As published in the September edition of Investor’s Monthly
Over 95 Segregated Depository Accounts (SDAs) have been opened by JSE members, investors and custodian banks since they were introduced by Strate to enhance investor protection in the South African market.
SDAs are opened by investors who choose to have their securities (such as equities and bonds) in safekeeping accounts opened directly in the books of the CSD.
Monica Singer says that 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.
Introducing Segregated Depository Accounts
SDAs significantly enhance the portability of investors’ listed securities, allowing them to engage with an alternate service provider at short notice. This ensures that in the event of a custodian failure (similar to Lehman Brothers or MF Global), the investor’s SDA would not be frozen and they could continue trading in that account in a relatively seamless manner as their full legal ownership of securities would remain undisturbed.
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 a failed custodian, while the curator or other administrator endeavours to identify ownership and return securities to their rightful owner.
In addition, investors may appoint a Secondary Participant either upfront when they open an SDA or at a later stage. In the event of insolvency proceedings being instituted against a Primary Participant, the custody and administration of the investor’s securities can be switched to an appointed Secondary Participant almost immediately. This functionality significantly enhances the portability of an investor’s securities.
In both the Lehman and MF Global instances, some investors found that their securities were bundled together with the failed custodian’s assets and became a creditor of the institution. Where clients had segregated accounts within the custodian’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. With the segregation of securities at CSD level, investors that open SDAs are now protected in both instances in terms of South African law,” says Singer.
One of the benefits of having the segregated accounts held at the CSD is that the CSD is a neutral party and is not exposed to the same risks as other market players, so the record-keeping function lies with a truly independent third party. In South Africa, Strate as the CSD already has the technology to maintain the most up-to-date records of ownership of securities and this register is recognised by law as the official record of ownership.
While many service providers previously offered segregated accounts to their large corporate clients only, the SDA structure gives all investors the option to further protect their securities.
Singer says that since SDAs were introduced into the South African market, a number of international investors, asset managers and JSE members have started moving their securities to such accounts and the local demand for these accounts by investors is growing at a steady rate.
She stresses that 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.