Investor Strategy News Article: Tri-party Collateral Management the Right Direction

As published in the Investor Strategy News on 20 July 2014
Author: Penny Pryor

The ASX’s tri-party collateral management service, ASX Collateral, has reached $500 million in balances in fixed income assets and expects that figure to reach $2 billion by the end of the month. ASX Collateral started with fixed income in July last year, in partnership with Clearstream Banking, and plans to launch equity capabilities next year. 

 

Andrew White, general manager, settlement services for the Australian Securities Exchange, told delegates at the Global Investor/ISF Masterclass Conference last week that their service is unique, because ASX Collateral retains the assets within Australia at the central securities depository. 

 

“You can make a choice about whether you move your assets yourself,” White said. “You’re not handing those assets over to another tri-party provider and therefore running a risk that tri-party,” he says. 

 

After the equities capability is launched next year, ASX Collateral will examine what it can do globally via the arrangement with Clearstream. Tri-party collateral management is a relatively small market in Australia but Kieran Buckley, executive director at Morgan Stanley, expects the local trend will match that of the US, where growth has been rapid. 

 

“[It’s] definitely the future of the equity repo side in Australia as well,” he said at the conference. “Tri-party is a number one goal in our view for Australia. We want to move away from bilateral agreements.” Another trend will be a movement away from cash to high-quality liquid assets. “Certainly in Australia most of our collateralisation today is in the form of cash,” White said. “They’ll need to use non-cash to meet the increased collateral demand.” 

 

While obviously advantageous to service providers and custodians, tri-party can also aid risk mitigation, through both geographically and client-type diversification. “Hopefully tri-party will broaden the client base that will participate in this product,” Buckley said. 

 

Meanwhile, David Beatrix, senior business developer at BNP Paribas Securities Services in Paris, said on a recent visit to Australia: “Industry players expect a surge in collateral management requirements as a result.” He said the number of margin calls was expected to increase five to ten times what here were at present. “New regulations across the globe are increasing the need for collateral for all OTC (over the counter) derivatives, whether cleared or non-cleared. The G20 countries have implemented strict measures to regulate OTC derivatives by passing several laws, and in particular the Dodd Frank Act in the US and EMIR in Europe.” 

 

The new liquidity standards of Basel III will also affect future demand for high quality liquid assets. This may be exacerbated in countries such as Australia where there is a lower level of government issued debt than other countries. Beatrix said: “As a result, there is a lot of discussion as to exactly how much collateral will be needed under new regulations, whether it will lead to a collateral squeeze, and how financial institutions will be able to manage collateral in the quickest and most cost effective way.

 

“Providing a solution to mitigate counterparty risk remains at the heart of investors’ requirements. It is an end-to-end discussion beyond the core question of the collateral itself – what asset type, how to select, how to settle and safe keep, what timing, who has the obligation, what regulations apply. It also crystalises for our clients the core question of ‘where are my assets?’ “As such, optimisation and protection of collateral are becoming critical decision factors; clients want to be able to maximise the use of their assets. Those in need of collateral must best allocate their limited resources or effectively source eligible assets.

 
“The sheer volume of collateral that managers will need to monitor going forward is about to grow exponentially. Collateral management will become a complex challenge. Keeping track of margining requirements through the lifecycle of every derivative portfolio will be a daunting task.”

 

 

Strate Celebrates Mandela Day

For Mandela Day this year, Strate employees were given the challenge to take a Selfie of themselves doing a good deed for others.

 

One of the good deeds included a relay of Strate employees baking, decorating and packaging over 300 cupcakes within 67 minutes for charity. More than 500 cupcakes were done in the time provided, which were delivered to Thembalami Care Centre, Tarentaal Retirement Home and Deansgate Retirement Village.

 

Here are some wonderful memories from the day’s event:

 

 

    

 

 

 

 

 

 

      

 

The Requirement to Disclose Email Addresses in the Securities Register (BND)

During 2013, the disclosure of shareholder information became a topical subject for the market following changes to legislation, receiving quite a lot of attention from the South African financial media. The legislative changes resulted in a number of questions being raised about the electronic securities register, which is why we  have taken the opportunity to clarify some of the confusion regarding the requirement to disclose a shareholder’s email address in the beneficiary download (BND).

 

The Companies Act 71 of 2008 (section 50) and the Companies Regulations of 2011 (section 32) prescribe the minimum information that must be entered into the BND of a company. In terms of section 50(3) of the Companies Act, other information may also be prescribed by the CSD Rules. It is important to note that in terms of section 50(3) of the Companies Act, a record of uncertificated securities ‘must be administered and maintained by a participant or central securities depository in the prescribed form’.

 
The statement ‘in the prescribed form’ places a duty on the Participant or CSD to ensure that the prescribed information (as required by the Companies Act, the Companies Regulations, CSD Rules and Directives, etc.) is entered into the BND. In terms of section 32(2)(a)(ii) of the Companies Regulations, the securities register must, among other things, contain:
‘The person’s email address, if available, unless the person has declined to provide an email address’.  It appears that this statement can be misinterpreted to suggest that a shareholder’s consent is required before an email address is entered into the BND. Seeking a shareholder’s consent would seem to be an impractical exercise and ought not to be the intended legislative result. It is important to take note of one of the objectives of the Companies Act, being ‘to define the relationships between the companies and their respective shareholders or members …’.

