The Johannesburg Stock Exchange (JSE), in partnership with South Africa's finance ministry, the Central Securities Depository (Strate), banking instutions and the Financial Sector Conduct Authority (FSCA), has launched a new electronic trading platform for SA government bonds.

The ETP, designed and operated by European electronic market platform provider MTS, fully automates and "harmonises" trade in bonds enabling this process through one interface.

Bonds are issued by government entities for listing on the JSE to raise funds for large infrastructure projects such as roads, power stations and hospitals.

Investors purchase these bonds and thereby invest in these entities. They secure a return on this investment through interest payments. According to the JSE, R2 trillion worth of government bonds is currently listed on its Debt Board.

The JSE ran a pilot of the technology in July 2018 and used what it described as the 'less risky bond R2023', followed by a phasing in of the full spectrum of JSE bonds.

Primary dealers (financial service firms that buy bonds directly from the government) have started trading on the platform.

Donna Nemer, Director of Capital Markets at the JSE said, "There was a request for proposals that was issued a few years ago and we had several service providers that bid and there was a very diligent evaluation process that was undertaken which included national treasury, the primary dealers, the JSE and other stakeholders. The choice was MTS and I believe it was a good choice. The MTS platform is a fit for purpose trading platform for government bonds and it hosts the trading of government bonds for several other countries around the world. I must say that when we launched the project on the MTS platform we have not had any technology issues and I think it is because to add another market like South Africa was not complex in terms of the technology design."

Nemer said the ETP enhances the process of trading in bonds because it provides for price transparency and ease of trading at a lower cost and without many of the complications experienced before the rollout of the electronic platform.

"We asked the nine primary dealers to connect directly to MTS. They do not connect to the JSE first and then from the JSE to MTS. They go directly into MTS platform in Milan, Italy and the JSE in terms of operating the market and for surveillance purposes has access to the play-by-play, orders and so forth that go through the market so we can ensure that market quality is appropriate and assist national treasury with putting together primary dealer reports in terms of their obligation monitoring. The only integration into the JSE systems is on that surveillance side."

African opportunities

Nemer believes a more technologically sophisticated market infrastructure which has been achieved through the ETP for government bonds positions South Africa as an attractive investment destination and should be considered by other stock exchanges on the African continent for the benefit of investors and issuers of government bonds.

"I think this solution can theoretically be taken up by other markets across Africa. The question is whether there is enough critical mass to justify the cost and certainly in the case of South Africa there is. Our bond market is a huge market and it trades twice as much on a daily basis than our cash equities market trades. Our market is very large and is very liquid. The primary dealers and other stakeholders in the rest of Africa would have to determine whether that makes sense for them on a stand-alone basis or if there is some way to pool the markets in Africa and work with a platform like MTS."

Angelo Proni, Head of New and Local Markets at MTS says the company currently works with twenty governments across Europe alone and the JSE is their first foray into Africa after they were selected out of five other providers.

"The big challenge in this project I think was mainly getting the post trading and settlements side of the equation to work properly. From the trading side, system operations, primary dealers that was all actually straight forward. It was the settlement arrangements that took a lot of time. The JSE know exactly what they are doing. We'd like to think that given this first experience it can provide quite a valuable case study and opportunities in the region if possible."

Proni and Nemer would not be drawn on the specific amount the JSE is paying for the MTS solution except to say that it is "very competitive".

Deputy Minister of Finance Mondli Gungubele said the launch of the trading engine has been seven years in the making. "Its launch is a testament to what can be achieved when government and the private sector work together to achieve a common purpose."