Equities Settlement Service
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
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
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
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.
Investors know that the trade will settle five 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 five business days