Strate’s role in the successful processing of the African Bank event

In February 2016, the curator of African Bank Limited, Tom Winterboer, launched exchange offer documents to creditors of African Bank to exchange their claims in African Bank for new debt in the “Good Bank.”

 

We played an integral part in ensuring that communication of the proposed restructure by the Curator to funders of African Bank, through the CSD participants, was timely, clear and concise.

 

Head of Operations at Strate Iann Seymour-Smith:  “We achieved a major milestone as this communication proved highly effective and comprehensive. All funders accepted the proposed restructure in the Money Market environment as well as the Listed Bond Instruments with the result that no investors through inaction remain in a “Bad Bank” environment. We also proposed innovative solutions to encompass Euro Medium Term Note (EMTN) investors and funders outside of the Strate domain in order to create an electronic record of claims against the “Bad Bank” entity. The restructure went ahead on 4 April 2016. To enable this, Strate developed an automated process which was made possible via our new TCS BaNCS Money Market platform. This allowed us to bring functionality to the market in a very short period of time to facilitate this unique event in the South African markets.”

 

Tom Winterboer, head of Financial Services at PricewaterhouseCoopers and curator of African Bank:  “Strate provided exceptional service and dedication to the lengthy and complicated process. Their clearing and settlement was central in facilitating the exchange of debt instruments and the creation of the new bank instruments.”

 

Approximately R16.6 billion in senior debt and R4.2 billion in subordinated debt was exchanged for new African Bank Limited (ABL) securities Strate’s systems. The new debt securities are now tradable in the over-the-counter market, with all clearing and settlement done by Strate.

 

This is a significant milestone for African Bank and Strate has been committed to this complex project, the first such transaction of this nature to be processed in South Africa.

 

Strate’s CEO Monica Singer: “I would like to congratulate African Bank on this significant milestone. The implementation of Strate’s new TCS BaNCS Money Market system provided us with the flexibility to enable the successful processing of this transaction.”

 

South Africa’s new stock exchange, ZAR X, partners with Strate

In March 2016, ZAR X, South Africa’s new exchange, announced that it had been granted conditional approval from the South African Financial Services Board to operate. ZAR X’s first milestone after receiving its conditional licence was to announce its partnership with Strate.

 

A key factor in the relationship with Strate to date has been the close collaboration in the development of T+0 settlement, or same day settlement of trades, minimizing the time-lag between matched trade and settlement and clearing into an investor’s account. The ZAR X approach also mitigates settlement risk as transactions are pre-funded.

 

Etienne Nel, CEO of ZAR X, commented: “Strate has made T+0 settlement possible for our clients, which is significantly shorter than the current T+5 turnaround on offer. We are delighted to be partnering with a reputable partner like Strate – the ideal operator to provide our clearing and settlement services because of its proven track record and its trusted and independent third-party status.”

 

ZAR X will benefit from the same robust infrastructure that is currently in place for the clearing and settlement of trades. Strate will further collaborate with ZAR X to ensure that their systems can fully integrate into its clearing and settlement platforms prior to going live. This demonstrates that Strate is in a position to create innovative and responsive services in the interest of a common goal: to grow and enhance the liquidity and sustainability of the financial system in South Africa.

 

ZAR X is scheduled to begin operations in September 2016 and will offer simple, fast and affordable platforms for corporate listings and share trading, with strong focus on the market in restricted equity offerings, primarily black empowerment securities.

 

CEO of Strate, Monica Singer: “ZAR X will benefit from the same robust infrastructure that is in place for the clearing and settlement of trades. Strate will collaborate with ZAR X to ensure that their systems can fully integrate into its clearing and settlement platforms prior to going live. This demonstrates that Strate is open for business and is in a position to create innovative and responsive services in the interest of a common goal: to grow and enhance the liquidity and sustainability of the financial system in South Africa.   We look forward to building an ongoing and sustainable relationship with ZAR X.”

 

OTC derivatives regulatory reform impacts – Eurozone specific?

