South Africa was toppled as the biggest single stock futures market by India after derivative contract defaults forced banks to buy equity stakes and plunging share prices deterred trading.
The National Stock Exchange (NSE) of India traded 50.2 million single stock futures in the first quarter compared with 27 million on the JSE, operator of Africa’s largest stock market, according to the World Federation of Exchanges. Trades on the Johannesburg-based bourse slumped 68 per cent from a year earlier, the JSE said.
Absa Group and Rand Merchant Bank were among banks forced to spend more than 2 billion rand ($220 million) on equity stakes in small-cap companies such as Vox Telecom, Control Instruments and Blue Financial Services after their share prices fell, causing clients to miss payments on futures contracts linked to the stocks.
“Many clients, brokers and clearing houses were severely burned when the market collapsed,” said Garth MacKenzie, head of derivatives trading at BoE Private Clients in Johannesburg. “People lost money and now investors are scared.”
The South African bourse, which was the biggest single stock futures market for 18 months, is now the world’s third-largest single stock futures trader after India and Euronext.liffe. In the past month Indian stocks have posted the steepest returns among emerging market economies as investors snapped up the cheapest shares in 13 years.
The drop-off in volumes was mainly because of sliding equity markets and not because single stock futures “aren’t a good product,” Allan Thomson, director of equities and derivatives trading at the JSE, said in a phone interview. “Single stock futures allowed people to use leverage. There’s been a de-leveraging of markets worldwide.”
The value of single stock futures traded on the JSE fell by half in the year through March, according to the bourse’s figures.
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Equity derivatives accounted for 13 per cent of the JSE’s 1.1 billion rand in revenue in 2008, so the fall in trading volumes needs to be “watched” even though steady equity trading volumes may compensate for the decline, Nicky Newton- King, the deputy chief executive officer of the JSE, said.
Single stock futures are contracts that give investors the right to buy or sell a share at a fixed price on a future date. Brokerages provide loans to customers to buy stocks. If the value of a company’s shares decline below a certain level, the broker will issue a so-called margin call, forcing the customer to repay part of the loan or provide collateral.
The JSE last year increased the amount of money investors need to set aside as guarantees for margin calls, which has also made it harder for people to enter the single stock futures market, BoE’s MacKenzie said. BoE, a venture between Nedbank Group and Old Mutual, had seen a 70 per cent drop in the value of trades and 50 per cent decrease in volumes in the first quarter.