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STRATE MODULE 7
MONEY MARKET MODULE II
Version 6
Date June 2014
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Document Information
Copyright Notice
Contents of this document are protected under South African copyright law. No part of this document may be copied, completely or partly, either electronically or manually, without the written consent of Strate Ltd. This document remains the sole property of Strate Ltd. Disclaimer
Although this document is the result of extensive analysis and research, it is subject to changes which may emanate from the audience or any supporting or endorsing party. The revisions and editions will be recorded and indicated per the Version Numbers that are released.
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Important Notice
The Strate Rules and Directives which are relevant to Money Market Module II are free and must be downloaded from the Strate website at www.strate.co.za and form part of this module’s learning material.
The Relevant Directives for Module 7:-
Compliance
SA.10 – Risk
Strate Rules
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Document Information 2
1 MESSAGE FROM THE CEO 6
2 STRATE’S VISION, PURPOSE AND OBJECTIVES 9
2.1 Vision __________________________________________________________________ 9
2.2 Purpose ________________________________________________________________ 9
2.3 Objectives ______________________________________________________________ 9
3 ACKNOWLEDGEMENT 11
4 LEGAL FRAMEWORK 12
4.1 Introduction ___________________________________________________________ 12
4.2 Structural and Regulatory Framework of Strate ______________________________ 12
4.3 CSD Rules and Directives ________________________________________________ 14
4.4 An Informal Market ______________________________________________________ 15
4.5 Legal Considerations For The Transformation To An Electronic Market _________ 16
4.6 Rule and Directive Processes _____________________________________________ 22
4.7 Money Market Rules and Directives ________________________________________ 24
5 REGULATION AND SUPERVISION 25
5.1 Strate as a Self Regulatory Organisation (SRO) ______________________________ 25
5.2 Regulation and Supervision ______________________________________________ 27
5.3 Regulatory and Supervisory Pyramid ______________________________________ 29
5.4 Supervisory approach and strategy ________________________________________ 38
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5.5 Chinese walls __________________________________________________________ 39
6 COMPLIANCE AND REPORTING REQUIREMENTS 45
6.1 The Compliance Function ________________________________________________ 45
6.2 Conflicts of interest for Compliance Officers ________________________________ 48
6.3 The Roles and Responsibilities of the Strate Compliance Officer _______________ 50
6.4 Whistleblowing _________________________________________________________ 54
6.5 Strate Circular__________________________________________________________ 59
7 RISK 64
7.1 Risk and the Role of the Compliance Officer ________________________________ 64
7.2 Regulatory and Supervisory Risks ________________________________________ 66
7.3 Aspects of the Rules and Directives which require monitoring _________________ 70
7.4 Strate Rules pertaining to internal controls and Risk Management procedures ___ 71
7.5 Systemic Risk __________________________________________________________ 73
8 GLOSSARY OF TERMS 76
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1 MESSAGE FROM THE CEO
The journey we have taken with the market in introducing an electronic Money Market has been a
challenging one and most certainly, an exciting one. All the parties involved in the development of
the electronic Money Market have together, in a collaborative manner, developed functionality,
systems, policies and procedures which will result in a reduction in the risks and increase the
efficiencies in this arena. This participative approach has ensured that the wide interests of the
market have been taken into consideration.
This second Money Market Learning Material encapsulates the understanding of the electronic
Money Market and introduces the reader and examination candidate to a wide variety of new
concepts and functionality. The most exciting innovation is the introduction into the Central
Securities Depository (CSD) of a Securities Ownership Register (SOR), where Securities are held
in individual accounts at beneficial ownership and foreign Nominee level.
We are also excited about the introduction of the Electronic Trade Matching Engine (ETME) and
providing the market with a trade reporting and matching platform in place of a formal Exchange.
We are grateful for everyone‘s time and effort in designing this solution and for the endless hours
discussing ―bulks‖, ―allocations‖ and ―Ban numbers‖.
Strate realises that there is always a need for companies to improve the skills in their
organisations. Strate has embarked upon a process to assist our stakeholders in achieving such
an important and worthwhile initiative. This Learning Material and the associated Money Market
workshops, seminars, and examinations that we offer, will compliment and assist you to achieve
your training objectives.
Because our target audience requires different levels of training, Strate has adopted a modular
approach and can tailor the content of the course material to the needs of the trainees.
We are sure that you will enjoy reading this material as much as we have enjoyed creating it. We
value your input and we are committed to meeting customers‘ needs in an ongoing process of
improvement. Please submit any training requirements or suggestions to improve what we do, to
the Strate Training Division, via email ([email protected]).
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I leave you with some wise words of a poem I once read:
Do not undermine your worth by
Comparing yourself with others.
It is because we are different
That each of us is special.
Do not set your goals by what
Other people deem important.
Only you know what is best for you.
Do not take for granted the things
Closest to your heart.
Cling to them as you would your life,
for without them, life is meaningless.
Do not let your life slip through your fingers
By living in the past nor for the future.
By living your life one day at a time,
You live all the days of your life.
Do not give up when you
Still have something to give.
Nothing is really over until the
Moment you stop trying.
It is a fragile thread that
Binds us to each other.
Do not be afraid to encounter risks.
It is by taking chances
That we learn how to be brave.
Do not shut love out of your life by
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Saying it is impossible to find.
The quickest way to receive
Love is to give love;
The fastest way to lose love
Is to hold it too tightly;
In addition, the best way to keep
Love is to give it wings.
Do not dismiss your dreams.
To be without dreams
Is to be without hope;
To be without hope
Is to be without purpose.
Do not run through life
So fast that you forget
Not only where you have been,
But also where you are going.
Life is not a race,
But a journey to be savoured
Each step of the way.
Monica Singer
Strate, Chief Executive Officer
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2 STRATE’S VISION, PURPOSE AND OBJECTIVES
Please note that this chapter of this Learning Material is for information purposes only and
will not be examined.
2.1 Vision
SROWe are the leading independent South African provider of innovative post-trade products and
services. We facilitate risk management, enabling transparency and efficiencies for the financial
markets.
2.2 Purpose
Strate‘s purpose is to provide post-trade services for the securities market, enabling end-to-end
pragmatic, reliable, innovative solutions that facilitate the management of risk and the realisation
of value for all stakeholders.
2.3 Objectives
Strategic objective # 1: To ensure operational excellence and the effective management of
risk while driving innovation and market best practice.
Strategic intent:
Maintain and enhance internal systems, infrastructure and governance.
Continuously enhance Strate‘s operational capabilities.
Retain the CSD and Clearing House licenses.
Meet Transformation targets.
Drive market best practice.
Strategic objective # 2: - To be Stakeholder Centric
Strategic intent:
To expand the Client base by introducing new Clients or new services to existing clients.
To build the Strate brand globally.
To manage stakeholder relationships with excellence.
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Strategic objective # 3: To be profitable
Strategic intent:
Increase revenue from new income streams
Provide superior products and services at a commensurate price.
Ensure Strate‘s financial self sustainability.
Meet shareholder‘s financial expectations on returns.
Ensure operational costs are effectively contained.
Strategic objective # 4: To be a learning organization, enabling Corporate and Personal
growth.
Strategic intent:
To strive for personal growth and the development of skills amongst Strate staff.
Maintain an appropriately skilled, competent employee base within Strate.
Provide thought leadership.
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3 ACKNOWLEDGEMENT
Strate takes this opportunity to thank Anthony Van Eden and Beverley Furman for their valuable
contribution, both in information and time, to the writing of this Money Market Learning Material.
Special mention is also made to thank Dr Maria Vermaas for her contribution of the Legal
chapter. Without their involvement and willingness to assist, this Learning Material would not
have been as comprehensive.
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4 LEGAL FRAMEWORK
OBJECTIVE
The objective of this chapter is to gain an understanding of the legal framework supporting the
electronic custody and settlement of securities. The chapter covers the main legislation pertaining
to the securities industry, as well as an overview of the Strate Rules and the list of Strate
Directives.
4.1 Introduction
The purpose of this chapter is to explain the legal framework of electronic Money Market
transactions. A critical success factor of the Money Market project is legal certainty in the
movement from a largely manual, paper-based market to an electronic environment where Money
Market Securities are held in the Central Securities Depositary (CSD) and settlement of
transactions occurs electronically.
The statutory basis for the electronic settlement of Money Market Securities is the Financial
Markets Act (No 19 of 2012) (FMA), which has removed the legal impediments that previously
governed the area.
This legal framework, where Participants can use one point of access to a central system for the
settlement of all electronic Money Market Securities, is more secure and efficient than the
fragmented legal framework that exists for paper instruments.
4.2 Structural and Regulatory Framework of Strate
In section 38(1), the FMA provides for a ―Central Securities Account‖, kept by the CSD, within which
the transfer of securities can take place. The legal structure for the settlement of Money Market
Securities is built around this concept. Strate calls this Central Securities Account the ―Securities
Ownership Register‖ (SOR).
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The provision for a Central Securities Account gives more Participants access to the CSD and allows
them to participate in the Money Market environment. Of course, this can only happen if an applicant
Participant meets the entry criteria as set out in the CSD Rules and Directives.
In the context of legal risk, it is important to understand that Strate is a ―regulated person‖ in terms of
the FMA and that it can only act within certain parameters. Strate is licensed as South Africa‘s CSD
in terms of the FMA, and also as a Clearing House under the same legislation. It is the FMA that
provides the legal framework to support electronic securities services performed by Strate as the
CSD.
However, although the FMA sets out a framework for market regulation, it leaves much of the details
to secondary legislation. Thus Strate is required to issue CSD Rules which set out in more detail the
basic principles to be followed. Rule 7 of the CSD Rules describes all aspects of clearing, settlement
and the transfer of ownership of Money Market Securities. Certain policy and practical issues are
also entrenched through the CSD Rules and the Directives.
The objectives of the FMA are expressly stated as being to:
(a) ensure that the South African financial markets are fair, efficient and transparent;
(b) increase confidence in the South African financial markets by—
(i) requiring that securities services be provided in a fair, efficient and
transparent manner; and
(ii) contributing to the maintenance of a stable financial market environment;
(c) promote the protection of regulated persons, clients and investors;
(d) reduce systemic risk; and
(e) promote the international and domestic competitiveness of the South African financial
markets and of securities services in the Republic.
The objectives of the FMA also give Strate a yardstick to follow when issuing the CSD Rules and
Directives.
The Executive Officer of the Financial Services Board (FSB) fulfils the function of the Registrar, while
the Capital Markets Department of the FSB is the department responsible for ensuring that Strate
complies with the objects of the FMA, both in its role as a Self Regulatory Organisation (SRO) as well
as in its role as a Clearing House.
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The FMA applies to ―regulated persons‖ and the securities services provided by them. As stated
above, Strate is a regulated person and is by definition also an SRO. In terms of section 30(1) of the
FMA, Strate must act with due regard to the rights of CSD Participants, Clients and Issuers. In
addition, the FMA sets out requirements which Strate must comply with in conducting its business as
a CSD, and also in its role as an SRO.
The legislation has thus establishes a ―co-regulatory regime‖ in terms of which Strate must regulate
its activities and those of its Participants by making and enforcing CSD Rules that comply with the
requirements prescribed by the FMA; and the FSB must supervise compliance with the FMA by
every regulated person.
4.3 CSD Rules and Directives
Regulation in Strate is very important and Parliament has delegated, through the FMA, the rule-
making authority to the CSD. The CSD Rules must be consistent with the FMA (s 35(1)) and must
contain, as a minimum, the requirements determined by the FMA (s 35(2)). With the approval of the
Registrar, the CSD may also make CSD Rules on additional matters that are not covered in the FMA.
Whereas the CSD Rules are made by the CSD in accordance with the FMA, a ‗Directive‘ is issued by
the SRO in accordance with its Rules. The Directives normally prescribe the detail or technical
requirements for electronic settlement and other matters. Strate endeavours to deal with principle
matters in the CSD Rules and detail in the Directives.
It should be noted that all CSD Rules are binding on the CSD, a Participant, an Issuer of securities
deposited with the CSD (including their officers and employees), and Clients (s 35(6) of the FMA).
Besides the responsibility of making the CSD Rules, the FMA also prescribes that the CSD must
monitor the Participants and enforce compliance to the FMA and the CSD Rules and Directives. This
supervisory role has been delegated to the Strate Regulatory and Supervisory Committee of the
Controlling Body.
The manner in which the CSD Rules may be made, amended or suspended, and penalties for
contraventions of such CSD Rules are stipulated in section 71 of the FMA.
