market, causing bank stocks to
  fall. You decide to buy a Short SSF and sell two
  DEC08 SBKQ contracts, which give you the
  equivalent exposure of 200 Standard Bank shares.
• The value of each contract is R9,500 therefore
  R19,000 in total and the initial margin is
  R2,850. This amount will be taken from your SSF
  account and deposited in a trust with SAFEX,
  which earns interest at the specified rate. Your
  exposure is now two contracts.
• The inflation data released is worse than
  predicted causing markets to fall. Your Standard
  Bank shares fall by 4 on the same day as the
  data is released. The share price decreases from
  R94 to R90. You decide to close out your position
  and sell out the two DEC08 SBKQ contract you are
  holding.
• At this point your initial margin along with the
  difference between the value of the underlying
  shares when you opened and closed the contract is
  refunded which is 200 shares x (R90 R94) R800
  which equates to a profit of 28 for an initial
  capital outlay of R2,850.
• The realised profit and initial margin returned
  are available for new positions immediately, even
  though the cash will only be processed onto the
  trading account at the conclusion of the trading
  day.

8
WHAT ARE THE FEES CHARGES?

• The following fees are involved with SSF trading
• 0.5 (excl VAT) R60 booking fee
• Brokerage at 0.4 (excl VAT) of the value of the
  transaction
• Market makers commission at 0.1 (excl VAT) of
  the value of the transaction
• Booking fee of R60 per future code in which a new
  position is opened per day therefore you pay
  only for the opening leg of all transactions, and
  only once per day per future code
• Interest payable on the SSF will be determined
  daily by the market maker in relation to the
  ruling SAFEX rates. The final SSF price will
  include this interest.
• Interest will be paid on cash balances in the SSF
  account at the JSE Trustees rate.

9
HOW IS THE PRICE OF AN SSF DETERMINED?

• Part One
• The following variables are used to calculate the
  price of an SSF
• The underlying share price
• Eg R100 in the case of ABSA (ASA)
• The interest to be paid on the total cost of the
  SSF
• Eg 12.5 on R10,000 (R100 per share 100 shares
  per contract) for 3 months
• The dividends that are expected to be paid on the
  shares held within the SSF
• Eg R5 per share
• Market makers commission and brokerage
• Eg 0.5 per transaction

10
HOW IS THE PRICE OF AN SSF DETERMINED?
Part Two The following example will illustrate
these costs
Calculation of a SSF price based on an underlying share

Purchase price of underlying shares (cents) 10000
SSF purchase date 22 September 2008
SSF close-out date 18 December 2008
Days between purchase date and close-out date 87

SSF interest rate per year 11.93
SSF interest rate up for duration of SSF contract 2.84
Market maker's commission and brokerage included in SSF price 0.50

Dividend expected (cents) 300
Dividend adjustment for interest to be earned (cents) 306
LDT for dividend expected 15 October 2008

SSF price including all costs and dividends expected 10028

SSF price Underlying price (adjusted for interest payable) 10284
- Dividend expected (adjusted for interest receivable) -306
Market maker's commission 50
10028
11
WHAT ABOUT DAILY MARGIN CALLS?

• All realised profits and losses are processed
  onto accounts immediately after trading and
  therefore realised profits and returned initial
  margin will be available for trading immediately.
• Should positions remain open overnight, they will
  have produced either unrealised profits or
  unrealised losses. These are processed by SAFEX
  as cash journals on the SSF account. Therefore,
  if an account has a cash balance of R5,000 and
  total unrealised losses of R7,500 at the close of
  trading, SAFEX will process the loss of R7,500 on
  the account to leave the account with a negative
  cash balance of R2,500.
• All standard SSF account holders will be required
  to pay in that R2,500 as variation margin by
  1600 on the following trading day regardless
  of intraday share movements on that following
  trading day. If an account holder fails to
  deposit the required variation margin, the PSG
  Online dealing desk will close out sufficient
  contracts to cover the unrealised loss.

12
WHAT ABOUT THE SSF EXPIRY DATE?

• SSFs expire every quarter usually on the third
  Thursday of March, June, September and December
  of each year.
• The holder of a SSF may take delivery of the
  actual underlying instruments, but this will only
  be the case if the holder of the SSF has arranged
  in writing for PSG Online to take delivery of the
  instruments. In the absence of any specific
  instruction to this effect, PSG Online will
  simply roll the SSF to the next available SSF
  expiry date for the same underlying instrument.

13
WHAT ABOUT CORPORATE ACTIONS AND SSFs?

• Corporate actions will be processed onto SSF
  contracts by the JSE and owners of SSF positions
  will not be prejudiced by movements in the
  underlying instruments.
• Dividends expected during any given quarter are
  priced into SSFs including the expected
  interest to be received on the dividend payment
  and therefore investors do not receive dividends
  as a cash payment even though they do benefit
  from them. By way of a very simple example, if a
  share trades at R100 and a R5 dividend is
  expected before the next SSF expiry date, the SSF
  price will be R95 because the dividend will be
  paid out and the share price will fall
  commensurately before the SSF expiry date.