By Anthony van Eden – Head: Collateral Management Services, Strate

 

The Collateral Management team at Strate attended Clearstream’s Global Securities Financing Conference in Luxembourg in January 2016.

 

The Group of 20 (G20) regulatory reforms to ensure stable financial markets continues to gain traction in the Eurozone, which already has several licensed trade repositories in operation. The European Securities and Markets Authority has issued regulation governing the clearing and margining of Over the Counter (OTC) derivative transactions effective from 1 September 2016.

 

While most market players are aware that ‘all standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, reported to trade repositories and where appropriate, cleared through central counterparties’[1] , many may not anticipate the wider regulatory impact for uncleared OTC derivatives related to initial margin (IM) and variation margin (VM). The more noteworthy impacts being:

 

  • IM requirements and daily VM imposed;
  • Daily collection of two way IM on a gross basis;
  • Collateral segregation for IM at custodial level and/or triparty agent
  • Restrictions on reuse of IM collateral

The effects of these OTC reforms, while tightening security and supervision on an otherwise moderately regulated market, could mean that the Eurozone will require an additional several hundred billion Euros in collateral [2].

 

The 5 year OTC derivative regulatory roll out highlights potential outcomes such as:

 

  • 85% of IM is to be posted must be High-Quality-Liquid-Assets (HQLA) such as sovereign fixed income.
  • IM received in cash must be invested into money market funds due to the fungibility of cash;
  • Collateral to cover IM will be called for in shorter cycles, and with fewer pools to source collateral, therefore the velocity of collateral will increase.
  • The securities posted as IM cannot be reused causing a liquidity trap; therefore the cost of HQLA will increase. This will cause collateral givers to look to other eligible securities or use agents to transform available assets into eligible assets in order to meet their requirements.
  • The connectivity with Repo desks and CCPs will have to improve as time lines become shorter.
  • The regulatory changes will have significant operational impacts, especially impacting transactions where cross border time zones are involved.

 

So how do these developments in the Eurozone impact the South African financial market? A significant portion of South African OTC derivative transactions are with foreign counterparties, of which a large constituency includes the Eurozone. From March 2017 trading in OTC derivatives will have to conform to the margining rules of the local jurisdiction or Central Counterparty (CCP).

 

Furthermore, if recent regulatory changes in South Africa seem to have been coincidentally closely aligned to the Eurozone, and with South Africa being a member of G20, then it stands to reason that Eurozone reforms in the OTC derivative space could be just around the corner for the South African local traders. The cumulative effect of the IM and VM requirements will negatively impact the pricing of derivatives and place even greater pressure on the pools of available HQLA both locally and those held abroad.

 

If this is to be the new normal in the OTC derivatives market, then what should the strategy be to remain not only competitive, but afloat in this industry?

 

It is imperative to ensure that you have the ability to mobilise the required collateral for IM to the right place and in required timeframe from centralised pools of HQLA. The location and type of collateral as well as the cost of placing the collateral and, if you are a bank, the impact on the balance sheet ratios, need to be carefully simultaneously considered. Collateral fragmentation will prove costly. The time is right to ensure that pools of collateral can be accessed timely and automatically selected on a cheapest to deliver basis and substituted seamlessly be the available HQLA be on or off-shore.

 

It is has been estimated that once regulatory controls have been implemented globally, an estimated 99% of IM will be controlled by TriParty systems [3].

 

Strate’s collateral management service provides fully automated, integrated, near-time settlement of collateral placed through either pledge or cession. Securities placed as collateral remain within Strate. Furthermore, securities ceded are protected from disposal by the collateral receiver as only the collateral giver can dispose of its securities once other eligible assets have been substituted with the collateral receiver. A detailed audit trail of permitted reuse of collateral assets ceded is retained and the return of ceded assets follows the initial reuse chain.

 

[1] European Market Infrastructure Regulation (EMIR)”. European Securities and Markets Authority. Retrieved 22 January 2016.