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4.4 An Informal Market
The Money Market has operated on an ―over the counter‖ (OTC) basis since inception. The informal
nature of the market is ideal for the rapid issuance and transfer of the short term bearer negotiable
debt instruments which are traded for same day settlement and used for short term funding and
investment.
There is no exchange or automated trading system. Instead trade execution is conducted
telephonically between traders. The legal foundation for trading is found in South Africa‘s
law of contract. A legally binding contract is concluded between a buyer and a seller by the offer
and acceptance of agreed terms.
Trades are normally, but not exclusively, executed on a T+0 settlement cycle on a gross
principal-to-principal basis.
From the outset it was agreed by all market players and the FSB that existing and proposed new
legislation would not seek to change the informal nature of the market‘s activities once it was
converted to an electronic market. You will therefore note that Money Market Instruments are
specifically excluded in the definition of ―Securities‖ of the FMA, except for purposes of chapter IV of
the Act, which deals with the custody and administration of securities. This means that the FMA does
not deal with the trading of Money Market Securities on exchanges, but only with the custody and
settlement activities thereof.
However, the Money Market role players did wish to address certain risk elements inherent to the
informal model, and this led to the establishment of a ―Securities Ownership Register‖ which contains
the detailed holding records of individual investors.
To facilitate the electronic clearing and settlement of primary issues and trades in the Money Market
environment, electronic functionality is required to match trade details and, where necessary, bi-
laterally allocate underlying allocations to bulk trades. Consequently, an Electronic Trade Matching
Engine (ETME) was developed for this purpose. It was also agreed that this Engine would be inter-
linked with other system components to form one logical and robust network that could be used by all
market players.
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4.5 Legal Considerations For The Transformation To An Electronic Market
The key requirements from a legal perspective are the following:
Money Market Securities must be issued electronically;
The obligations of the Issuers with regard to the electronic Money Market Securities
will remain legally binding;
The definite record of ownership must be recorded electronically in a way that
protects the owner‘s rights; and
Custody of Money Market Securities and settlement of transactions must be
governed by a suitable legal framework.
4.5.1 Money Market Securities must be issued electronically
Paper Money Market Instruments exist today and may still exist in future in terms of other
legislation. For example the Bills of Exchange Act regulates most of the paper instruments issued
and traded on the Money Market. The Banks Act, the Public Finance Management Act, the South
African Reserve Bank Act and other legislation all deal with different types of paper Money
Market Instruments. The transfer of ownership and the evidencing of these Money Market
Instruments happen in a completely different way to that prescribed for electronic Money Market
Securities in the CSD Rules and Directives.
Chapter IV of the FMA addresses the legal impediment of moving to an electronic environment
for Money Market Instruments where ―paper‖ is required in terms of the above legislation. Paper
Money Market Instruments are held by whoever holds the instrument from time to time, and the
instrument is transferred simply by transferring possession thereof. The FMA now specifically
makes provision for Money Market Instruments and provides for the use of uncertificated
securities where the evidence of transfer is by electronic entry (see s 33 of the FMA). It should be
noted that although the FMA enables uncertificated holdings, it does not make it compulsory.
However, one of the fundamental principles agreed upon by the role players was that only
electronic Money Market Securities will be processed within the electronic Money Market
infrastructure. The CSD Rules and Directives therefore only allow, and only deal with, electronic
Money Market Securities.
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The question was then whether paper Money Market Instruments should be dematerialised over
a period of time or whether only new uncertificated Money Market Securities would be accepted
in the CSD. In contrast with the conversion processes of dematerialisation for Equities and Bonds
from paper to electronic holdings, it was decided that a dematerialisation of existing Money
Market Instruments was not required. It is clear that because the life span of most Money Market
Instruments is so short, there is no need to convert these paper instruments into electronic
securities. The existing paper instruments will be allowed to mature in the paper environment,
and only new issues will be in electronic form. For this reason, the CSD does not accept the
deposit of any Money Market Instruments in paper format.
New uncertificated or electronic securities are ―packaged‖ in a unique way that has changed the
legal nature of the securities. They are referred to as ―Money Market Securities‖ in the CSD Rules
and Directives to distinguish them from ―Money Market Instruments‖ that are held in paper format.
As explained above, the FMA still allows Money Market Instruments (albeit outside the CSD
environment) and therefore it also prescribes that the holder or owner of all uncertificated
securities (including Money Market Securities) has the right to ―withdraw‖ electronic securities
from the CSD system. On such a request, these securities will then be replaced with other Money
Market Instruments (held in paper format). This process is dealt with separately via the Issuers
and outside of the CSD.
The key requirement from a legal perspective is that Strate works with a new legal order for
modern electronic securities. Money Market Securities therefore means ―Money Market
Instruments‖, for purposes of chapter IV of the FMA, deposited in the Securities Ownership
Register as eligible uncertificated securities in terms of the CSD Rules.
Note that a Money Market Issuer creates a Money Market Security by depositing it - with the
associated ISIN, amount on issue and other relevant information, as stipulated by Directive - in
the Securities Ownership Register. The ISIN is the International Securities Identification Number
which is a unique, internationally recognised securities identification number that identifies the
specific Money Market Security.
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4.5.2 The obligations of the Issuers with regard to the electronic Money Market
Securities will remain legally binding
In s 33(1) of the FMA it says that an Issuer may issue uncertificated securities despite any
contrary provision in any other law, the common law, an agreement, the articles of association of
an Issuer, a prospectus, or any other conditions applicable to the issuing of securities.
In the electronic environment, Issuers will still be able to design their own Money Market
Securities from the four standardised categories by assigning certain characteristics to their
securities. In many paper Money Market Instruments, the conditions of the instrument are written
on the paper itself and the rights and obligations of the Issuer are determined by reference to
these conditions. The publication of the terms and conditions is thus inseparable from the issue of
the instruments. In the electronic environment, these two functions are by nature separated.
The general conditions of these Money Market Securities could still be ―published‖ (in paper or
electronically, e.g. on a web site), but the specific terms and conditions of issue relating to the
Money Market Securities will be captured by electronic entry.
These unique characteristics - such as the issue date and maturity date - would be entered on the
electronic records in accordance with the CSD Rules and Directives. The legal obligations of the
Issuer are defined in this way.
The FMA also states in subsection 33(4) that an Issuer has the same obligations in respect of
uncertificated securities as it has in respect of certificated securities, except that no written
instrument is issued in respect of uncertificated securities.
4.5.3 The definite record of ownership must be recorded electronically in a way that
protects the owner’s rights
The new practice of evidencing and transferring holdings of uncertificated securities has been
radically changed by the computerisation of the securities markets. Therefore, the FMA
prescribes in subsection 33(3) that an Issuer, a CSD and its Participants must make
arrangements for uncertificated securities to be evidenced by way of entry. These arrangements
are governed by the CSD Rules and Directives.
Securities fall broadly into two categories: bearer securities and registered securities. A bearer
security promises on its face to pay the bearer, and the rights the bearer has against the Issuer
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are locked up in the instrument itself. Examples of bearer securities are bearer bonds and
certificates of deposits.
In contrast, legal ownership of registered securities is determined prima facie by a register which
contains the names of all the holders of that security. Examples of registered securities are
equities where the Issuer or its agent maintains a database (a register) in which the names of the
holders are recorded from time to time.
In order to transfer registered securities, it is necessary to change the register to reflect the name
of the transferee in the place of the name of the transferor of the securities. For uncertificated
securities, the Participants or the CSD itself may maintain this register in accordance with
applicable legislation (e.g. the Companies Act, 2008 and the FMA).
In the case of Money Market Securities, Rule 7.5.8 of the CSD Rules provides that the Securities
Ownership Register shall be prima facie evidence of any matters directed or authorised to be
entered therein by the CSD Rules and Directives. It thus regards Money Market Securities as
registered securities and not as bearer securities. This record of title to Money Market Securities
will be maintained by the CSD, but the administration in connection with such register will be
handled by the Participants.
4.5.4 Custody of Money Market Securities and settlement of transactions must be
governed by a suitable legal framework
As explained above, the FMA forms the statutory basis for the custody and settlement of
electronic Money Market Securities. CSD Rule 7 is furthermore of specific application to Money
Market Securities held on the Securities Ownership Register.
Similar to the transfer of uncertificated Equities and Bonds, the CSD Rules prescribe the
debit/credit method as the only method to transfer ownership of Money Market Securities. This
means that the transferee will become the owner of the Money Market Securities upon the
crediting of the Money Market Securities Account in the Securities Ownership Register and that
no additional requirements or formalities are necessary. Only the CSD may effect the transfer of
Money Market Securities in the Securities Ownership Register, and the CSD can only effect the
transfer on receipt of an authenticated instruction by a Participant, by order of court, or by
operation of law.
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Settlement means delivery, usually against payment. Once a trade has taken place, the seller is
contractually bound to deliver the securities to the buyer, and the buyer is contractually bound to
pay the purchase price to the seller.
The Strate system then arranges for delivery and payment to take place in order to discharge
these contractual obligations. Whereas Money Market trades take place on the informal market,
the Money Market Securities settlement takes place through the electronic Money Market System
which is designed to avoid the delays and other risks inherent in paper-based settlement. It also
synchronises the payment and delivery side of each transaction.
As explained above, Money Market Securities in Strate are treated as electronic registered
securities. Unlike paper Money Market Instruments, they are evidenced and transferred without
paper certificates or instruments of transfer. Most paper Money Market Instruments are treated in
law as negotiable instruments. A negotiable instrument in law has two attractive features. First, it
is transferable without formalities, and second, honest acquisition confers good title even if the
transferor did not have good title. Uncertificated or electronic Money Market Securities cannot be
classified as negotiable instruments. However, because of the enactment of the FMA, they still
enjoy the benefits of ease and security of transfer. Rule 7.5 defines the manner in which the book
entry transfer of Money Market Securities may take place.
Security of transfer refers to the protection of the bona fide, or good faith, purchaser, meaning the
purchaser is able to retain the transferred assets free from any adverse claims. The CSD Rules
replicate the traditional benefits of negotiability (security and ease of transfer) in Rule 7.5.3. It
states that transfer of ownership shall occur, notwithstanding any fraud or illegality which may
affect the Money Market Securities in respect of the transfer; provided that a transferee who was
a party to or had notice of the fraud or illegality may not benefit from the Rule. It is important to
note that this CSD Rule also addresses fraud risk. This means that the technical, legal and
contractual framework ensures that each transfer of Money Market Securities is final if the
corresponding transfer of funds is final.
The commitment to settle (CSD Rule 7.6) is a contractual arrangement and an operational matter
dealt with in the Directives.
The Securities Ownership Register comprises the various Money Market Securities Accounts
opened and maintained by the Participants. A Client may only operate its Money Market
Securities Account through the Participant that opened the account on his behalf. Note that only a
Participant can open these Money Market Securities Accounts and that a Participant is not
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obliged to accept an application to open such an account on behalf of any person. In addition to
maintaining these accounts on behalf of Clients, a ―Full‖ Participant may open one or more
Money Market Securities Accounts of its own. It is clear that the mere depositing of Money Market
Securities in the accounts it keeps on behalf of Clients does not make the Participant or the CSD
an owner, co-owner, holder, pledgee or cessionary of these securities (s 36(2)(a) of the FMA).
The ―Full‖ Participant is not allowed to open a Money Market Securities Account for a Client in the
name of a nominee, except where the nominee is a foreign nominee, and that foreign nominee
has been approved and is regulated by the appropriate regulator in its home country.
To ensure security in the Money Market System, a ―unique Client code‖ is created by the CSD
which identifies the owner of the Money Market Securities and links the Money Market Securities
Accounts in the Securities Ownership Register with that owner.
It is also important to know that when opening a Money Market Securities Account, a Participant
must provide the CSD with specified ―Client Identification Data‖. The Participant is responsible for
ensuring the correctness of this data and for updating it regularly. Each Participant must maintain
in respect of each Client:
the ―unique Client code‖;
the ―Client Identification Data‖;
the Money Market Securities Account details in the Securities Ownership Register;
the ISIN and nominal value of each kind of Money Market Security deposited and/or
transferred; and
any further information that may be required by the FMA or the CSD Rules and
Directives.
An important use of Money Market Instruments is as collateral. Legally, this is arranged as
pledges of instruments or outright transfers (out-and-out cession). For Money Market Securities
held in the Securities Ownership Register, the collateral arrangements will be similar to those
which currently apply to the other Strate-eligible securities (uncertificated Equities and Bonds).