 

It is evident from the Companies Act that communication between the company and its shareholder is of significant importance in the establishment and maintenance of this relationship, for example the duty of the company to send financial statements to the shareholders (section 31); send notices of shareholders’ meeting to the shareholders (section 62); publish a record date to the shareholders (section 59); send resolutions for voting by the shareholders (section 60 and 65(2)) etc. As such, this objective of the Companies Act must be considered when interpreting this requirement for email addresses to be provided. The intention of the lawmakers with this statement is to promote communication between the company and its shareholders.

 
The first part of the statement (‘the person’s email address if available, …’) makes it compulsory for an email address to be entered into the BND, if the shareholder has one. The second part of the statement (‘… unless the person has declined to provide an email address’), merely gives the shareholder an option to refuse to provide an email address. Therefore, based on the first part of the statement (‘the person’s email address if available …’), an email address of a shareholder, by default, must always be entered in the BND if the shareholder has an email address. A shareholder’s consent is not required. Seeking a shareholder’s consent seems impractical and does not support the objectives of the Companies Act.

 
A practical step would be to request email addresses from the shareholders or clients and enter into the BND those email addresses as may be provided. In instances where a shareholder has already provided an email address, it must as a default, be entered into the BND as required by the Companies Regulations.

 
Should you have further queries on this subject, please email Strate’s Legal & Regulatory Division via Strate-
Legal@strate.co.za.

Strate Receives Feedback on the Review of its CPSS-IOSCO Assessment

In December 2012, The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organisation of Securities Commissions (IOSCO) released a set of 24 Principles for Financial Market Infrastructures (FMIs), as well as an associated Assessment Methodology and Disclosure Framework, to effectively help these organisations address essential aspects of risk management within the financial markets.

 
The adoption of these Principles is being strongly encouraged in most international markets by practitioners and regulators alike.

 
Given that Strate is one of South Africa’s FMIs, it voluntarily completed a self-assessment shortly after the Principles and Assessment Methodology were published by the CPSS-IOSCO. The outcomes of this review were submitted it to its regulator – the Financial Services Board (FSB) – for review during 2013.

 
Having completed its review, the FSB recently published the report on its website (click here to view the report). It confirms that Strate is recognised as “observing” 14 of the Principles and “broadly observing” a further 3. The remaining 7 Principles are not applicable to Strate at this time.

 
The ratings indicate that South Africa is at the forefront of adopting initiatives that ensure its financial markets remain robust and resilient, even during periods of market stress. “Greater compliance by all FMIs with the Principles will benefit the global financial markets. By incorporating these Principles into the legislative, governance and risk management frameworks that guide the way that Strate operates allows us to further foster the safety, efficiency and resilience of the country’s FMIs,” says Dale Connock, Strate’s Head of Risk.

Cell C Take a Girl Child to Work Day

Thursday 29 May 2014 marked the 12th Cell C Take a Girl Child to Work Day® annual campaign targeted at Grade 11 South African girl learners, giving them the opportunity to visit a place of work and to experience first-hand, the “world of work”.

 
We would like to thank all the learners for visiting Strate. We trust they took away the knowledge and insight that they needed to prepare themselves when they enter the workplace. Here are a few photos from the day:


  

Building Financial Literacy in our Community

South Africa’s Central Securities Depository (CSD), Strate, has invested over R100 000 as part of its corporate social investment to build financial literacy among disadvantaged learners and teachers in its community.

 

On 16 May 2014, Strate together with Full Value Financial Services launched a Financial Markets and Instruments course for eleven Grade 10 learners attending Vuleka Sekolo Sa Borokgo (VSSB), a school that caters for previously disadvantaged learners.
“The course content will be presented by SETA-accredited trainers over seven sessions made up of two hours per session, and it will empower learners and their teachers to make better financial decisions and understand the consequences of their actions. Both learners and teachers will attend the course, which will consequently enable them to empower the communities in which they live with what they have learnt,” says Tanya Knowles, Strate’s Head of Corporate Affairs.

 

VSSB Principal Dave Rossouw explains that the initiative is centred on educating the community how to be financially independent. “The community’s financial literacy is of utmost importance to us, as well as to Strate and Full Value Financial Services, as the sponsors and trainers of the programme respectively. That is why we are also empowering eleven teachers as well and educating them on topics such as basic financial skills, retirement, estate planning, insurance, financing budgets and saving methods. They can then use this knowledge themselves and pass it on to others.”
Full Value Financial Services’ course facilitators include people who were former traders. As the accredited
services providers, they will host the classes at VSSB from May until August 2014.