[2]  Apers. B. (2016, January 16). Initial Margin for OTC Derivatives. Speech presented at Clearstream Securities Financing Conference in Luxembourg, Europe.

[3] Apers. B. (2016, January 16). Initial Margin for OTC Derivatives. Speech presented at Clearstream Securities Financing Conference in Luxembourg, Europe.

 

Contact Collateral Management:

Anthony van Eden

Head: Collateral Management

+27 (11) 759 5314

 

 

TCS BaNCS Market Infrastructure: A new robust settlement system to align with global standards

 

In February, Strate launched a new system for the settlement of money markets securities. The new system was selected for being a world-class CSD solution for the electronic settlement of securities.

 

The implementation of money markets was the first project to be launched that forms part of a wider programme where Strate will replace its IT infrastructure for all asset classes. The Bonds and Equities asset classes will be switched over at later stages using a phased approach.

 

The new infrastructure offers the market a streamlined service, as multiple systems are consolidated into one. Strate is now in a position to offer more innovative products to the market in a much shorter time, using the new system.

 

The system utilises the Market Infrastructure solution from the TCS BaNCS product suite by Tata Consultancy Services (TCS).

 

Strate has embarked on the next phase in which a new Debt Instrument System (DIS) for the bond market will be introduced. The project is a significant development for the South African market as it is not only a replacement of the current technology, but also the implementation of a new bond clearing, settlement and asset servicing model utilising a Securities Ownership Register (SOR).

 

The new bond technology aims to:

 

  • Reduce business risk;
  • Provide operational flexibility to configure and control various business processes;
  • Support current and new CSD Participants and the broader market’s growing needs;
  • Be flexible to settle all three Bank for International Settlements’ (BIS) settlement models;
  • Cater for international links with other Central Securities Depositories;
  • Have multiple settlement runs to minimise failure; and
  • Provide the ready support for Segregated Depository Accounts (SDAs) and Securities Ownership Register (SOR).

The implementation of this new system and market practice will be in Q1 2017. The new advanced technology for the bonds clearing and settlement system will take the entire market forward using global best practice and standards.

 

Contact:

Iann Seymour-Smith

Head: Operations

+27 (11) 759 5349

 

Strate’s innovative solutions to processing complex corporate listings

 

During the last quarter of 2015 and early 2016, the South African Financial markets saw the entry of two new foreign companies listing on the Johannesburg Stock Exchange (JSE). Steinhoff Limited de-listed from the JSE and was re-created as Steinhoff International Holdings N.V. (a Dutch Incorporated Company) with a primary listing on the Deutsche Borse (Frankfurt) and a secondary listing on the JSE. Anheuser-Busch InBev (AB InBev) already listed in Belgium, USA and Mexico was now listed on the JSE.

 

Both transactions brought with them significant challenges in that both Dutch and Belgium Law prohibited the CSDs within these regions from connecting to and/or opening an account with a Transfer Secretary/Issuer Agent. This posed a hurdle for both listings, particularly as a key principle for cross-border listings is the ability to enable an investor (no change in beneficial ownership) to move their securities between two markets for arbitrage opportunities, amongst others. This function, termed “a removal process”, was traditionally performed by a Transfer Secretary/Issuer Agent.

 

The restrictions in the European legal framework prompted Strate to consider and implement what is commonly known as an “Indirect CSD Link”. This was successfully implemented via both Standard Chartered (for the Steinhoff listing) and Citibank (for the AB InBev listing). An “Indirect CSD Link” can be best described as the ability to link CSDs between two markets by using a common participant in both markets. By introducing this solution, Strate was able to readily and successfully move securities for these listings between markets.

 

With Strate’s innovative technology, Strate was able to support the market with these recent complex corporate action events.

 

Update on T+3: Reduced settlement cycle for equity market to be launched soon

South Africa aims to attract local and foreign investment and maintain global best practice with regard to settlement time. That is what the JSE’s T+3 project aims to achieve and deliver.