CSD Rule 7.8 deals with pledges and cessions to secure a debt. Out-and-out cessions are
treated as transfers of ownership and are dealt with under those sections.
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4.6 Rule and Directive Processes
The table below details the sequence of events which Strate follows when formulating, amending and
suspending Rules which require the approval of the FSB, and when formulating, amending and
suspending Rules which require the approval of the Strate Regulatory and Supervisory Committee.
Sequence
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Step 7
Owner
Head of Legal
Head of Legal
Head of Legal
Head of Legal
Head of Legal
Head of Legal
Head of Risk, Head of
Legal, Head of Supervision,
Head of Internal Audit
Activity
Draft Rule or Directive in conjunction with
the relevant Head of Division based on
market requirement, best practice or
legislation
Strate review internally
Head of Division releases to appropriate
market forum (e.g. Corporate Actions
Forum, Bonds Settlement Workgroup,
Systems Working Committee, Money
Market Advisory Committee) for comments.
Review and consider comments made in
conjunction with relevant Head of Division.
Amend where necessary.
Relevant Head of Division to re-circulate to
market and set date for final comments.
Complete ―Approval Form‖ that details all
steps above. Implications (financial, risk,
legal, etc) spelled out.
Sign-off on Approval Form
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Step 8
Step 8A
Step 9
Head Legal
Head of Supervision
Head of Supervision
Submit ―Approval Form‖ together with
Directive/Rule to Supervision Division.
Authority is delegated to the Head of
Supervision to approve Directives in certain
limited defined circumstances (e.g. fee
schedule where Board of Strate has already
approved it).
Submit Directive/Rule with Approval Form to
Strate Regulatory and Supervisory
Committee to approve/ reject/amend. The
Committee‘s Terms of Reference allow for a
Round Robin Resolution for the approval of
urgent amendments to existing Directives.
Step 10
Step 11
Step 12
Step 13
Step 14
Chairperson of Strate
Regulatory and Supervisory
Committee
Head of Legal
Head of Legal
Financial Services Board
Financial Services Board
Formally approve/reject/amend at meeting
(Financial Services Board is observer at this
meeting). The Chairman must give prior
permission to approve Directives by means
of a Round Robin Resolution.
In the case of a Directive, send Directive
with Special Gazette to all Participants,
Financial Services Board, Board members
and Strate Management, all interested and
affected parties indicating effective date of
implementation.
In the case of a Rule, send to Financial
Services Board for publishing in
Government Gazette.
14 days for objections on Rule from date of
publication of notice.
If no objections received, or Financial
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Services Board decides to approve Rule,
the amendment or new Rule comes into
operation on date determined by Financial
Services Board by notice in Gazette.
4.7 Money Market Rules and Directives
4.7.1 Rules
Section 7 of the CSD Rules relates specifically to the electronic Money Market environment. Please
refer to the Strate website www.strate.co.za for the complete set of CSD Rules.
4.7.2 Directives
The various Money Market Directives relate to issues in the electronic Money Market. These
Directives are issued separately to the Handbook/Learning Material and can be accessed via the
Strate website www.strate.co.za .
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5 REGULATION AND SUPERVISION
OBJECTIVE
The objective of this chapter is to gain an understanding of the regulatory versus supervisory
roles and responsibilities of Strate. An explanation of the scope of regulation and ambit of
supervision within the South African Securities industry is provided.
One of the main challenges of regulators is to keep up with and adapt to continuous changes –
some of which are international in nature. Regulation must be flexible. The regulatory structure in
South Africa is dynamic and since the 1980‘s major changes have taken place.
As lead regulator in the Securities environment, the Financial Services Board (FSB) has actively
utilised the concept of self-regulation through the appointment of certain appropriate Self
Regulatory Organisations (SRO‘s).
5.1 Strate as a Self Regulatory Organisation (SRO)
Strate has been appointed as a Self-Regulatory Organisation by the FSB in accordance with the
Financial Markets Act Act. It is through, inter alia, Section 2 and 3 of the CSD Rules that the
powers to regulate are vested on Strate.
In terms of the Strate Rules:-
2.4 The authority to enforce the Rules and Directives vests in the Controlling Body, which authority has been delegated to the Regulatory and Supervisory Committee.
2.5 the Regulatory and Supervisory Committee may impose a penalty or take disciplinary
action against any person or entity referred to in section 35(6) of the Act, which fails to
execute an instruction given or take any action required by, the Controlling Body; and
2.7 the Regulatory and Supervisory Committee must make, and may amend, Rules that
comply with section 35 (6) of the Act and must supervise compliance with the Rules by
Participants.
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It should be noted that, in terms of section 35(6) of the FMA, all Rules and Directives are binding
on the CSD, a Participant, an Issuer of Securities deposited with the CSD and their officers and
employees, and Clients.
The advantages of self-regulatory organisations include:-
regulation is carried out by acknowledged experts in the market;
the regulators‘ standing in the market is likely to enhance the consent and
compliance of the regulated;
the SRO is fully aware of innovations and industry changes and their implications,
and can adapt accordingly;
the SRO is likely to be less legalistic and dogmatic in its decisions;
it is in the self-interest of the SRO to maintain standards and retain the public‘s
confidence in the market;
the SRO is better positioned to detect abuses of the regulatory system;
the SRO can operate with greater flexibility, speed and effectiveness than direct
regulation; and
self regulation is more effective as the regulated activity becomes more specialised.
(Source : Financial Regulation in South Africa Bamber, Falkena, Llewellyn and Store)
STRATE AS REGULATOR
REGULATORY
Setting of Rules
and issuing of
Directives
Monitoring of
Participants
compliance.
SUPERVISORY
Regulatory
and
Supervisory
Committee
Board
27
5.2 Regulation and Supervision
The FMA identified the main objectives of securities regulation and supervision namely:-
increasing the confidence in South African financial markets by:-
requiring that securities services be provided in a fair,
efficient and transparent manner; and
contributing to the maintenance of a stable financial market
environment.
the protection of regulated persons and Clients;
the reduction of systemic risk; and
promoting the international competitiveness of securities services in South
Africa.
Regulation, supervision and enforcement include the following:-
legislative framework and specific regulation governing the activities of
Participants
Rules and Directives set by Strate;
entry criteria;
monitoring and supervision by the regulator;
disincentive structures;
disciplinary procedures;
on-site visits and audits; and
the role of market discipline, monitoring and reputation.
The Strate regulatory and supervisory strategy is about optimising the combination of these
components. The key is to optimise the effectiveness of this mix. All components are necessary
but none alone is sufficient. The mix will change over time and depending on transgressions,
heavier reliance will be made on particular components than others.
As an SRO and the regulator of Participants, it is necessary for Strate to establish a structure that
achieves the following:-
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performance of the regulator role defined in the Financial Markets Act;
Participant compliance with the Rules and Directives;
effective risk management for Strate and the Strate system;
effective management of operational and financial risks;
co-ordination and direction of the appointed Strate Compliance Officers;
monitoring of licensee performance and investigation of breaches of
Rules/Directives and the application of appropriate and effective discipline;
maintenance of system integrity and monitoring of performance and activities in
the Strate system; and
the provision of education and training courses for stakeholders.
This structure will ensure that the objectives of maintaining market confidence, reducing risk,
protecting investors, and providing a secure environment to encourage investment are achieved.
Regulatory intensity refers to the degree of detail and prescription and the extent to which the
behaviour of the regulated person has to be modified by the regulatory agency. The supervision
of Participants normally entails medium to high intensity regulation – high in some instances e.g.
acceptance procedure for Participants, with low intensity supervision that escalates whenever
needed. This combination proves suitable for the South African market.
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5.3 Regulatory and Supervisory Pyramid
The scope of Strate‘s regulatory and supervisory responsibilities has been depicted
diagrammatically in the below pyramid. The pyramid and below notes, explain the roles and
responsibilities of those institutions and organisations involved in various securities services.
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FSB responsibilities
The FSB (which is at the apex of the pyramid) is, inter alia, responsible for supervising
and regulating the financial markets other than the function of accepting deposits from
the general public. This is achieved by, inter alia, the use of SRO‘s, which currently
include the JSE and Strate.
Section 6(2) of the FMA stipulates that ―the Registrar must perform functions assigned to
the Registrar by or under this Act and must supervise compliance with this Act.”
The FSB is an independent institution established by statute (Financial Services Board
Act, No 97 of 1990) to oversee the South African financial services industry with the
exclusion of the function of accepting deposits from the general public. The FSB became
operational on 1 April 1991, and is financed by the financial services industry itself by
means of levies, with no contribution coming from government. The FSB aims to foster
an efficient regulatory framework, which reflects a sound balance between statutory
control and self- regulation.
Principle 7 of the IOSCO Principles for self- regulation states: ―SROs should be subject to
the oversight of the regulator and should observe standards of fairness and confidentiality
when exercising powers and delegated responsibilities.”
The IOSCO recommendation of oversight is enshrined in the FMA. The oversight by the
Registrar is applied to the SRO in a strict, fair and effective way. It is widely accepted
that the basic principle of self-regulation could be undermined by too much oversight.
Where a SRO is appointed and licensed, there is no direct supervision of its Authorised
Users/ Participants by the FSB. However, the FSB does supervise overall compliance
with the FMA (s6(2)).
Powers of intervention and inspection
For practical reasons, the regulatory arrangements by the Registrar do not place strong
emphasis on formal supervision other than on SROs and Clearing Houses. Compliance
by the Authorised Users/Participants with the FMA, Rules and Directives of the relevant
SRO, is not directly supervised by the FSB and will be driven mainly by complaints by
investors and others as well as by the application of sanctions for non-compliance with
the Rules.
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The FSB has powers to investigate or conduct an inspection on any matter where it
receives a complaint, charge or allegation, or if the FSB has reason to believe that a
person who provides securities services is contravening or is failing to comply with any
provision of the FMA (s 94(1)). This means that the CSD is not only bound by its own
Rules, but must also enforce them. Drastic measures can be taken against the SRO
where it fails in its duties as an SRO.
After an investigation or inspection, the Registrar is authorised to:-
apply to court for the winding-up or judicial management of the SRO;
apply to court for the appointment of a curator;
direct the SRO to take any steps to remedy the irregularity;
direct the SRO to prohibit or restrict specific activities of a director or other
officers if the Registrar believes that the person is not fit and proper to perform
such activities;
refer the matter to the Enforcement Committee; or
hand the matter over to the National Director of Public Prosecutions where the
contravention or failure is an offence in terms of the FMA (see s 96(e)).
The Registrar has the power to impose penalties in the case of any failure by a SRO to
submit to the Registrar any statement, report or other document as required in terms of
the FMA (s 97).
Enforcement powers
It is important to understand that the role of the CSD as a SRO is balanced by the fact
that it is a ―regulated person‖ in terms of the FMA. The FSB has comprehensive
enforcement powers over Strate.
The Registrar may cancel or suspend the CSD licence (s 60(1)). This sanction is very
powerful as Strate realises that the CSD business is its core business. On refusal of the
licence, the Registrar may take such steps as are necessary to achieve the objects of the
Act, which steps may include the transfer of the business to another similar SRO or the
winding-up of the SRO in terms of s 100 (s 60(4)). This sanction could also be very
powerful as a new CSD could be licensed and the existing CSD closed down.
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The Registrar can also refer a matter to the Enforcement Committee in terms of s 99 of
the FMA. This Committee acts independently of the Registrar and gives the Registrar
more effective enforcement powers.
SARB responsibilities
The SARB performs multiple roles, namely:-
The Bank Supervision Department of the SARB is responsible for the regulation and
supervision of Banks, especially the prudential supervision thereof. Five of the existing
Participants are banks. As such a co-regulatory environment exists between Strate and
the SARB in so far as bank Participants are concerned. A MOU was signed between
Strate and the SARB in July 2004. This serves as the agreement by which regulatory/
compliance information on relevant prudential issues is shared between SARB and
Strate.
SARB is also responsible for the payment and settlement system (SAMOS) operated for
the banks in the clearing system.
The JSE responsibilities
The JSE is responsible to the FSB for the supervision of Authorised Users, including the
accounting, trading and custody activities. In turn the Authorised Users use Participants
for their settlement activities. Strate has no regulatory or supervisory responsibility for
Authorised Users. The JSE and Strate in their roles as SROs, do however have a need to
exchange information relevant to their respective regulated entities. A MOU, which was
signed on 13 October 2003, recognises the co-regulatory relationship that exists between
the JSE and Strate.
