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June 2015
gation, hence the introduction of Basis Futures. There is therefore
no need to have the physical product on JSE silo receipts in order to
secure a basis premium.
The proposed contract design for a Basis Futures contract is that
this will form an extension of the current deliverable grain futures
contracts and included in the detailed agricultural contract speci-
fications as an additional appendix. We expect the following to be
approved by the clearing members and various risk committees:
Basis Futures – defined as the location premium or discount
that the buyer and seller agree on, for a future-dated obligation
to either make or take physical delivery at the specified regis-
tered delivery point.
Futures contracts will be available for all major grain products,
namely white and yellow maize, wheat, soybeans and sun-
flower seeds.
Only five main hedging month expiries will be available where
basis futures can be secured, namely March, May, July, Septem-
ber and December. Listing of expiries per registered delivery
point will be demand-driven and subject to an initial interest to
either bid or offer 50 contracts or more.
The Basis Futures will price at a premium or discount to the refer-
ence deliverable grain futures contract and will not include any
location differential component. In other words should the Basis
Futures contract, referencing WMAZ as the underlying prod-
uct, trade at +10 and assuming the WMAZ contract is trading at
R2 600/ton, then this represents R10 over and above R2 600 for
the white maize delivery at the specific delivery point. No ref-
erence to a location differential will be included in any of the
basis futures pricing. Should the Basis Future trade at -50 and
assuming WMAZ is trading at R2 600, then this represents de-
livery of white maize at the specific delivery point R50 under the
R2 600 level or R2 550 should the client lock in both the underly-
ing WMAZ hedge as well as Basis Future.
The underlying contract specifications in terms of contract size
and deliverable qualities will align with the listed grain futures
contract e.g. Basis Futures listed on white maize will see one
contract represent 100 tons of WM1 grade maize.
The Basis Futures contract will be quoted anonymously in a
similar fashion to the Spot Basis contracts so as not to disclose
the participants actively quoting and encouraging bids and
offer to come through the central order book.
The Basis Futures contract, introduced in the trading system as
a separate futures contract, will be margined and subject to a
daily mark-to-market (mtm) relying on the existing JSE meth-
odologies applicable to the derivatives market. Initial margin is
expected to be referenced back to the cash settlement penalty
until the JSE is able to build up more historical data around
basis values traded.
Clients can trade the Basis Futures contract independently of
the underlying deliverable grain futures contract, in other words,
lock in the basis premium or discount and then at a later date
hedge the overall price risk for the underlying commodity.
Only at expiration will a position in the deliverable grain futures
contract be required, but if this is not available, an equal and
opposite futures positions will be opened similar to the spot ba-
sis market today.
Since the Basis Futures contract ultimately is an extension of
the deliverable grains contract, whereby at expiration, physi-
cal delivery is required and matched with a futures position in
the deliverable grain contract, the Basis Futures contract’s last
trading day will be first position day as defined for the deliver-
able grains contract, with physical delivery processed for five
business days following last trading day.
Therefore all short position holders who have a Basis Futures
position following last trading day, will be obligated to tender
a JSE silo receipt in the registered delivery point as per the
listed Basis Futures contract for the defined underlying prod-
uct, with last notice day described as five business days follow-
ing last trading day. Should the short position holder not have
a corresponding short futures position on the deliverable grain
contract e.g. WMAZ, then the position holder will receive both a
short and long futures in WMAZ in order to process the physical
delivery – this is similar to the process in the Spot Basis contract.
The long position holders who have a Basis Futures position
following last trading day, will be obligated to take delivery and
make full payment for product represented by a JSE silo receipt
in a specific registered delivery point referencing the underlying
deliverable grain contract, with delivery triggered by the short
position holder.
We appreciate the Basis Futures process is described in detail, to explain the concept using
a simple example:
Assume a producer who aims to deliver at Kroonstad is interested in securing a Basis Fu-
ture contract for July 2015 white maize (WMAZ) at a level of -R60 on 4 March 2015. There is
a willing buyer who agrees to trade 50 contracts at this level of -R60 and therefore expects
delivery can commence from either 1 July 2015 through until 6 July 2015 (five business
days from last trading day which will be 29 June 2015). The Basis Future contract code
would be displayed as WKRO 29 June 2015 [W=white maize, KRO=code for Kroonstad,
29 June 2015 is last trading day for the contract].
On 9 April the same producer hedges his overall price risk on a WMAZ contract at R2 700.
On 29 June 2015, last trading day the WKRO contract the final mtm is -R50, implying that
the producer would have paid in R10 variation margin to the buyer. On 1 July 2015 the pro-
ducer tenders notice of physical delivery via a JSE silo receipt and this is then linked back
to the short WMAZ position held; the July 2015 WMAZ mtm is now R2 600, this implies
the producer would have received R100 variation margin as the WMAZ futures hedge fell
from R2 700 to R2 600. The invoice price for the producer is then calculated as follows as-
suming no outstanding storage = R2 600 -R50 = R2 550 is paid for the stock delivered in
Kroonstad. If we consider the original hedge value of R2 700 -R60 = R2 640 and compare
this with the final invoice price, do not forget the producer received R100 (from the WMAZ
contract) and paid out R10 (from the WKRO contract) therefore resulting in a net amount of
R90 received. This R90 added to the R2 550 invoiced value results in R2 640 – back to the
original hedged value.
Combining a standard futures contract to manage the overall price risk of the commodity,
but also secure the basis premium.
SA Grain/
Sasol Chemicals (Fertiliser) photo competition