Investment in Africa: Managing Currency Risk — Andrew Gillespie

Volatility is not a new word for investors in Africa. Events of 2014 and this year across the continent highlight this – especially in the continent’s currency markets. Irrespective of the market, or country; be it via private equity, listed equity, fixed income, or underlying trade and capital flows – managing FX volatility and risk is a constant feature of the evaluation process. For most participants, it is often a frustrating, opaque and expensive exercise, often prohibitively so. As a result African FX risk, be it directly or indirectly is often unhedged, to the detriment of capital and investment projects, as well as the investment and growth prospects for the continent. 

Not all is doom and gloom, though, as Africa’s financial markets continue to evolve – new tools and instruments are becoming available to hedge some of these FX risks efficiently. The Johannesburg Securities Exchange (JSE), Africa’s largest, most liquid and sophisticated exchange, specialist JSE broker Tradition Futures and Barclays Capital – listed three African FX futures on their Currency Derivatives division in 2014. The Nigerian Naira, Kenyan Shilling and Zambian Kwacha made their debut on the exchange, alongside 12 other currency contracts already traded on the JSE.

As quoted in the media at the time …

“The JSE is excited about this new ground-breaking initiative as we have been working on this strategy for two years. With Africa being a global investment destination, it makes sense for the JSE as a major exchange player in Africa to be involved in providing appropriate products to mitigate currency risk and exposure when dealing in Africa,” JSE capital markets GM Warren Geers said. The JSE had partnered with Barclays Africa and specialist brokers Tradition Futures to bring this new offering to market.”

For the first time, participants wishing to hedge out African FX risk, in these three currencies – now have an independent, well-regulated, transparent platform to do so, irrespective of domicile or size. The JSE listed FX Futures are cash settled and collateralized, creating a level playing field for all. The ability to transact anonymously, through specialist brokers such as Tradition Futures, and to have access to full and fair, timeous price discovery is an international benchmark requirement for a developed market.

This allows for a level and fair playing field, where the best price is available to all, without bias or favour, which is a significant facet and feature of this market in African foreign exchange on the JSE, as the exchange  stands in-between all counterparties and transactions, and acts as guarantor  of these trades. This market – in essence, a listed NDF proxy, obviously has risks inherent, as all markets in FX do.

Participants are able to hedge out exposures in these currencies vs. the USD, Euro or GBP – or against other African listed currencies. Practically, participants can choose to be ‘long’ or ‘short’ any of the 3 African currencies (4 including the Rand), vs. any of the other listed FX pairs – by synthetically creating the currency cross required. Liquidity in this JSE listed African FX market is provided by the same banks and participant’s as the OTC markets – So another way of viewing this market then, is simply an alternative, regulated platform to access and book OTC liquidity – with the JSE as guarantor of all trades. Total contracts traded to date, in the three new listed African FX Futures market is 985,930, equal to a notional value of US$472 million.

This market has been well received and used by market participants since its launch. Participants have included corporates wishing to hedge out FX exposure – in particular, we have seen companies doing business in Kenya, with Euro borrowings or funding; hedging out this EUR/KES exposures in the one year tenor, on the JSE. Equally the Investment and Asset Management Industry have been active participants in the USD/NGN market, hedging FX risk to their underlying equity and fixed income investments in Nigeria. International as well as South African Hedge Fund managers have also used this market to trade the implied fixed income opportunities in the USD/NGN market over this time. Trade and open interest in the Naira vs. USD cross grew exponentially over the Nigerian elections and subsequent currency volatility in 2015 – providing the desired hedging tool for those who used it.

Tradition Futures plans to list additional African FX Futures, in conjunction with the JSE and relevant price making banks and hopes to eventually have nine African FX Futures listed, liquid and trading. In addition, we provide niche FX focused research to our clients, and help to structure, execute and best hedge their African FX exposures. We welcome all enquiries about the workings and pricing of this new market.

Andrew’s Short Profile   
Andrew Gillespie, Head SA FX Derivatives, Tradition Futures, South Africa

Andrew joined the Tradition Futures in 2013 – spearheading their listed FX derivatives business in South Africa. Andrew has 20 years of extensive experience in the South African derivative markets, across the Equity, Fixed Income and FX asset classes.  

During the late 1990’s, Andrew was a full trading member of the Growth and Emerging Markets Division (GEM) of the Chicago Mercantile Exchange (CME), whilst heading up the Emerging Market FX desk at Commerz Futures, a division of Commerz Bank.  In this role, Andrew was instrumental in establishing the first market for a listed South African currency contract on the CME, as well as the Brazilian Real, Russian Rubble and Mexican Peso.

Andrew has continued to specialise in and focus on this market as it now developed in South Africa from fledgling beginnings in 2007, and as MD of Taquanta Treasury Solutions won the prestigious JSE Spire Awards for best Broker in the listed FX category in 2011. Andrew is a current member of the Johannesburg Stock Exchange Currency Derivatives Advisory Committee.