As a result of the merger between the JSE and BESA in June 2009, the JSE is now
responsible to the FSB for governing, controlling, managing and regulating the affairs of
the Bond Exchange and its Authorised Users and to maintain an orderly market for
trading in Securities.
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Strate responsibilities
Since all but one of the Participants are banks, the prudential regulation and supervision
of the Bank Participants is performed by SARB. For bank Participants, Strate‘s regulatory
scope is confined to functional regulation, i.e. Participant related activities of an accepted
entity. The Strate/SARB MOU, mentioned above, serves as the agreement by which
information is shared on relevant prudential issues between SARB and Strate.
Accordingly, Strate will not duplicate the activities of SARB in this regard.
However, the prudential regulation of non-bank Participants (e.g. entities such as
Computershare Limited) requires increased involvement by Strate as these entities do
not fall within the SARB regulatory net.
In respect to the bonds environment, Strate is the appointed Clearing House (previously
UNEXcor).
Strate is licensed as a CSD for the maintenance of immobilised and dematerialised
Securities holdings.
The Regulated Entity
The body of the pyramid depicts the flow of information to and from the various parties
with regard to Rules, Directives and legislation. The roles performed by various parties
vary with regard to the making and updating and implementation of Rules and Directives
and the supervision thereof. These are depicted in the downward direction. The upward
direction depicts the flow of information from regulated entities to those involved in the
supervision of such entities.
Controlling Body and Committees of the Controlling Body
In respect of Strate, the Controlling Body is responsible for the following five activities:-
34
The legislative function
This is the power to make, alter or rescind Rules and issue Directives which affect not
only Strate but its Participants and their Clients via mandates. This power brings with it
the duty to ensure the Rules and Directives issued by Strate are relevant and provide an
effective legislative scheme; the Rules are reasonable and intra vires the delegated
power and they are kept up to date.
The enforcement function
The authority to enforce the Rules and Directives is covered in the Rules - specifically the
disciplinary procedures established in Rule 12. The responsibility to ensure the Rules are
implemented lies directly with the directors of Strate.
The gatekeeping function
Strate must satisfy itself that Participants are admitted or removed in terms of the criteria
stipulated in Rule 3.2. The competency, honesty and efficiency of Participants are key to
the structure.
The policing function
Strate must prescribe to Participants the type of accounts and records required together
with minimum standards pertaining to the safeguards of internal controls, internal audit
and risk management procedures. Compliance Officers must monitor these and report to
STRATE Supervision. The responsibility for supervising these functions lies with
STRATE Supervision.
Investigation function
The Rules provide for a variety of investigative and quasi-judicial bodies to act upon
complaints and breaches of Rules or of the Act.
35
The Controlling Body has delegated certain functions to the Strate Regulatory and
Supervisory Committee to which STRATE Supervision has a reporting function.
Generally, the Controlling Body is responsible for the performance of the entity. Good
corporate governance should be fostered for a number of reasons. A primary need is that
poor governance can harm economic performance and ultimately effect financial stability.
This is because poor corporate governance structures lead to poor decision making.
Weak processes and ineffective procedures and controls prevent early warning signs
appearing and hence highlighting deteriorating conditions within an organisation.
Transparency and accountability attracts new business – it gives financial incentive to the
investing community. In order to attract and retain large pools of capital from investors,
there needs to exist credible and recognisable corporate governance arrangements.
Weak corporate governance undermines confidence in a financial system and market as
a whole.
Compliance Officer
CSD Rule 8.3.1 requires the appointment of a qualified Compliance Officer by each
Participant accepted by Strate. The Strate Compliance Officer‘s duty is to monitor
compliance with the provisions of the legislation, Rules and Directives and to report
breaches to STRATE Supervision. They must have sufficient support and authority from
their organisation to discharge this duty.
Management and Staff
The staff of Strate must have the necessary skills and training strategies to ensure they
are able to discharge their responsibilities. Staff of the STRATE Supervision division also
require judgement to balance their supervisory responsibility without creating a
prescriptive regime. They must act with professionalism and empathy but with an
appropriate sense of urgency when needed.
With regards to the management and staff of the Participant, adequate levels of training
and experience must exist to be able to discharge their responsibilities. In addition,
management should embrace values, ethics and relationships with their staff and
stakeholders, which promote good corporate governance.
36
The Strate Rules stipulate the eligibility criteria of Participants and include a requirement
to have competent and experienced management and staff.
On an annual basis the directors of a Participant, in their annual report to STRATE
Supervision, are required to confirm that their organisation has competent staff. Strate as
a SRO does not determine what constitutes ―adequate and skilled personnel‖ – this is a
responsibility of the Participant‘s management.
Internal and Registered Audit
Participants should have an effective internal audit function which has sufficient authority
and competence to justify reliance being placed on its work. The program of work should
cover the custody function of the Participant at least annually. Reports on their findings
should be made available to STRATE Supervision.
Strate in its role a SRO does not currently mandate the submission of internal audit
reports of a Participant. The Rules do however give STRATE Supervision the power to
call for these reports if required.
External Audits compliment the work of internal audit. By agreement with the South
African Institute of Chartered Accountants (―SAICA‖) and the Independent Regulatory
Board for Auditors (IRBA), specific audits are carried out which provide assurance to the
Supervision division. The scope of these audits and the nature of the reporting
requirements have been agreed with STRATE Supervision.
The Base of the Pyramid
The bottom line of the pyramid shows entities in the Securities industry, whether
regulated or not.
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Participants
The FMA defines a Participant as ―a person authorised by a licensed central securities
depository to perform custody and administration services or settlement services or both
in terms of the central securities depository rules, and includes an external participant,
where appropriate.”
In terms of the FMA, Strate must supervise compliance by Participants with the FMA and
Rules. Participants must comply with Strate‘s Rules and Directives and must ensure
compliance by their Clients. Participants in turn should advise their Clients of the latter‘s
obligations in terms of the Rules.
STRATE Supervision has developed a supervisory program for the Participants.
Enforcement and disciplinary strategies have also been developed if any Participant fails
to act in accordance with the Rules and Directives.
Securities Lending and Borrowing (SLB)
The SLB industry is unregulated. Accordingly the activities of SLB lending desks do not
fall within the ambit of Strate‘s regulatory responsibility.
However, SLB lending desks in the equities environment have contractually bound
themselves as Business Partners to Strate with respect to the settlement of SLB trades.
Compliance with these contractual obligations will be monitored and corrective action
taken if necessary. Unlike equities, no formal lending desks (Business Partners) exist in
the bond environment.
Nominees
In terms of Section 76 (1)(b) of the FMA:
“A nominee of a participant must be approved as a nominee by the central securities
depository in terms of depository rules and comply with the requirements set out in the
rules.”
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In terms of Section 76(3) of the FMA, the FSB is responsible for the approval of other
Nominees – ie Nominees who are Clients of Participants
Transfer Secretaries
The transfer secretarial industry is unregulated. Strate cannot therefore issue a Rule or
Directive that imposes duties on a Transfer Secretary. Transfer Secretaries, in so far as
they are acting as agent of an Issuer, must also comply with the JSE or BESA Listing
Requirements and Strate Eligibility Requirements.
Issuers
Issuers are regulated by the Exchanges to the extent that their Listing Requirements
impose responsibilities on Issuers. A section has been included in the JSE Listing
Requirements which refers to eligibility to operate in the Strate environment. Strate must
ensure compliance therewith before accepting the Issuer‘s Securities for
dematerialisation.
The diagrams further depict the co-regulatory environment where MOU‘s form the basis of mutual
co-operation and sharing of information. It is essential to avoid duplicating or over regulating the
market.
5.4 Supervisory approach and strategy
STRATE Supervision strives to build fair and credible supervisory processes consistent with low
to medium intensity supervision referred to above. Strate aims to apply and enforce its
supervisory approach consistently.
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5.5 Chinese walls
The Strate Regulatory and Supervisory Committee (the Committee), a sub-committee of the
Controlling Body of Strate, is tasked with the overall objective of assisting the Controlling Body in
discharging its regulatory and supervisory obligations in terms of the Financial Markets Act (FMA)
and the Rules.
Strate‘s Clients are Participants who in some cases are also shareholders. Strate‘s business is to
provide Security Services to these Clients (referred to as the CSD function). Under the FMA,
Strate also operates as a regulatory organisation which involves supervising Participants
including enforcement (known as the Self-Regulatory Organisation [SRO] function). Chinese
walls have therefore been established between the two functions to avoid confidential information
obtained as a result of its statutory powers as a SRO being used, or being seen to be used, to
provide Strate‘s CSD activities with an unfair advantage. The Terms of Reference of the
Committee require the Committee to monitor the workings of the Chinese walls between these
two functions which operate independently of each other.
The SRO function of Strate is split into two distinct areas namely the Rule and Directive setting
function and the supervision of Participants. The latter function is undertaken by the STRATE
Supervision Division (the Division). It is confidential information obtained while performing the
SRO function by the Division which needs to be protected by Chinese walls from reaching staff
involved in the CSD function.
CONFIDENTIAL INFORMATION
Confidential information means all information of any nature whatsoever which the Supervision
Division may obtain from another Party (Disclosing Party) while performing the SRO function, or
which:
is marked ‗confidential‘, (or similar legend),
may be password protected,
the Disclosing Party identifies as confidential, or which;
by its nature is confidential, including without limitation, reports, records, databases and
statistics pertaining to the performance, operations and structures of a Participant,
40
regardless of where or how such information is disclosed to the Supervision Division. Confidential
information includes information received, without limitation, orally, visually or by reason of
inspection of documentation, electronic data or other material.
THE OPERATION OF CHINESE WALLS AT STRATE
The following structures, procedures and processes have been put in place to establish and
ensure the effectiveness of the Chinese walls:
1. Access to computer systems and Participant information
This password protection procedure applies to staff working in the Supervision Division.
In terms of Strate‘s company policy, access to all personal computers (PCs) is subject to
password protection. Automated password software is installed on all PCs. An alpha/numeric
password is required in order to gain access to a PC. This password expires every 30 days and
must be replaced with a new password known only to the specific staff member. This password
protection procedure applies to staff working in the Supervision Division. Further, in the event that
the employment contract of any Strate staff member is terminated, access to all systems is
immediately revoked on their last day of employment with the company.
Separate folders and files have been created on the Strate shared network / repository which can
only be accessed by members of staff working in STRATE Supervision. All documents and
records containing confidential information, including, inter alia Participant Performance Models,
databases and statistic summaries, are password protected.
As Strate only has one network, the Strate System Administrators have access to these folders
too. A specific ―Code of Conduct: Networks and System Administration‖ has been developed for
System Administrator staff who are required to sign and be bound by this code of conduct.
Processes are in place to review and confirm any unauthorised access on a monthly basis.
41
2. Human resources policies
In terms of Strate Rule 4.4, ―… the CSD (including its officers and employees) must keep
confidential all information disclosed to it by a Participant….”
All Strate staff (including the System Administrators) are required to sign a Code of Conduct [in
addition to the one mentioned in 1. above] which includes a confidentiality clause. Staff working
for STRATE Supervision are further assessed and measured in their Balance Score Cards (BSC)
on their adherence to the confidentiality clause. STRATE Supervision staff are constantly
reminded of their duty to observe the highest professional standards and are given clear
guidance on the avoidance of conflicts of interest, the possible abuses of confidential information,
the observance of confidentiality and secrecy, and the observance of procedural fairness.
Performance appraisals of the Head of STRATE Supervision are conducted by the Chairman of
the Strate Regulatory and Supervisory Committee in conjunction with the CEO. The Head of
STRATE Supervision conducts the performance appraisals of STRATE Supervision staff.
Compliance with this Manual is considered at such performance reviews.
3. Legal Advice
The Supervision Division may need to consult members of the Strate Legal and Regulatory
Division on issues involving confidential information of Participants. Members of the Strate Legal
and Regulatory Division are required to sign a STRATE Supervision Confidentiality Agreement
undertaking to keep any information pertaining to a Participant that may be disclosed,
confidential.
4. Expurgation and circulation of documents
Confidential information on Participants is only sent to members of the Committee (other than the
member described in 6. below) and attendees referred to the Committee‘s specific Terms of
Reference.
Minutes and records of proceedings of meetings or hearings of the Committee and documents in
Committee meeting packs circulated to other attendees and to the Board are expurgated to
42
exclude any reference to confidential information about Participants that are discussed at the
meeting.
Separate expurgated and unexpurgated versions of the minutes of each meeting, hearing and
reports are maintained in the STRATE Supervision folder on Strate‘s information repository
system.
