Strate - Dematerialisation

What is dematerialisation?

Dematerialisation is a technical term referring to the process whereby paper share certificates are replaced with electronic records of ownership. Investors hand in their certificates, which are then sent to the relevant transfer secretary for validation. Once the authenticity of the certificate has been verified, the actual conversion process begins.

Converting paper shares to electronic record of ownership

Investors are required to hand their paper share certificates to either a Central Securities Depository Participant (CSD Participant) or a stockbroker who will then proceed with the conversion from paper to electronic record.

What is a CSD Participant?

Strate Ltd (Strate) is South Africa’s Central Securities Depository (CSD) for equities and bonds. CSD Participant stands for Central Securities Depository Participant. The CSD Participants are the only market players who can liaise directly with Strate. Most of the current CSD Participants are banks. In order to qualify for CSD Participant status, they have to fulfil the entry criteria set out by Strate and approved by the Financial Services Board.

The six CSD Participants are:

ABSA
First National Bank
Nedbank
Société Générale
Standard Bank
Computershare

Proof of ownership
Once the paper certificates are handed in to either a CSD Participant or a stockbroker, a receipt will be issued as proof of ownership. Once the certificates have been deposited into the Strateenvironment in electronic form, the investor will start to receive regular statements on their share account from their CSD Participant or stockbroker.

How long does the conversion process take?
The conversion into an electronic record generally takes a few days. However, depending on the volume of certificates due to be processed by the transfer secretary, it may take up to 21 days. It is also worth remembering that certificates not suitably registered in the first place may delay the process.
Can shares be traded without being converted to electronic format?
No. Shares must exist electronically before they can be sold. This is why it is advisable to submit all shares to the CSD Participant/broker as soon as possible.

Controlled and non-controlled clients
Under the Strate system, there are essentially two types of clients: controlled and non-controlled. A controlled broker client is one who elects to keep his shares and cash in the custody of his broker and, therefore, indirectly the broker’s chosen CSD Participant. Because CSD Participants are the only market players who liaise directly with Strate, all brokers must have accounts with CSD Participants and communicate electronically with them using an international network called SWIFT (Society for Worldwide Inter-bank Financial Telecommunications). A controlled client deals directly and exclusively with his broker and his regular share statement comes from his broker. A non-controlled broker client is one who appoints their own CSD Participant to act on their behalf. They surrender their certificates and open an account with their selected CSD Participant, while dealing with their broker only when they want to trade. They would have to provide their broker with the details of their share account at the CSD Participant when trading. A non-controlled client receives their share statements directly from his CSD Participant.

Must I complete an application form/contract with my selected agent?
Once you have decided which category of client you would like to be in, you should approach your selected CSD Participant or broker. You will be required to complete a client mandate which will allow you to define more closely the kind of relationship you elect to conduct with your agent. When opening your account, the CSD Participant or broker will capture all share information as well as any pertinent personal details into digital format in their records

Portfolio Security
It is advisable to define, by means of a mandate, the level of control the CSD Participant/broker has over the portfolio. Certain shareholders may wish to empower their agents to trade, make corporate action decisions, etc on their clients’ behalf. This is known as discretionary control. Other shareholders may elect to remain in complete control of the portfolio. These are classified as non-discretionary clients.

Registration of shares
Brokers are obliged to register clients’ shares in their nominee name. Of the six CSD Participants, only Computershare is currently offering ‘own-name registration’. All other CSD Participants will register all shares in their nominee name. Issuers are obliged to distribute company information to all beneficial shareholders, which are investors recorded behind a nominee company, who wish to receive it, irrespective of how their shares are registered. As such, there will be a designated field on the mandate signed with your broker or CSD Participant that gives the option to elect to receive such information from the company.

Guarantees of the broker’s integrity
The JSE, as regulator of the brokers, has established a set of criteria with which brokers have to comply in order to be eligible to hold nominee registers in the Strate environment. These entry criteria include factors such as internal controls and capital adequacy requirements. This should give investors peace of mind that the brokers holding their assets are indeed viable financial institutions. (Brokers who did not meet the entry criteria, are obliged to outsource this function either to an approved settlement agent or to a qualifying broker.) Strate is the regulator of the CSD Participants. If you encounter any problems and your account is with one of the CSD Participants, please contact Strate.

Dividends paid through electronic settlement
Dividends will be transferred electronically into the CSD Participant/broker account on the due date.

Rolling settlement
Rolling settlement refers to a settlement environment in which transactions (securities and funds) become due for settlement a set number of business days after trade. In South Africa, a rolling settlement for equities has been introduced on a T+5 basis while for bonds it is on a T+3 basis (where T= trade date). Rolling settlement represents a significant departure from the ‘account period’ methodology employed in the past whereby trades of any given week were settled from Tuesday of the following week. Investors know that the trade will settle either five or three business days later and can plan / budget accordingly. As every day is a trading day, under Strate every day is also a settlement day.

Contractual settlement
Contractual settlement is a market convention embodied in the rules of the JSE which states that a client has a contractual obligation to cause a JSE trade to settle on settlement day. The JSE, in its capacity as Settlement Authority, ensures that all on-market trades entered into by two JSE member firms settle five days after the trades are entered into. Investors obtain the assurance that their transactions will settle on the specified settlement day. The appropriate cash and share accounts will be debited / credited on settlement day and the risk of delayed settlement and loss of earnings is vastly reduced.

Simultaneous Final Irrevocable Delivery versus Payment (SFIDvP)
SFIDvP refers to the principle whereby the delivery of shares by the seller, and payment for those shares by the buyer, occur simultaneously.