Bond and Derivatives Exchange

Last week we covered the origin and benefits of the stock exchange, and this week, we will continue by focusing on the Bond and Derivatives Exchange Zambia Plc (BaDEx).  
BaDEx is one of two exchanges licensed and supervised by the Securities and Exchange Commission (SEC), the other one being the Lusaka Stock Exchange (LuSE).  It was incorporated in 2009, and became a licensed exchange in 2012.
BaDEx is an electronic market in which trading of financial contracts by buyers and sellers is done electronically over the internet. BaDEx also fully owns and manages a clearing house known as Centralised Systems Depositary Zambia Ltd, which is a separate legal entity.
The clearing house is a market utility and its sole function is to be the counterparty to every transaction on the exchange. This is to ensure the electronic derivatives market is able to function on an anonymous basis, whilst ensuring clearing and settlement of all transactions matched on the electronic trading platform, i.e. when client A or trading member A buys a futures contract on the market by matching a price provided by client B or trading member B, then the clearing house interposes itself in the agreements between the transacting parties. The clearing house interposes between buyer and seller and becomes the legal counterparty. The clearing house becomes a buyer to every seller, and the seller to every buyer.
Participants in the BaDEx market
Members are the figurative lifeblood of any exchange.  Membership is by application, and the meeting of minimum required standards. Membership is encouraged and promoted by the exchange.
Trading members
Trading Members (brokers) are the legal entities participating in the market that provide the physical access for market participants (clients) to be involved in the markets. Trading members may also transact directly in the market on their own account. The trading members require an approved clearing member relationship to be allowed to transact in the market, and in turn requires all its clients to have mandates and accounts in place, to provide market access to such clients. Further, the trading member needs to be licensed by the SEC, and approved by BaDEx as a market participant.
Clearing Members
The Clearing Members are integral to the functioning of the market as it cannot operate without at least one clearing member. The clearing members perform the role of lending their balance sheet to the market participants, who specifically transact through the specific clearing member. The clearing member in return for this service to the market participants charges a fee for all transactions done on the exchange, and is entitled to levy such additional margin as is required, in their opinion, to further mitigate the counterparty credit risk of any particular trading member or client, and further has the right to close out any such position (s) held by clients or trading members of the clearing member, that do not meet at least the minimum initial margin criteria.
Clients are ultimately the end users of any derivatives exchange. Clients are given access by trading members, who also manage the risk on the underlying clients in terms of adherence to the rule of the exchange, and the margin management on these clients, and their portfolios, in line with the requirements of the exchange.
Clients could be any one of the following;
a) Hedgers: These are individuals that have an exposure to a specific quantifiable risk to the movement of some financial instrument or commodity price.
b) Investors: Investors are individuals or companies that seek exposure to the price movement of specific assets, and they use derivatives.
c) Speculators: Speculators are market participants who enter into transactions for financial gain, and risk their own capital. Speculators are very important participants in any successful derivatives market as they offer the other participants risk pricing to hedge out, or enter into new positions, by being active in the market, with often differing views to the rest of the participants
d) Producers: Producers are those individuals or organisations in an economy that produce physical produce in some form or another. For example, a farmer’s
e) Consumers: individuals or companies.
a) Currency future and options: BaDEx has listed a cash settled currency contracts based on the Zambian Kwacha to the United States dollar, and South African Rand.
b) Equity Index Future and Options: These contracts form the cornerstone product for most derivative exchanges. Indeed, many are household names, and form the “shop window” entry point into a countries economy. Indices are not deliverable; therefore all contracts would be cash settled, making settlement extremely simple. An equity index would be a single entry point into a broad spectrum of equities in the Zambian economy.  A tradable index would have to be devised, which would take various factors such as liquidity, and free-float, into consideration. BaDEx plans to list a cash settled trade-able index based.
c) Single Stock Futures: BaDEx plans to list physically settled single stock futures and options on the most liquid Zambian Stocks.
d) Futures and Options on Bonds: Plans to list futures and options on Government and corporate bonds.
For more information, please contact us on or +260 211 227 012

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