 

The JSE’s move to implement a T+3 settlement cycle is set for 11 July 2016. Final implementation is the third phase of the project which is a regulatory obligation for the exchange. The third phase will be enabled by changes to the JSE’s equity clearing solution system.

 

The move to T+3 will bring numerous benefits to the market such as:

 

  • Creating harmonisation across global markets
  • Aligning the South African market to global standards
  • Boosting the operational efficiency and credibility of the market
  • Contributing to the management of systemic risk by reducing the value of unsettled trades
  • Improving liquidity in the market
  • T+3 is a significant milestone for South Africa. Strate has worked with the JSE and the market participants to ensure that the launch in July takes place seamlessly.

 

To facilitate the move, Strate has made process and system changes, which cover post-trade and post-settlement.

 

Save the date: London Roadshow and Issuer Forum

Strate will be visiting London during September 2016 to host a roadshow. The event will be held at the conference venue of the London Stock Exchange on Thursday 22 September.

 

An issuer forum has been scheduled with UK issuers and PLC companies for Wednesday 21 September. The JSE’s T+3 project would have been implemented by then and Strate’s presentation will be covering a long-term strategic view for all clients, as well as developments with regard to the South African market.

 

Join us if you will be in London at the time.

 

Join Strate on Social Media

Strate has a presence on a number of social media platforms, providing its followers or social media group members with insightful information and industry-related news.

 

You can connect with Strate on LinkedIn, Twitter and Facebook by searching for ‘StrateCSD’. Alternatively, you may click on the icons below and select the Follow button on the company’s Twitter Page, the Join button on its LinkedIn Group and the Like buttons on its Facebook profile and group.

 

Strate also has videos posted on YouTube that you can subscribe to and a blog that you can visit.

 

Click on the icons below to visit the different social media platforms.

 

First Interbank Collateralised Lending Transaction Processed through Strate’s Collateral Management Services

Two of South Africa’s large financial institutions, Standard Bank South Africa Ltd (SBSA) and FirstRand Bank (FRB), have created a significant milestone for South Africa’s financial markets, entering into the first secured interbank collateralised lending transaction through the country’s only Tri-Party Collateral Management Services Provider, Strate. The transaction was processed on 9 December 2015.

 

Strate is licensed as South Africa’s Central Securities Depository (CSD) and it has provided post-trade products and services to the financial markets for South Africa since 1998. Its collateral management services were launched in 2014 to assist the financial markets in efficiently managing their collateral by providing a cost-effective automated solution.

 

Paul Burgoyne, Head: SBSA Treasury and Money Markets, says Standard Bank is pleased with the introduction of tri-party repo technology to the South African market. “These developments will reduce risk in the local interbank markets, initially by making secured square-off options available to banks and should have a positive development on secured financing markets in South Africa”.

 

Muzi Mavuso, Head of Intraday Liquidity Management at FRB, adds, “This is a milestone for the interbank market in South Africa. We as FirstRand Bank are very excited and proud to be part of this history in the making. We would also like to congratulate Strate for successfully delivering the product to the market”.

 

According to the Head of Strate’s Collateral Management Services, Anthony van Eden, the efficient and automated services provide significant benefits to both the collateral givers and receivers as well as mitigating counterparty credit and operational risks.

 

“Strate’s Collateral Management Services provides banks with the opportunity to lend interbank on a collateralised basis in the daily ‘square-off window’ at the South African Reserve Bank. The service automatically selects ‘available for use’ securities (bonds, equities and money market securities) from the banks’ pools of available eligible securities based on predefined agreed collateral eligibility criteria of the counterparty banks, which are preloaded into the service. Securities placed as collateral can either be in the form of a pledge or under cession. The fact that the interbank overnight lending market can now be collateralised not only makes interbank overnight borrowing cheaper but also provides access to funds above banks unsecured credit limits and will widen and deepen liquidity pools in the South African Market.”

 

Visit https://www.strate.co.za/our-services/managing-your-collateral, or email collateral@strate.co.za, to find out more about what the service offers.