(The following press release from JSE Ltd. was received by e-mail. The 
sender verified the statement.) 
* * 
*JOHANNESBURG, 14 MARCH 2013*. Safcom - the clearing house for the JSE’s
derivatives market – today announced the promulgation of the rules enabling
the establishment of a default fund intended to add another layer of
investor protection in the exchange traded derivative market. The need for
the fund arises from the financial crisis of 2008, which prompted
coordinated efforts to improve global market stability. Internationally,
derivatives markets must now have prefunded resources to provide capital
(in addition to the collateral posted by participants) in case a clearing
member defaults. The fund aims to reduce the impact of this risk and thus
limit the liability for Safcom’s clearing members, most of whom are banks.
Safcom calls for approximately R14billion in margin to cover trading valued
at R350 billion per day. 
The proclamation of the new rules follows the recent signing of a temporary
legal agreement by all clearing members and paves the way for a new best of
breed risk management process for the SA derivatives market, one which is
aligned to global guidelines set by the International Organisation of
Securities Commission (IOSCO) and compliant with Basel III requirements. 
The structure of the new fund works on the basis that the nine clearing
members, together with the JSE on behalf of Safcom, will pay collateral
into the default fund (a legally separate entity) and invested as per an
investment mandate agreed by Safcom. Each clearing member’s contribution to
the fund is calculated according to the risk that each member brings to the
central counterparty (CCP). The size of the fund and proportional
contributions will be recalculated by Safcom quarterly and the total size
of the fund will be disclosed to the market. 
Under the new rules of the pre-funded limited liability default fund,
Safcom now has a clearly defined and transparent *full risk waterfall* with
four layers of defence built into the system for default purposes; namely
initial margin of the defaulting clearing member, the defaulting clearing
member’s contribution to the default fund, SAFCOM’s contribution to the
fund and lastly, non-defaulting members’ contributions to the fund. 
This replaces the previous model whereby Safcom’s members where liable for
all losses incurred in the default of another clearing member. If the
losses depleted the defaulter’s initial margin contributions, then the
other members were obliged to step in to support the CCP with their capital
to the very last cent if required. 
* * 
“For the JSE, this is a big step towards overhauling the risk process in
the SA exchange traded derivatives market and raising the profile and
credibility of this market, particularly given that trading decisions are
increasingly being made based on the costs of doing that trade,” says Leila
Fourie, director of post-trade services at the JSE.  “For the first time,
Safcom effectively has “skin in the game” as it is now legally bound (as
are other clearing members) to contribute to reducing the impact of the
risks faced by clearing members. This ultimately adds additional layers of
protection for both its members and ultimately investors.” 
The new fund reduces systemic risk as well as clearing members’ exposure to
counterparty credit risk when clearing through Safcom. As a result,
clearing members will need to hold less capital for centrally cleared
exposures in terms of Basel III. The Basel Committee on Banking Supervision
allows banks to apply a lower risk weight to trades cleared through a CCP
that complies with the  IOSCO best practice guidelines.  IOSCO recommends
that clearing houses should hold the necessary financial reserves, such as
additional collateral or a pre-funded default arrangement to cover credit
exposures from participant defaults in extreme but credible market
conditions.* * 
* * 
The new rules govern the use of the fund, the calculation of the required
size of each member’s contribution and the investment and maintenance and
governance of the fund itself. 
* * 
The default fund applies to all markets for which Safcom provides a
clearing service and hence default in one market will consequently be
funded by clearing members across all markets. Due to the size of the
different markets and trading profile of clearing members, this was
considered appropriate and more capital efficient than having a separate
fund for each market. 
Following on from Safcom becoming the first CCP in the world to qualify for
IOSCO compliance in November last year, the new default fund is
another big step
towards the JSE’s plans to launch its own onshore OTC clearing service
later this year.
JSE Limited 
As South Africa’s only full service securities exchange, the JSE connects
buyers and sellers in four different financial markets, namely equities,
equity derivatives, commodities derivatives and interest rate instruments.
The JSE Ltd offers the investor a first world trading environment, with
world class technology, surveillance and settlement in an emerging market
context. It is amongst the top 20 largest equities exchanges in terms of
market capitalisation in the world. 
For further information, please visit www.jse.co.za
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