The Derivatives Market in South Africa: Lessons for Sub-Saharan African Countries

IMF Working Papers, September 1, 2009

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The paper examines the role of the derivatives market in South Africa and provides policy options for promoting the development of derivatives markets in sub-Saharan Africa.
South Africa's derivatives market has grown rapidly in recent years, supporting capital inflows and helping market participants to price, unbundle and transfer risk.
There are tight regulations on asset allocations by insurance and pension funds to prevent excessive risk taking.
The development of derivatives markets in sub-Saharan African countries could:
- enable market participants to self-insure against volatile capital flows;
- reduce their overdependence on bank credit as a source of funding;
- improve management of seasonal risk through the introduction of commodity futures.
These markets must be appropriately regulated and supervised.
Since such markets would likely be small, consideration should be given to the establishment of a regional derivatives market.

Promote the development of derivatives markets to support capital inflows and risk management.
Maintain tight regulations on asset allocations by insurance and pension funds to prevent excessive risk taking.
Introduce commodity futures to improve management of seasonal risk in agricultural and commodity-dependent economies.
Consider regional approaches (establishment of a regional derivatives market) given the likely small scale of national markets in many sub-Saharan African countries.
Ensure appropriate regulation and supervision frameworks accompany any market development.

South Africa:
- Rapid growth of the derivatives market in recent years.
- Role in helping market participants to price, unbundle and transfer risk.
- Presence of tight regulations on asset allocations by insurance and pension funds.
Sub-Saharan African countries:
- Potential to use derivatives to self-insure against volatile capital flows.
- Potential to reduce overdependence on bank credit.
- Potential to manage seasonal risk via commodity futures.
- Need for appropriate regulation and supervision.
- Likely small market size argues for regional solutions.

Subject: Derivative markets, Financial institutions, Financial markets, Futures, Futures markets, Options, Over-the-counter markets
Keywords: Africa, agriculture commodities derivative, bond futures, bond market, currency derivative, currency futures market, derivative instrument, Derivative markets, derivative platform, derivative trading, derivatives, equity futures, exchange control reform, fixed income, fixed income derivative, futures, futures contract, Futures markets, market, market growth, market operator, market participant, options, Over-the-counter markets, South Africa, stock futures futures contract, Sub-Saharan Africa, WP