 

  

 

South Africa to Expect Improved Liquidity from Shorter Equities Settlement Cycle

South Africa will be following a global trend to reduce its settlement cycle for equities to align to global best practice. The equities transaction settlement cycle will reduce from the current five business days after the trade date (T+5) to three business days after the trade (T+3).

 
Shorter settlement cycles are known to reduce risk and improve liquidity due to the earlier release of funds, according to Strate’s Head of Custody & Settlement, Iann Seymour-Smith.

 

CSDs across Europe have been moving to shorter settlement cycles following proposals published by the European Commission during 2013. Known as the Central Securities Depositories Regulation (CSDR), the proposals aim to improve settlement efficiency across the region and have securities transactions settle within two days after the date on which a trade is executed (T+2).

 
“South Africa’s financial markets have been preparing for the move to shorter settlement cycles in line with global best practice. It is currently working on a project to move to T+3 for equities, which is expected to be implemented next year. While we understand that some international markets have moved to T+2, a decision has been made to move to a T+3 settlement cycle for South Africa, as such a large jump from T+5 to T+2 may result in higher fail trade rates – something which our country can be proud to say that, to this date, it has not experienced in on-market transactions,” adds Seymour-Smith.

 
According to data provided for by the Global Custodian Annual Survey of Agent Banks, trades that fail to settle on time can cost up to US$2.9 billion for equities. “As a market aiming to attract investors to the country, South Africa’s history of no on-market failed trades has played a key role for investment,” he adds.

 

Seymour-Smith concludes that the market participants and Strate have been supporting the country’s important move to reduce its settlement cycle as part of the JSE’s T+3 Project, making it a top priority for the South African financial markets.

 

Strate Contributions to CSI Initiatives during 2013

Strate supports a number of worthy causes that have a positive impact on people’s lives and their futures.

 
Each year, the company continues to show the care and support for those in need and encourages its staff to get involved too. During 2013, it supported initiatives linked to empowerment, development and education, as well as other charities close to the heart of its employees.

 

It contributed 1% of its 2012 Net Profit After Tax  to a number of charities and Corporate Social Investment (CSI) initiatives, some of which are listed in the table below.

CSD Rules Amended to Align to Financial Markets Act

Strate’s regulator, the Financial Services Board (FSB), has approved the amendments to the Central Securities Depository (CSD) Rules to have them aligned to new legislation.

 
“Following the implementation of the Financial Markets Act, 2012 (FMA), the CSD Rules had to be adjusted to align to the new legislation as well as to the National Payment System Act and the Insolvency Act,” explains Maria Vermaas, the Head of Strate’s Legal & Regulatory Division.

 

She explained that the section relating to Duties of Participants (within Section 5) had to be revised to include additional clauses, while the Accounts section (Section 6) was also modified to provide further clarity on the irrevocability of settlement instructions.

 
New sections have been added to the amended CSD Rules (Sections 15 and 16 respectively) for Complaints Procedures and Procedures for Management of Participant’s Insolvency Proceeding. While the amended CSD Rules became effective the day they were published in the official Government Gazette, being 14 February 2014, there are a number of clauses that will only take effect on 13 May 2014. These are clauses 5.1.6, 5.1.8, 5.7.1 and 5.7.3.

 
The revised CSD Rules are available on the Regulatory Environment section of Strate’s website. Click here
to view the CSD Rules.

Supporting the Success of South Africa’s Young Entrepreneurs of Tomorrow

Strate has become one of the sponsors of an exciting initiative called iValue, which aims to promote entrepreneurship within previously disadvantaged schools, where selected qualifying learners will participate meaningfully in economic activity.

 
“Given that South Africa is confronted with high levels of unemployment, Strate did not hesitate to partner with iValue’s Entrepreneurship Programme to invest and empower learners so that they can successfully and sustainably contribute to the economy and provide for their families. The iValue Programme was ideally suited to achieve the investment in skills and socio-economic development that aligns with Strate’s objectives,” says Strate’s Head of Corporate Affairs, Tanya Knowles.

 
iValue explains that the concept of its Entrepreneurship Programme is to involve 20 grade 10 learners per school and follow them into grade 11 in a process that will enhance their entrepreneurial spirit.

 
Knowles explains: “As part of the programme design, the learners will get to understand entrepreneurship and life skills, and then develop a business plan. The five best plans will then be put to the test, as learners will implement their business ideas with start-up capital to run their small businesses successfully.”

 
At university level, with the Faculty of Management at the University of Johannesburg, two students completing their Bachelors of Commerce Degrees or Diplomas on Entrepreneurial or Small Business Management will support the growth of a group of ten learners. Two groups will be formed to benefit from a competitive environment. During the second year, each individual will have to present their business plan and the five more relevant and accurate per school will be provided a start-up, capital, which they will have to pay back at the end of the year.

 
In conclusion, Knowles says that iValue’s story of nuturing an enterprising spirit among young learners is one that needs to be acknowledged, given that only some 7% of successful grade 12 learners in South Africa find employment in the formal sector. “The future of our economy depends on how we as a nation raise and educate our youth. Therefore, the investment in education and skills transfer should be a non-negotiable item on every corporate agenda.”