Risk Management
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Challenges Facing the South African Derivatives Market

by Bianca Ruddy and Simona Nicole Levet, Financial Risk Management Team, KPMG Advisory

The unrelenting waves of regulatory reforms that have followed in the wake of the 2008-09 crises are creating tectonic shifts across the derivatives landscape. The South African derivatives market is far from immune. Among the swathe of regulations is Basel III, while – as a member of the G20 – South Africa will also start to address OTC derivatives reform through the framework of the Financial Markets Act. At the intersection of these regulatory reforms is the desire for greater transparency and more secure derivatives trading, to buffer and safeguard financial markets against another meltdown.

These reforms have, however, introduced a significant degree of complexity. They will change the way that derivatives are priced, traded and reported. With so many of the operational details still in evolution, there is much uncertainty among market participants. Beyond the banks, a broad range of market participants will feel the impact: from corporates hedging their FX and interest rate exposures, to insurance companies hedging their long-dated liabilities, and from hedge funds and asset managers executing a variety of strategies, to pension funds focusing on long-dated funds. Business models, operations and infrastructure will have to adapt and evolve, balancing the imminent and urgent against the longer-term strategy and available resources.

The unintended consequences introduced by the ‘new paradigm’ will be revealed in time. For now, KPMG sought to unlock the perspectives of South African derivatives market participants around these challenges, gaining insight through a survey and discussions.

When the tide goes out…

On 15 September 2008, Lehman Brothers filed its bankruptcy petition. The default exposed the lack of transparency around the credit worthiness of derivative market players, the exposure size – not to mention who was ultimately exposed, and spotlighted issues relating to collateral management.