Strate’s executives, after several initiatives to utilise existing systems in the country to perform clearing, settlement and depository functions, concluded in mid 1997 that there was no system in South Africa capable of doing the work required by Strate. In September 1997 a team of banks and JSE representatives spent time in Switzerland and concluded that the Swiss system was the right system for South Africa as Switzerland was one of the few countries to comply with the G30 recommendations and in particular to achieve true Simultaneous, Final and Irrevocable Delivery versus Payment. In May 1998, the agreement to buy the Swiss system was concluded. The successful implementation of this system in April/May 1999 marked the beginning of a new era in South African settlement.
SAFIRES (South African Financial Instruments Real Time Electronic Settlement system) and its corresponding front end system SAFE (SAFIRES Front End) have made the transition from a paper-based to electronic-based environment possible.
On Market Settlement Process
The process begins with the investor, who will place an order for trade with a JSE Broker. This trade is classified as being an “On-market trade”. The JSE Broker enters the order into TradElect, where it will be matched automatically with an opposite order. The matched trade will then be passed from TradElect, for Broker-to-Broker trades, or BDA, for Broker-to-client trades, to SAFIRES, the processing system of Strate. SAFIRES will send instructions to CSDPs to settle. For more info see Chapter 8 – The Role of the JSE limited.
Off Market Settlement Process
Off-market trades are: “Trades in uncertificated securities not concluded through the TradElect system and which are reported by the seller and the purchaser of the uncertificated securities to their relevant CSDP, for settlement through the CSD.”
CSDPs through a “commit” process, confirm to SAFIRES that settlement may proceed. The commit process is a conditional undertaking by the CSDP to ensure that the transaction will settle on settlement day ie: that the securities and/or funds are available, on settlement day, to effect the transfer of ownership.
On settlement day, SAFIRES confirms the availability of securities through the “reservation process”. If reservation at CSDP level is successful, SAFIRES proceeds to send a request for the transfer of funds to the South African Reserve Bank (SARB). SARB facilitates the movement of cash between the Participants through the South African Multiple Option Settlement system (SAMOS). Cash obligations are netted across transactions, per Participant, per payment run. Once the availability of bank funds has been confirmed, and money has been transferred between SARB bank accounts at CSDP level, SAFIRES will transfer ownership within CSDP uncertificated securities accounts in the SAFIRES system. For transactions that do not involve payment (eg. account transfers and free of value orders), transfers will be effected on settlement date provided the Participants have sufficient securities balances.
Confirmation of a successful settlement is then related to the CSDP, who reflect the entry in its books at client level. Settlement is completely secure because the transfer of funds and securities happens simultaneously; in a contractual transaction that is considered to be both final and irrevocable. At the end of the business day, transactions that could not settle (either due to lack of security or funds) will be treated as failed.
The Benefits of Strate
The benefits of Strate emerge from the variety of advanced, technological features and business principles incorporated in Strate’s underlying software, SAFIRES (South African Financial Instruments Real-time Electronic Settlement system). SAFIRES is an adaptation of the Swiss Settlement system, SECOM, which has been providing investors with secure and efficient settlement for years. This system has also been sold to India.
The features of Strate’s system are numerous and each provides a very significant, risk-reducing benefit to the market as a whole.
Electronic Custody of Securities
In respect of , shareholding is recorded electronically by each of the Central Securities Depository Participants (CSDPs) and collated at CSDP level within Strate. These electronic records take the place of the register of shareholders kept by Transfer Secretaries on behalf of companies. The records of the CSDPs are balanced and reconciled every day with the records kept in SAFIRES, where the total balance of dematerialised securities is kept. Investors receive regular statements detailing their electronic holdings and, as these statements are not negotiable instruments, investors need not fear the loss or duplication of such statements. These statements take the place of share certificates. This is in direct contrast to the paper settlement environment where risks of lost, forged or stolen documents abound. Naturally, the costs associated with the replacement of such documents are also eliminated under Strate.
Security of the System
The electronic records of shareholding are subject to extensive controls. In fact, as mentioned previously, SECOM has been in use in Switzerland for years and, thanks to a sophisticated encryption and authentication device in the coding of the software, the security of the electronic records has never been compromised.
Furthermore, Strate utilises the renowned S.W.I.F.T network (Society for Worldwide Interbank Financial Telecommunications) for the relay of electronic messages. S.W.I.F.T is a network owned by all the banks in the world and therefore the provider of choice for all major financial institutions, globally. This is the most secure network in the world with consistent 99% up-time since its inception.
Electronic Settlement of Transactions
At the point of settlement, the electronic records are updated real-time via book-entry. Settlement via book entry is both secure and efficient. It is no longer necessary for the seller to submit his share certificate to his Broker for further submission to the Transfer Secretary who issues a new certificate in the name of the buyer. This manual process was risky, administratively burdensome and time consuming.
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, rolling settlement has been introduced on a T+5 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. Since mid-2016, rolling settlement is on a T+3 basis, where should trades take place on a Monday, settlement will occur on that Thursday of that week (during a normal business week that excludes public holidays).
Investors know that the trade will settle three business days later and can plan / budget accordingly. The ‘account period’ methodology of the paper-based settlement environment operated on an indefinite basis; some transactions remained unsettled for months. As every day is a trading day, under Strate every day is also a settlement day (for the trades which took place three business days before).
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 Brokers settle three 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 securities accounts will be debited / credited on settlement day and the risk of delayed settlement and loss of earnings is vastly reduced.
SLB Stages in Strate
Effective Securities Lending and Borrowing was recognised as essential for the market to function efficiently. “Lending for settlement purposes reduces settlement failures; an Achilles heel of South Africa’s otherwise sophisticated securities markets: in this way the risks and costs associated with trading on South African markets are reduced.” Genesis Report (1999).
With the impending dematerialisation of liquid stocks in July 2001 and the introduction of T+5 rolling contractual settlement (which as from 2016, became T+3), and the potential impact on the banks’ lending desks, who are mainly involved in lending liquid stocks, a system had to be designed to facilitate the settlement of Securities Lending and Borrowing in the Strate environment to ensure that settlement took place on settlement date. Strate proposed the Lending Desk Business Partner concept and this was accepted by the lending market. As the liquid stocks are held mainly by institutional clients who deal through banks’ lending desks, the Settlement Authority had to look to the business partner concept as a way of dealing with banks’ lending desks in the most efficient way.
The Settlement Authority became a Lending Desk Business Partner on 6 August 2001.