The recent implementation of the Companies Act (2008) provides enabling legislation to allow for enhanced legal protection for investors. Therefore, as South Africa’s Central Securities Depository (CSD), we have introduced Segregated Depository Accounts (SDAs) to take advantage of this protection for the benefit of investors.
The failure of Lehman Brothers, and more recently MF Global, prompted many financial institutions and investors to call for higher levels of transparency, increased regulation and improved access to their assets in the event of an intermediary or custodian failure.
SDAs significantly enhance the portability of investors’ listed securities, allowing them to engage with an alternate service provider at short notice. This ensures that if there was a custodian failure (similar to Lehman Brothers or MF Global), their account would not be frozen and the investor could continue trading in that account in a relatively seamless manner.
Reduce risk with a Segregated Depository Account
The key purpose of the SDAs is to provide a safe-keeping account structure for investors. Should their intermediary or custodian collapse, the client’s full legal ownership of securities would remain undisturbed.
As a result, SDAs are designed to reduce market, price and operational risk by avoiding a situation where the investor’s securities may be trapped in the books of the failed entity, while the curator or other administrator endeavours to identify their ownership and return the securities to their rightful owner.
In both the Lehman and MF Global instances, some investors found that their securities were bundled together with the failed entity’s assets and became a creditor of the institution. Where clients had segregated accounts within the entity’s books, the accounts were frozen immediately and it took over six months for some of these securities to be returned to the rightful investor.
Protecting securities for investors
With the segregation of securities at CSD level, investors that open SDAs are now protected in both instances in terms of South African law.
While many service providers previously offered segregated accounts to extremely large clients, the SDA structure gives all investors the option to further protect their securities.
Since SDAs were introduced into the South African market, a number of international investors, asset managers, and brokers have started moving their securities to such accounts, and the local demand for these accounts by investors is growing at a rapid rate.
The recent intermediary failures in the international arena have made it an imperative for South Africa to have something in place to manage such a potential risk.