5. Attendance at Committee meetings
The Committee‘s Terms of Reference states, ―…any member or observer must recuse
themselves from those parts of a meeting when matters of a confidential nature relating to a
Participant are discussed, in accordance with the Chinese wall Manual.‖
Accordingly, staff of the CSD function of Strate, including its CEO and Legal and Regulatory
Division, does not attend Committee meetings while confidential information relating to
Participants is discussed. An exception is made when legal advice is required by the Committee
and the member of the Legal and Regulatory Division (who has signed the additional
confidentiality agreement referred to in 3) attends Committee meetings.
Where Strate‘s CEO and management attend a Committee meeting, they cannot overrule or
veto regulatory or supervisory decisions or alter the supervisory and enforcement strategy.
6. Non disclosure of confidential information to a member of the Committee
The expurgation of documents and attendance at meetings referred to at 4. and 5. above also
apply to any member of the Committee who is appointed for his/her expert knowledge of the
Securities industry, but who is also employed by one of the Participants.
7. Physical Location
The STRATE Supervision offices are physically separated from the offices of the CSD function.
Access to these offices is restricted to staff working in the Division. Any person wishing to gain
access to STRATE Supervision‘s offices can do so only if accompanied, or allowed access, by a
43
staff member of the division. Processes are in place to review and confirm authorised access on
a monthly basis.
8. Interaction between staff of Supervision Division and Strate’s CSD function
The Head of STRATE Supervision is not a member of Strate‘s Exco and attends the Exco
meetings as an observer. Confidential matters relating to the supervision of Participants are not
included on the Exco agenda or discussed at these meetings.
STRATE Supervision Division staff develop the supervisory strategies required for the effective
and appropriate supervision and monitoring of compliance by Participants with the FMA, CSD
Rules and Directives. Accordingly, the Head of STRATE Supervision and members of the division
attend Strate operational forums and meetings only in the capacity as observers for the purposes
of understanding and remaining abreast of market related initiatives and developments.
Accordingly, enforcement and supervisory matters and findings are not discussed with staff of the
CSD function and are only reported on at the Committee meetings or discussed with the
Committee Chairman and the Financial Services Board (FSB).
AUDIT ASSURANCE
The operation of the Chinese wall structures, procedures and processes contained in the Chinese
wall Manual are periodically subjected to audit procedures carried out by external auditors, to
provide assurance to the Committee on whether or not they are working effectively.
FINANCIAL CONSIDERATIONS
Although STRATE Supervision generates its own income through annual membership fees, the
Controlling Body ensures that the division is adequately funded and has the necessary resources
to fulfil its enforcement and supervisory functions.
Penalties i.e. monetary fines, do not form part of the revenue of Strate or STRATE Supervision
but these funds are transferred into a Special Purpose Reserve Fund (SPRF). The SPRF is used
to
44
fund or subsidise special projects or market training initiatives and requires the prior approval
of the Audit, Risk and Compliance Committee (ARCC). Reliance is not placed on this stream of
income to finance the division‘s activities or those of Strate. In no way does any monies
received by STRATE Supervision form part of any individual‘s Balanced Scorecard, nor does it
form part of Strate‘s budgeting process. In this way there is no incentive for Strate, STRATE
Supervision, or any individual to utilise the ―fines mechanism‖ as a source of revenue to reach a
target, budget or incentive objective.
MONITORING
The Committee is responsible for monitoring the effectiveness of the Chinese walls established in
accordance with the Manual..
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6 COMPLIANCE AND REPORTING REQUIREMENTS
OBJECTIVE
The objective of this chapter is to gain a basic understanding of the role which the compliance
function fulfills in an organization and the importance that compliance plays in the supervision of
Strate Participants.
“Although management may appoint a chief risk officer or risk facilitator to assist in the execution
of the risk management process, the accountability to the board remains with management and
should be the responsibility of every employee.” (King II)
This chapter of the Learning Material briefly explains the valuable role which the compliance
function fulfils within an organisation.
6.1 The Compliance Function
Compliance functions are relied on to assist organisations in complying with ever increasing
regulatory requirements and managing risk.
Sound corporate governance is essential for effective compliance! The Board of Directors is
ultimately accountable for compliance with the regulatory requirements that are imposed.
Directors have the duty to make the necessary enquiries to ensure that risks (including
compliance risks) are adequately managed. Each organisations‘ governance structures should
address the delegation of compliance and risk management responsibilities to management and
employees.
The compliance function itself is not responsible for compliance. The compliance functions‘ key
contribution within an organisation is to assist management in discharging their responsibility to
comply with regulatory requirements.
The King Report on Corporate Governance supports this view in that it indicates that the role of
the Compliance Officer encompasses:-
providing a service to management by assisting them in identifying and
prioritising all applicable regulatory requirements;
46
providing awareness training to enable management to manage applicable
compliance risks appropriately; and
conducting monitoring programs to identify and report aspects of non-compliance
to the CEO and Board.
Although the above is merely a high level overview, it cuts to the core of the contribution that is
made by Compliance Officers.
The Compliance Officer is therefore not responsible for compliance, but rather to assist
management in ensuring compliance. In order to assist management and the Board with this
compliance responsibility, the Compliance Officer has to adequately inform them of the status of
compliance within the organisation.
How exactly is this achieved?
One of the key means of providing the support needed is through the use of compliance reports.
Compliance reports generally serve to:-
report on challenges being faced;
highlight control issues;
bring problems and/or breaches to the attention of management / regulators; and
detail action taken or to recommend changes / remedial action.
47
The reporting lines within each organisation will also vary. The below diagram indicates an ideal
compliance reporting line.
The Compliance Officer must at all times maintain a high degree of professional independence.
Where he/she reports directly to management, a conflict between business objectives and the
applicable regulatory requirements could exist. The Compliance Officer could effectively be
reporting the ―failure‖ to the person responsible for such non-compliance, added to which the
report may be squashed and never reach the Board who is ultimately responsible for compliance.
Becoming too independent can also be detrimental. Compliance needs to ensure that it remains
part of the day to day business decisions in order to ensure that it can assist management in
being ―part of the solution‖ in complying with regulatory requirements.
Compliance is more than just manuals and procedures – it is most effective when integrated into
all business processes. It should not be seen in isolation and should be seen in the light of all the
related role players. It is imperative that organisations promote a culture of ―doing the right thing.‖
It is equally important that those who report on any wrong doing are not adversely effected
through their ―whistleblowing‖.
Ov
era
ll co
mp
lian
ce re
sp
on
sib
ility flo
ws
from
the
top
do
wn
Board of Directors
CEO Board Audit Committee
Management Compliance Officer
Staff
Indirect reporting lines Direct reporting lines
Ro
ll u
p o
f re
po
rtin
g
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Compliance with regulatory requirements is not only the law, but it also makes good business
sense. Customer satisfaction and confidence, to a large extent, is directly related to the level of
compliance by the financial institution with applicable regulatory requirements.
Compliance is ―good business‖ and much of what regulatory requirements represent or aim to
achieve, is good practice.
6.2 Conflicts of interest for Compliance Officers
The effectiveness of any self-regulating body is dependent on the information it receives from its
Compliance Officers who work in that industry. The effectiveness of a Compliance Officer in turn
is dependant on the information that he obtains from within his organisation, as well as his ability
to communicate with the regulator.
An effective Compliance Officer needs to have access to information, as well as the ability to
disseminate and communicate it to those who matter. His ability to communicate is however
governed by his duty to his employer, as well as his duty to the regulator. A Compliance Officer
could therefore be placed in a position of conflict.
Duty to employer
The Compliance Officers duty to his employer can be divided into 2 areas:-
expressed duties: usually detailed in the Compliance Officers‘ contract or job
description. This often requires the Compliance Officer to ensure that the
company adequately complies with the Rules and regulations set down by the
regulator. The Compliance Officer would therefore be expected to enforce any
Rules / restraints on others; and
implied Duties: usually includes the duty of confidentiality and obedience to his
employer.
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Rules imposed by regulator
Regulatory authorities may require that all Compliance Officers be registered as such, and that
they agree to abide by its Rules through the acceptance of a ―code of conduct or ethics‖. The
Compliance Officer is therefore unable to conceal information from the regulator, which the
employer may not want him to disclose.
A direct conflict exists between their obligations to the regulator, as well as their duty of
confidentiality and obedience to their employer.
Other duties often imposed on Compliance Officers may include a duty to the customer or a duty
imposed by Statute.
To mitigate the conflicts of interest, the Compliance Officer should always deal with its regulator
in an open and co-operative manner and keep the regulator promptly and adequately informed of
any issues that may reasonably be expected to be disclosed. It is imperative that those who ―blow
the whistle‖ on any offence, malpractice or irregularity be protected and should not be disciplined
or victimised for their disclosures.
Certain requirements should be met in order for Compliance Officers to provide an effective
value-added function within their organisations.
As stated previously, the functions of a Compliance Officer include, inter alia:-
identifying the risks that an organisation faces and advising on them –
identification;
designing and implementing controls to protect an organisation from those risks –
prevention;
monitoring and reporting on the effectiveness of those controls in the
management of an organisations exposure to risk - monitoring and detection;
resolving compliance difficulties as they occur – resolution; and
advise the business on Rules and controls – advisory.
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Companies often expect their Compliance Officers to know the answers to all the regulatory
questions. This may seem unrealistic to some, but frequent contact with the regulator and the
Compliance Officers ability to identify and understand a problem should reduce the employers
concerns about talking to the regulator. It often enables concerns to be addressed before it
becomes a problem.
There is a need to instil a compliance culture in the regulated entity whereby compliance is a
preventative tool, rather than it being viewed by some as a policing function. Regular dialogue
between the Compliance Officer and management, as well as staff being able to raise day to day
queries with the Compliance Officer will increase the quality of information the Compliance Officer
is able to obtain. Inevitably this leads to better information flowing to the regulator which in turn
improves the effectiveness of self regulation.
6.3 The Roles and Responsibilities of the Strate Compliance Officer
Compliance officers should:-
have clear and objective responsibilities;
exhibit the highest levels of professionalism;
operate independently within their business unit;
be accountable;
have adequate powers, resources and capacity; and
adopt clear and consistent processes.
The compliance program within an organisation must add value. The benefits of an effective
compliance program and appropriate compliance monitoring include:-
the reduction of regulatory wrongdoing;
potential administrative and cost reduction;
providing the organisations leadership with a more accurate view of its
employees behaviour;
helping personnel make sound business decisions;
identifying criminal and unethical conduct;
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providing a channel for effective dissemination of changes in regulatory and
legislative requirements; and
encouraging employees to report and address concerns internally rather than
externally, which may reduce reputational risk.
As already highlighted above, the Compliance Officers‘ primary responsibilities, from a regulatory
perspective, should include:-
oversight and monitoring;
reporting;
education and training;
review and investigation; and
informer / ―whistle blowing‖ procedures.
6.3.1 Section 8.3.1 of the Strate Rules
Section 8.3.1 of the Strate Rules details the roles and responsibilities to be performed by a Strate
Compliance Officer as follows:-
8.3.1 a Participant must appoint a compliance officer as stipulated by Directive to ensure
compliance with the provisions of the Act, Rules and Directives;
8.3.2 a compliance officer must;
8.3.2.1 pass the compliance officer examination and fulfil any further requirements
stipulated by Directive;
8.3.2.2 immediately report to the senior management of the Participant any apparent
breach by the Participant, its officers and employees, of the provisions of the
Act, Rules and Directives;
8.3.2.3 immediately report to the senior management of the Participant any
discrepancy or irregularity detected in terms of the Rules and Directives and
any other issue considered by the compliance officer to be irregular;
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8.3.2.4 if the Participant fails to rectify the breach, discrepancy or irregularity reported
to it in terms of Rules 8.3.2.2 and 8.3.2.3 within 24 (twenty four) hours, the
directors of the Participant or, failing the directors, the compliance officer, must
report the breach, discrepancy and or irregularity to the Controlling Body, which
report shall include a description of any action taken by the Participant to rectify
the breach, discrepancy or irregularity;
8.3.2.5 submit a bi-annual report signed by the chief executive officer or designated
officer of the Participant and the compliance officer, relating to the Business of
the Participant which indicates any material problems that the directors or
compliance officer have experienced during the preceding 6 (six) months and
how these have been or are to be addressed. The report must include a
disclosure and analysis of the impact on the solvency of the company of any
material problems or losses experienced, risk management, internal controls
and procedures implemented to mitigate the risks introduced, as well as any
material claims of which the directors or compliance officer are aware;
8.3.2.6 receive all notices issued in terms of Rule 13 and monitor that they are
complied with;
8.3.3 The primary functions of the compliance officer are to:-
8.3.3.1 review the daily monitoring, controlling and reconciling of the Securities
Accounts of the Participant;
8.3.3.2 review on a daily basis, that the total of the balances of the Securities Accounts
held for all Clients for each class and type of Securities held by the Participant
agree with the aggregate amount for those Securities reflected in the Records
of the Participant;
8.3.3.3 review on a daily basis, that the Participant’s Records of the aggregate quantity
of the Securities of each class and type held by it are the same as those held
by the CSD on its behalf;
8.3.3.4 review the effectiveness of the internal controls and risk management
procedures;
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8.3.3.5 monitor that the Client mandates, BEE Contracts and BEE Certificates, where
applicable referred to in Rule 5 are in place ; and
8.3.3.6 monitor the compliance by the Participant of all Rules and Directives.
