JSE’s Commodity Derivatives Division to trade Safex silo receipts

The South African grain market is set to benefit from increased price discovery through a move by the JSE’s Commodity Derivatives Division to trade Safex silo receipts in completion of a futures contract.

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The move will allow market participants to trade grain at registered delivery points at a basis premium as represented by Safex silo receipts. With close to 200 registered delivery points, this is sure to create additional value across the grains market in South Africa.

Both producers and buyers will benefit from the initiative as both can bid or offer a preferred premium based on the location of the product. Producers can negotiate a better price by placing an “offer” onto the system for a premium over and above the Safex price for stock in the specific silo as represented by the receipt.

Buyers, for example, millers and processors, will benefit through access to bid at all registered delivery points at a premium per ton, regardless of whether or not physical grain is on offer. This is welcomed by the market as no bids were previously permitted without available stock on offer. Buyers will also benefit through access to bid for preferred delivery locations of grain.

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“The JSE is very excited about this new initiative and the opportunities it brings to the South Africa grain market. We look forward to simplifying the physical delivery process for our members and at the same time providing a platform for basis premiums to be discovered over and above the published location differential,” says Chris Sturgess, Director: Commodity Derivatives at the JSE.

When making physical delivery, the price is a function of the Safex mark-to-market price on the day less the location differential (indicative transport cost) to the registered delivery point. With this new functionality the value of grain at each delivery point can be negotiated transparently between buyer and seller and included in the final settlement price.

Clients are no longer required to have existing futures positions during the initial stages of participation. However, should orders be successful, they have to either open a position during the remainder of the trading session or will be provided with an equal short and long futures position once the physical delivery is processed. This is to ensure the basis premium is simply another form of the physical delivery process and keep futures positions in balance with other position holders.

While the silo owner continues to guarantee the quality and quantity of the physical stock on the Safex silo receipt, the JSE will guarantee the cash-flow process. As settlement is guaranteed by the JSE there is no risk of counterparty default. Settlement will take place over a two-day cycle meaning that trade today and be settled tomorrow (or the next business day if tomorrow falls on a weekend). This cycle eliminates delayed payments generally associated with cash market transactions.