8.3.4 Except where the Controlling Body may otherwise determine, a Participant
must not carry on Business for more than 3 (three) months in any continuous
period of twelve months unless such Participant has appointed a compliance
officer in terms of the Rules.
8.3.5 In the absence of a duly appointed compliance officer or where a compliance
officer post has become vacant, a temporary compliance officer must be
appointed for a period no longer than 3 (three) months.
6.3.2 Directive SA.6 – Strate Compliance Officer Appointments
In terms of Directive SA.6:-
1. all Participants must appoint a Strate compliance officer (SCO) who has passed the
compliance officer examination prescribed by the controlling body;
2. all Participants must appoint at least one additional compliance officer, termed the
Alternate compliance officer (ACO), to act as an alternate to the SCO. If more that
one ACO is accredited, STRATE Supervision Division must be advised of the
nominated ACO when the SCO is absent from their post; and
3. SCOs and ACOs must achieve the minimum compliance points per annum, as stated
in the Directive.
In terms of the above Directive, the Compliance Officer is required to maintain a minimum
number of points per annum. The objective of this points system is to encourage
―Continuous Professional Education.‖ The actions, tasks and qualifications of a Strate
Compliance Officer for which points are awarded, and the quantity of such points, are
detailed in the Guidance Note.
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Please refer to the Strate website www.strate.co.za, for the current version of Directive SA.6 and
the Guidance Note.
6.4 Whistleblowing
Various definitions of whistleblowing are provided, namely:-
a) ―bringing an activity to a sharp conclusion as if by the blast of a whistle‖-(Oxford English
Dictionary);
b) ―raising a concern about malpractice within an organisation or through an independent
structure associated with it‖-(UK Committee on Standards in Public Life);
c) ―giving information (usually to the authorities) about illegal or underhand practices‖-(Chambers
Dictionary);
d) ―exposing to the press a malpractice or cover-up in a business or government office‖- (US,
Brewers Dictionary);
e) police officer summoning public help to apprehend a criminal; and
f) referee stopping play after a foul in football.
Compliance officers are often seen as ―blowing the whistle‖ on wrongdoers. The conflict of
interests explained above, often results in Compliance Officers being placed in a tough position
between reporting the fraud or irregularity and their own personal security. The protected
Disclosures Act provides some compensation and protection to whistleblowers.
6.4.1 Protected Disclosures Act
The Protected Disclosures Act came into force in February 2001. It encourages people to raise
concerns about improprieties in the workplace and will help ensure that organisations respond
by:-
addressing the message rather than the messenger; and
resisting the temptation to cover up serious malpractice or ―improprieties‖.
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Through protecting whistleblowers from being subjected to an occupational detriment in the
following circumstances, the Act promotes the public interest.
Impropriety
The Act applies to people at work raising genuine concerns about crime, civil offences (including
negligence, breach of contract, breach of administrative law), miscarriage of justice, danger to
health and safety or the environment and the cover up of any of these. It applies whether or not
the information is confidential and extends to malpractice occurring overseas.
Individuals covered
The Act covers every employee and applies to every employer.
Legal Advice
The Act confirms that employees may safely seek legal advice on any concerns they have about
improprieties.
Internal disclosures
A disclosure in good faith to a manager or the employer will be protected if the whistleblower has
a reasonable suspicion that the impropriety has occurred, is occurring or is likely to occur. Where
a third party is responsible for the matter this same test applies to disclosures made to it.
6.4.1.1 Disclosures to Member of Cabinet or Executive Council
Where the employer is:-
an individual appointed in terms of legislation by a Member of Cabinet or of the
Executive Council of a province; or
a body the Members of which are appointed in terms of legislation by a Member
of Cabinet or of the Executive Council of a province; or
an organ of state.
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A disclosure made in good faith, by an employee to the Member of Cabinet or Executive Council
will be protected in the same way as an internal one.
Disclosures to prescribed bodies
The Act protects disclosures made in good faith to prescribed regulatory bodies such as the
Public Protector and the Auditor General where the whistleblower reasonably believes that the
information and any allegation in it are substantially true.
Wider disclosures
Wider disclosures (e.g. to the police, the media, MPs and non-prescribed regulators) are
protected if, in addition to the tests for disclosures to prescribed regulatory bodies, they are
reasonable in all the circumstances and they meet one of the preconditions.
Provided they are not made for personal gain, these preconditions are that the whistleblower:-
reasonably believed s/he would be subjected to an occupational detriment;
if s/he raised the matter internally or with a prescribed regulator; or
reasonably believed a cover-up was likely and there was no prescribed regulator;
or
had already raised the matter internally or with a prescribed regulator; or
the impropriety in question is exceptionally serious.
Whether the disclosure was reasonable will depend on the identity of the person to whom it was
made, the seriousness of the concern, whether the risk or danger remains, and whether it
breached a duty of confidence the employer owed a third party. Where the concern had been
raised with the employer or a prescribed regulator, the reasonableness of its response will be
particularly relevant. Finally, if the concern has first been raised with the employer, it is relevant
whether any whistleblowing policy in the organisation was or should have been used.
Occupational detriment
A whistleblower who is subjected to any disciplinary action - including dismissal, suspension,
demotion, harassment or intimidation; a transfer against his or her will; a disadvantageous
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alteration in the terms and conditions of his or her employment will have been subjected to an
occupational detriment.
A refusal of a transfer or promotion; a refusal to provide a reference or providing an adverse
reference; a refusal of employment or appointment to office; or any other adverse impact on the
whistleblower‘s employment will also amount to an occupational detriment.
Threatening the whistleblower with any of the above is an occupational detriment.
Remedies
Where the whistleblower is subjected to an occupational detriment s/he can bring a claim in any
court having jurisdiction, including the Labour Court, or pursue any other process allowed or
prescribed by law (for example conciliation through the CCMA). In addition to providing for
financial compensation, the Act enables the whistleblower to request and obtain a transfer on
terms and conditions no less favourable than the conditions that applied immediately before the
transfer.
Confidentiality clauses
Confidentiality or ‗gagging‘ clauses in employment contracts and severance agreements are void
insofar as they conflict with the Act's protection.
6.4.1.2 Companies Act – Protection of whistle-blowers
The section below has been included following the promulgation in the new Companies Act 71 0f
2008, on 1 May 2011.
Section 159 of the Companies Act also deals with the protection of whistle-blowers. Please note
that any protection of an employee in this section is in addition to and not substituting the
protection contained in the Protected Disclosures Act 26 of 2000. Further, the Protected
Disclosure Act will still apply to a disclosure made by an employee in terms of this section.
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Any Memorandum of Incorporation, the rules of the company or agreement is void to the extent
that it is inconsistent with this section (that is, restricting or limiting whistle-blowing or disclosures).
It further states that shareholders, directors, company secretary, prescribed officers, employees,
registered trade unions or other employee representatives, suppliers, etc, who make a disclosure
in terms of this section, have qualified privilege in respect of such disclosure, and are immune
from any criminal, civil or administrative liability in respect of such disclosure. A person making a
disclosure shall not be subjected to (that is, protected against) any threat or detriment by any
person, and may claim from such person compensation for any damages suffered.
A disclosure can be made to either the Commission, the Companies Tribunal, the Panel, a
regulatory authority (e.g. FSB), an exchange, a legal advisor, a director, a prescribed officer, a
company secretary, an auditor, a person performing the internal audit function, the board or
committee of a company concerned. Such disclosure must be made in good faith, and at the time
of making a disclosure, person making a disclosure need to have a reason to believe that a
company or external company, or a director or prescribed officer of a company –
Has contravened certain prescribed laws (see Schedule 4 of the Companies Act),
Failed or was failing to comply with any statutory obligation to which the company was
subject,
Engaged in a conduct that had endangered or likely to endanger the health and safety of
any individual,
Engaged in a conduct that had harmed or likely to harm the environment,
Unfairly discriminated or condoned unfair discrimination against any person, or
Contravened any other legislation in a manner that could expose the company to risk of
liability or prejudice the interests of the company.
Public companies and state-owned companies must directly or indirectly establish and maintain a
system to receive disclosures confidentially and act on them, and routinely publicise the
availability of such system to the persons entitled to make the disclosures (that is, shareholders,
directors, employees, etc).
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6.5 Strate Circular
6.5.1 Background
Discussions with the South African Institute of Chartered Accountants (SAICA) commenced in
2003 with a view of mandating and standardising the audit reporting for Participants. Previous
audit reports submitted in terms of the Strate Rules were inadequate and did not focus on the key
operational areas. When discussions commenced there was significant debate over the wording
of the Strate Rules and the processes to be performed by the Registered Auditors. The Rules
stated that the auditor was to express an opinion, but following lengthy debate it was finally
agreed that Strate would accept a report on factual findings.
A working committee was formed which proceeded to draft the Strate/Strate Circular which was
eventually approved by SAICA in July 2003 and the Strate Controlling Body in August of 2003.
SAICA – Circular 3/2003 – Guidance for Auditors reporting in terms of Central Securities
Depository (CSD) Rules was thus passed.
6.5.2 Strate / Registered Audit Guidelines
The purpose of the guidelines (known as the Strate Circular) is to provide guidance for
Registered Auditors when reporting in terms of the CSD Rules and the FMA on the Participants‘
compliance with the relevant sections of the FMA. This Circular contains the ‗agreed-upon
procedures‘ to be performed by the Registered Auditor of a Participant regarding the
implementation and operating effectiveness of key controls (identified by management of the
Participant), that are designed to meet the control objectives (specified by Strate), for transactions
relating to the settlement, custody and administration, of Strate eligible Securities.
The format for the Registered Auditor‘s factual findings report is set out in an appendix. The
Registered Auditors scope of review includes the following areas:-
Client mandates
Dematerialisation, Rematerialisation and Immobilisation
Operation of Securities Accounts
Balancing
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Settlement
Securities Transfer Tax Act (Equities)
Corporate Events (Equities and Bonds)
Capital Events (Money Market)
The guidelines have been amended over the years. The current Registered audit guidelines are
available on the Strate website www.strate.co.za.
6.5.3 Reports and Audits
As mentioned above, in terms of Rule 8.3.2.5 the Strate Compliance Officer is to submit a bi-
annual report. This report is submitted for the following periods:
1 January to 30 June – to be submitted to STRATE Supervision by 31 July; and
1 July to 31 December – to be submitted to STRATE Supervision by 31 January of the following
year.
In terms of the Strate Rules, there are certain other reports which must be submitted
during the year. Section 8 of the Strate Rules state:-
8.1.1 the Controlling Body may, in addition to the Accounting Records prescribed by the
Act, determine the nature and type of reports, Accounts and Records which a
Participant shall maintain for the purpose of the requirements of the Act and Rules;
8.1.2 a Participant must, to the satisfaction of the Controlling Body, introduce and
maintain internal controls and procedures to ensure that the Securities Accounts
held by it are audited on a regular basis according to SA.1. All audit reports
compiled in accordance with the provisions of this Rule and submitted to the CSD
shall only be disclosed to the Executive Officers of the CSD and the Head of
Supervision and on request, to the Registrar;
8.1.3 every Participant must annually report to the Controlling Body whether or not;
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8.1.3.1 the Participants’ internal controls and procedures, in so far as they relate to the
Business of the Participant, provide reasonable assurance as to the integrity
and reliability of the Accounts;
8.1.3.2 the audit procedures and internal controls and procedures are based on
established policies and procedures and are implemented by trained and
skilled personnel;
8.1.3.3 the adherence to the implemented internal controls and procedures is
continuously monitored by the Participant;
8.1.3.4 the Participant is maintaining high ethical standards, thereby ensuring that the
Business of the Participant is conducted in a manner which is above reproach;
8.1.4 the Participants must submit the report required in terms of Rule 8.1.3 within 90
(ninety) calendar days after the financial year-end of the Participant;
8.1.5 the Registered Auditor of the Participant must submit a factual findings report
annually to the Controlling Body, within 90 (ninety) calendar days after the
financial year-end of the Participant which complies with the Strate Circular, the
Act and Rules.
The Registered Auditor responsible for the audit of the SARB or a Participant
which is also a bank,must submit the factual findings report within 6 (six) months
after the financial year-end of such bank Participant or the SARB.
8.1.6 the Registered Auditor of the Participant must annually report to the Controlling
Body whether or not;
8.1.6.1 the Participant complies with the requirements of the Act and the Rules
regarding the maintenance of Securities Accounts;
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8.1.6.2 the Participant complies with the Rules relating to the reconciliation of
Securities Accounts to the Central Securities Accounts kept by the CSD ;
8.1.6.3 the Participant complies with Rule 5.1.1, and on the adequacy of the
arrangement made and measures taken by such Participant on holding of
sufficient Securities in terms of Rule 5.1.
8.1.7 a Participant must, within 90 (ninety) days from its financial year end, or within
6 (six) months in respect of a bank Participant or the SARB, ensure that its
Registered Auditor submits to the Controlling Body, any further reports as
required by the Act and Rules;
8.1.8 a Participant must report any material malfunction in the functioning of the
aforementioned controls, procedures and systems to the CSD as soon as
reasonably possible after it has come to the directors' or officers’ of the
Participant’s attention, and as prescribed by Directive.
8.1.9 a Participant must conduct a full Disaster Recovery test bi-annually on its
relevant internal systems and related infrastructure and report to the CSD the
results of such test, and as prescribed by Directive.
8.1.10 a Participant must advise the Controlling Body in writing of any material change
to its shareholding or corporate structure that is likely to affect the risk profile of
the Participant.
7.5.3.1 Directive SA.10
Directive SA.10 provides for the management of risks in the Strate environment, including testing
and disaster recovery, applicable to Participants and Business Partners.
This Directive covers three main requirements, namely:
a) Disaster Recovery Tests. As mentioned in Rule 8.1.9, Participants must conduct the
disaster recovery test at least once every 6 (six) months, and report the results of such
test to STRATE Supervision within 30 (thirty) days from the date of the test. Where tests
are unsuccessful (i.e. the results are ―fail‖) the Participant must, within 10 (ten) business
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days, advise STRATE Supervision of the circumstances leading to the failure as well as
its plans to conduct a subsequent test. Further, the Directive includes requirements for
both Participants and Business Partners to participate in Strate‘s own annual testing
programme.
b) Technical Difficulty and Business Continuity. Requirements are imposed on Participants
and Business Partners to notify Strate of all technical difficulties experienced.
c) Communication Networks. The Directive stipulates the minimum messaging systems /
communication network service providers to be in place between a Participant and
Strate.
For more information regarding any Strate Directives, the reader of this Learning Material must
refer to the Strate website www.strate.co.za.to obtain the latest version of any Strate Directive.
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7 RISK
OBJECTIVE
The objective of this chapter is to gain an understanding of the internal control and risk
management requirements within the Strate environment as well as the key risks which exist
within this environment.
Emerging markets face the same issue that today‘s developed first world markets faced in their
earlier stages decades ago. How does one build a safe Securities market that will attract both
domestic and foreign investment into the market, thereby increasing local and international
monetary flows to ensure a healthy and thriving environment?
A common issue facing all countries in the development of its Securities markets is safety. The
cornerstone of a safe, stable Securities market is a safe and reliable clearing and settlement
system supported by market Participants who operate effectively, efficiently and accurately.
Strate, in conjunction with the Financial Services Board and Exchanges, focuses on achieving
safety not only in the clearing and settlement system so as to ensure that domestic and foreign
investors remain comfortable that their trades will be brought to completion, but also in achieving
an effective, efficient and safe custodial system beyond the settlement of the trade.
7.1 Risk and the Role of the Compliance Officer
The International Organisation of Securities Commissions (IOSCO) recognised that the reduction
of systemic risk is one of three main objectives of Securities regulation; the others being
- the protection of investors and
- ensuring that markets are fair, efficient and transparent.
The IOSCO principles state that ―an efficient and accurate clearing and settlement system that is
properly supervised and utilises effective risk management tools is essential”.
Risk can be managed but never totally mitigated. Life involves risk and companies can not
escape risks. It is important for companies to empower their Compliance Officers with
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the information to know these risks and the understanding that when risks are faced that these
were fully anticipated and known so that they can be controlled and managed.
The compliance role is to assess the operations of their business units and make
recommendations on which compliance risks may or may not be accepted. It would also be
expected that compliance risk areas be pointed out and advice given on which controls appear to
be inadequate. This suggests a sufficiently high level of understanding of the industry.
Compliance Officers need to acquire the skills, knowledge and experience to assist them in
performing this duty.
“The Compliance Officer must facilitate the development of a culture which is conducive to
minimizing risk‖ (Source: Compliance: Making Ethics work in Financial Services – Andrew
Newton). It is the responsibility of the Compliance Officer to establish procedures and to monitor
activities to ensure that all levels of staff are aware of the relevant regulatory requirements and
operational fundamentals so as to minimize the compliance risk exposure of the organisation and
market as a whole. The nature of Strate means wider impact i.e. a single transaction may
become complex and inter dependant and could impact multiple parties and systems.
Techniques used to control and manage risks include:-
AVOIDING RISK – processes and operations are
redesigned in order to reduce the overall risk exposure.
DIVERSIFYING RISK – risk is spread in order to
minimize the impact or exposure.
CONTROLLING RISK – redesigning of processes and
activities to prevent, detect or contain the adverse events and to encourage
positive outcomes.
SHARING / TRANSFERRING RISK – includes, inter alia, a
reinsurance of risk whereby elements of the risk are outsourced to third
parties.
ACCEPTING RISK – depends on the organisations
level of risk aversion. This occurs when minor risks are assumed / tolerated
because the cost of managing the risk is greater than the potential exposure
itself.
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Some academics refer to the above as the ―Four T‘s of Risk‖:-
TRANSFER - Transfer the risk or the consequences of the risk to a
third party, selffinance mechanism or to the insurance market.
TOLERATE - Accept the risks - probability and severity impacts will
not adversely affect the business or you are able to manage those risks internally.
TERMINATE - Terminate the risk in the business – the probability of
occurrence is too high. When it occurs, the severity / financial impact will be too great
for your business.
TREAT - Reduce the potential effects of the risk by taking specific
action(s) which provide protection systems and / or procedures which reduce the
probability or potential impact to the company.
Either way it must be remembered that risk cannot be eliminated – it can only be controlled,
contained and managed.
7.2 Regulatory and Supervisory Risks
Risks are derived from areas such as business, operations, market and credit. The most
important area from Strate‘s perspective is operational risk.
Trades may fail as a consequence of an operational process failure induced by failure within an
organisations system or by its people. Operational failures are often seen as
―normal failures‖, which inevitably leads to repeat failures – but could have a major impact on
settlement risk.
Among the various categories of risk monitored by Strate, two, specific, broad categories have
particular relevance to the management of risk from a regulatory and supervisory perspective,
namely operational risks and prudential risks.
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7.2.1 Operational Risks
For the purpose of this Learning Material / Handbook the various operational risks have been
divided into several sub-categories which are defined below.
CUSTODY RISK
The risk of loss of Securities held in custody occasioned by the negligent or fraudulent
action of the Participant. The risk of incorrect record keeping by the Participant, and as a
result the investor suffers a loss or it undermines confidence in the efficiency and
effectiveness of the market.
TECHNOLOGY AND SYSTEMS RISK
This risk is the inability of the custody and payment systems/applications to manage and/or
control the business processes/information of the Participant. The risk of system failure or
technical difficulty experienced by a Participant which results in the entity being unable to
perform its CSD related activities.
COMMUNICATION RISK
The risk that the exchange of information between Participants and Strate, and Participants
and their Clients, is inadequate. The risk that the Participant (and as such its Clients) is not
aware of or misunderstands new/amendments to operational procedures, Rules and
Directives. This results in operational errors and the consequence is that the investor
suffers a loss or it undermines confidence in the efficiency and effectiveness of the market.
CONTRACTUAL / LEGAL RISK
The risk that the Participant acts without, or contrary to the provisions of, a client mandate.
The risk that the Participant settles transactions over a Clients‘ Securities Account without
there being a mandate in place, or alternatively, where a mandate is in place, acts contrary
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to the binding terms and conditions. As a result the investor suffers a loss or it undermines
confidence in the efficiency and effectiveness of the market.
COMPLIANCE OFFICER RISK
The risk that the Strate Compliance Officer is not effective in monitoring the applicable
processes and procedures. The risk that the Strate Compliance Officer fails to perform the
roles/responsibilities prescribed in the Rules which could result in fraud and errors in the
custody and settlement records maintained by the Participant not being detected. This
could result in the investor suffering a loss or it undermines confidence in the efficiency and
effectiveness of the market.
PROJECT MANAGEMENT RISK
The risk that the implementation of new or amended Strate products and/or market
required functionality fails or cannot be implemented timeously due to the lack of resources
or poor project management and this introduces risk to the Participant, CSD, Exchanges or
other stakeholders.
HUMAN RESOURCES / PERSONNEL RISK
The risk that a Participant fails to recruit and/or retain qualified staff with appropriate skills
and competencies to perform each business function.
AUDIT RISK
The risk that the auditors (internal and Registered) lack the knowledge and experience of
Strate procedures and practices, the result of which is inadequate audit findings. The risk
that the auditors lack the knowledge and experience of Strate related activities which
results in them failing to detect errors, weaknesses and transgressions, leading to
poor/unreliable audit reports.
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REPUTATIONAL RISK
The current and prospective effect on earnings (and capital) arising from negative public
opinion. This affects the Participant‘s ability to establish new relationships or services, or
continue servicing existing relationships. Reputational risk may expose the Participant to
litigation, financial loss or a decline in its customer base. A Participant's reputation can be
damaged by services that are executed poorly or otherwise alienate customers and the
public.
The consequence is that the investor could suffer a loss or it undermines confidence in the
efficiency and effectiveness of the market and / or the Participant could face disciplinary
action.
7.2.2 Prudential Risks
For the purpose of this Learning Material/Handbook we have divided Prudential risk into two sub-
categories namely:-
INSURANCE RISK
The risk that the Participant has inadequate insurance in place to operate as a risk
mitigating tool. The risk that in the event of a loss (either own or via claim from third party)
the Participant cannot look to an Insurer and/or lacks sufficient reserves (in the event of
self-insurance) to cover the financial costs/damages arising from the event.
FINANCIAL RISK
The risk that the Participant cannot continue to operate as a financially viable entity. The
risk that the Participant fails (placed into curatorship, liquidation or judicial management)
and the assets (both cash and Securities) are trapped in the failed entity to the detriment of
the Client.
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7.3 Aspects of the Rules and Directives which require monitoring
Having explained Strate‘s regulation strategy, the need for supervision and the risks which an
arise in the course of electronic settlements, it is vital to go back and look at those sections of the
Rules and Directives on which Strate will focus their compliance attention on.
Aspects which require stringent monitoring are those that deal with, inter alia:-
knowledge and skill of the employees of the Participant who have access to or input data
into the CSD systems or who provide information to those people who input data into
settlement systems;
continued adherence to the participation eligibility criteria;
system integrity;
record keeping and the maintenance of Securities Accounts;
Client interaction and mandates
adherence to the financial soundness provisions (capital adequacy);
adherence to the settlement parameters and timeframes;
Beneficial Ownership information and disclosure; and
licencing of Nominees.
Strate as regulating authority will take or initiate the necessary corrective action whenever
deficiencies are detected. Postponing action could cause an accumulation of adverse effects –
could exacerbate the disruption and threaten the stability of the market.
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7.4 Strate Rules pertaining to internal controls and Risk Management procedures
Internal Controls and Risk Management
In terms of section 8.2.1 of the Strate Rules, a Participant must adopt sound risk management
principles and procedures and be able to describe and demonstrate the objectives and operation
of these.
In terms of the Strate Rules, the internal controls and procedures of the Participant must be
designed to ensure that:
8.2.2.1 the Business of the Participant can be carried on in an orderly and efficient
manner;
8.2.2.2 the financial and other information used or provided by the Participant is
reliable;
8.2.2.3 all transactions and commitments entered into by the Participant in so far as
they relate to the Business of the Participant are recorded as prescribed by the
Act, Rules and Directives and are within the scope of authority of the
Participant and of the officer or employee acting on its behalf;
8.2.2.4 there are procedures to safeguard and segregate the Participant’s assets and
assets belonging to other persons to which the Participant is accountable, and
to control liabilities;
8.2.2.5 there are measures in place to detect, identify and mitigate the risk of losses to
the Participant and its Clients from any irregularity, fraud or error in terms of the
Act, Rules and Directives;
8.2.2.6 on a daily basis the Client’s Records of the aggregate quantity of the Securities
of each class and type of Securities held by it are the same as those held by
the Participant on their behalf; and
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8.2.2.7 on a daily basis, the Participant’s Records of the aggregate quantity of the
Securities of each class and type held by it are the same as those held by the
CSD on its behalf.
8.2.3 The principles and procedures of risk management must be designed to enable
the Participant to:
8.2.3.1 identify, quantify, control and manage its risk;
8.2.3.2 make timely and informed Business decisions in regard to the identified risks;
8.2.3.3 monitor the performance and all aspects of its Business; and
8.2.3.4 monitor its capital to ensure compliance with the capital adequacy requirement
and other requirements imposed in terms of the Rules and Directives.
8.2.4 A Participant must be able to describe and demonstrate the objectives and
operation of its internal controls and procedures and risk management to its
Registered Auditor, the CSD and the Registrar.
Security measures and controls
Additional risk related requirements imposed on Participants in terms of section 8.4.1 are:
8.4.1A Participant must take all reasonable security measures, including establishing
and maintaining such procedures as may be necessary or expedient, to protect
information, data, Records, certificates, documents of title and other documents
relating to Clients, and in particular, relating to their Securities Accounts, against
any unauthorised access, alteration, destruction or disclosure. Without limiting the
generality of the aforegoing the Participant must ensure that:
8.4.1.1 a formal security clearance programme for all staff and contract personnel,
including a confidentiality agreement, is in place;
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8.4.1.2 it has the necessary security systems to protect against the inappropriate or
unauthorised access of its hardware, software and related procedures;
8.4.1.3 a documented security manual for standards and practices is compiled and
enforced by the Participant;
8.4.1.4 it adequately secures its physical premises and ensures that those responsible
for this function report to a senior official of the Participant; and
8.4.1.5 adequate segregation of duties of staff members exist to prevent unauthorised
transfers between Clients’ Securities Accounts.
NOTE: Please refer to the Strate website on www.strate.co.za for the latest version and a copy of
the Strate Rules
7.5 Systemic Risk
Financial institutions are fundamentally different from other corporations. When a non-financial
company goes insolvent, shareholders, bondholders, and other creditors suffer financial losses.
The overall effects of the failure, however, are limited to direct stakeholders.
In contrast, if a bank should become insolvent, it could be significantly more harmful in that
corporations who have deposits with the bank (i.e. Clients of the bank) would not be able to
access their own cash to run their businesses, which could in turn cause them to also become
insolvent.
Unlike other entities, banks and Securities houses play a special role in the economy. They
facilitate payment flows to and from their Clientele. This very role, however, can also make bank
failures much more disruptive for the economy than the failure of other entities. This threat is
called systemic risk.
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Systemic risk may be defined as the risk of a sudden shock that would damage the financial
system to such an extent that economic activity in the wider economy would suffer.
Systemic risk can come from two sources:-
panicky behaviour of depositors or investors. In a ―bank run‖, depositors become
worried about the stability of their bank and queue up at the door of the branches
of the bank to withdraw all of their cash e.g. Saambou; and
interruptions in the payment system. This can arise from the failure of an
institution or a technological breakdown in the payment system.
A significant milestone in the regulation of banks and Securities institution originated from a
breakdown in the payment system in June 1974 with the failure of Bankhaus Herstatt, a small
German bank active in the foreign Exchange market. The bank received a payment in German
marks and was required to make a dollar payment to its counterparty. Unfortunately the German
authorities shut the bank down in the course on the day before Bankhaus Herstatt could make the
dollar payment creating substantial losses and a serious liquidity squeeze for counterparties.
This event caused severe disruption in the payment system and has become known as Herstatt
risk. The consequence of this event led to a concerted effort by bank regulators to try to avoid
such situations, which ultimately gave birth to the Basel Committee on Banking Supervision
(BCBS). Another objective was to create a system that ensures a level-playing field for global
financial institutions. This came about because at the same time as the failure of Bankhaus
Herstatt, Japanese banks were expanding aggressively into the global markets and were taking
away a lot of business from their competitor banks due to more lenient Japanese banking
regulation.
The BCBS consists of Central Bankers from the Group of Ten (G-10) countries and its primary
objective is to promote the safety and soundness of the global financial system. The BCBS
established minimum risk-based capital standards that apply to Securities institutions such as
banks. These capital standards have become known as the capital adequacy rules and are
described in a series of documents known as the Basel Capital Accord. The Basel Capital
Accord, concluded on July 15, 1988, represents a landmark financial agreement for the regulation
of internationally active Securities institutions.
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This Basel Capital Accord was basically implemented as the requirements for Securities
institutions and was enforced by the Central Banks of the respective countries globally (including
the countries not part of the BCBS). National regulators are permitted to adopt arrangements that
set higher levels, or other criteria than is laid out by the Accord. Failure to meet the capital
adequacy requirements by a bank will trigger regulatory action which could ultimately affect the
type of activity in which an institution can engage and will require prompt corrective action,
including the possible liquidation.
Initially the capital charges were based on a set of standard, rigid rules defined by the Basel
Committee which attempted to create penalties for risky assets. The 1988 Basel Accord only
covered credit risk and amounted to ensuring that bank\Securities institutions had to keep a
certain amount of capital to serve as a buffer against unexpected financial losses, thereby
protecting depositors and financial markets.
These risk-based capital adequacy requirements evolved over time, first covering credit risk,
followed by market risks. The financial markets have developed significantly since the initial
Capital Accord of 1988 which has led to a comprehensive revision to the Basel Accord. This
revision has become known as Basel II.
The new framework is based on ―three pillars‖, viewed as mutually reinforcing:-
Pillar 1:- Minimum capital requirement.
These regulations are directed at covering credit risk and market risk, as before, with
the addition of operational risk. Relative to the 1998 Accord, banks now have a wider
choice of models for computing their risk charges.
Pillar 2:- Supervisory review process.
Relative to the previous framework, supervisors (national regulators) are given an
expanded role. Supervisors are required to ensure that banks have procedures and
processes in place for assessing their overall capital in relation to risks, monitor that
these institutions operate above the minimum regulatory capital standards and take
the necessary corrective action if required.
Pillar 3:- Market discipline.
The new accord emphasizes the importance of risk disclosures in financial
statements.
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8 GLOSSARY OF TERMS
Automatic Trading System: ATS:
A mechanism whereby both sides of a trade can be captured and automatically matched.
Account Transfer:
A free payment transfer, resulting in no change in beneficial ownership, between a Client‘s Money Market Securities Accounts, either at a single Participant or between Participants.
Association of National Numbering
Agencies: ANNA:
The Association that supplies the guidelines to obtain a uniform process
among the various National Numbering Agencies for the allocation of ISIN
codes.
Back Office:
The administration and/or settlement department of an organisation.
BAN:
A unique bilateral allocation number assigned by the ETME for settlement
purposes to allocations underlying a bulk transaction.
Bearer:
A bearer Security is a Security or bond (paper based), which does not have
the owner‘s name recorded in the register of the Issuer or on the Security
certificate itself. Whoever is the physical holder of the Security is the owner.
Interest or any proceeds from sales are payable to the holder. Should the
investors name be completed, the certificate is no longer deemed a bearer
certificate, and the owners endorsement is then required prior to delivery.
Bearer Document:
A Security that does not have the owner name recorded in the books of the
issuing company or on the associated Security certificate. The holder of the
certificate is deemed the owner and therefore entitled to any interest or
capital repayments due.
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Beginning of Day (BOD):
The time as stipulated in Strate Directive SGA – Operational Market
Windows – Money Market Securities.
Bilateral (Netting / Off-setting):
The netting of transactions between two parties:
e.g. If Bank A owes Bank B R500m, and Bank B owes Bank A R200m
then Bank A will have a net bilateral obligation of R200m to Bank B.
Book-over:
An internal transaction between Companies or Clients belonging to the same
Financial Institution. No external Trader is involved.
Bond:
A certificate, which is evidence of debt, on which the Issuer promises to pay
the holder, at pre-determined intervals, interest calculated at a contractual
rate and to repay the loan on its maturity.
BP ID:
A unique Business Partner Identification Number allocated to every
Participant and Business Partner linked to the MMSS.
Business Day:
Any day which Strate does business, except a Saturday, Sunday or public
holiday or any other day that Strate is closed.
Strate can in it‘s discretion decide to accommodate the opening of an
operational window on a non-Business Day, provided that:-
i) Strate has three Business Days prior notice of
the requirement; and
ii) all other parties involved have been informed
by the requesting party.
Business Partner:
An entity which is not a Participant and which interfaces with the CSD to
perform an essential market function in the issue, investment and settlement
of Money Market Securities. Business Partners in the Money Market
environment include Money Market Issuers, Issuer Agents and Traders and
Settling Banks..
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Bearer Coupon Securities:
Short-term fixed-interest Securities that are a debt obligation of the Issuer.
Bearer Coupon Securities are a promise to repay the stated amount
invested plus the specified interest (or coupon) on due date.
Bridging Bonds:
Bridging Bonds are short-term fixed-interest Securities, which serve as an
evidence of debt of the Issuer. Essentially, they are an undertaking to pay
the capital investment plus the agreed interest on the specified due date.
Bridging Bonds are quoted and traded at yield.
e.g. Development Bank of South Africa (DBSA) Bridging Bonds
Call Bonds:
Call Bonds are issued for indeterminable periods, but not less than one day.
Both the Issuer and the Investor have the right (but not the obligation) to
terminate the transaction on demand. Call Bonds usually run on for a
number of days or weeks.
Call Bonds are quoted and traded at yield, and the rate on can be
negotiated daily.
Capital Event:
An action taken by an Money Market Issuer or Issuer Agent which affects the
holding or entitlement of the owners of Money Market Securities.
Central Bank:
Refer to South African Reserve Bank (SARB) in this Glossary of Terms.
Central Securities Depository:
(CSD)
a person authorised by a licensed central securities depository to perform
custody and administration services or settlement services or both in terms
of the central securities depository rules, and includes an external
participant, where appropriate
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Client Identification Data:
In respect of an owner of Money Market Securities, the information stipulated
by Directive.
CSD Participant:
―Corporate‖ Participant - A Participant that opens and maintains Money
Market Securities Accounts in the Securities Ownership Register for Money
Market Securities owned by it.
―Full‖ Participant - An organisation that maintains custodial accounts of its
own and for their Clients, in the CSD.
Clearing:
The process, in conjunction with settlement, of determining accountability
for the exchange of money and Securities between counter parties to a
transaction. Clearing creates binding statements of obligation for Securities
and/or cash due.
Clearing Bank:
The Clearing Banks are the institutions that initiate the process of Delivery
versus Payment (DVP).
In the South African Money Market trading arena the Clearing Banks and
the Settling Banks are the same institutions, and these terms are inter-
changeable in this document.
Clearing House: CH
A Clearing House is an independent institution that ensures the payment
and delivery of Securities between market participants, in a timely and cost-
efficient manner.
Collateral:
Collateral is when acceptable Securities are pledged as Security, by a
borrower, to cover the payment or settlement of an obligation. Should the
borrower default, the Securities pledged may be taken and sold by the
lender to ensure the fulfilment of the original obligation.
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Collateral Management:
A facility or system that allows a financial institution to monitor and manage,
on a real-time basis, the collateral they provide:
On their own behalf to the Central Bank
On behalf of their Clients, to facilitate settlement or as surety in a business transaction.
Commercial Paper (COMP):
An unsecured, short-term debt instrument issued by a corporation, typically
for the financing of accounts receivable, inventories and meeting short-term
liabilities.
Consideration:
In a Securities trade, the funds or settlement amount is known as the
consideration.
Corporate Participant
―Corporate‖ Participant - A Participant that opens and maintains Money
Market Securities Accounts in the Securities Ownership Register for Money
Market Securities owned by it.
Counter-party Risk:
The risk that the counter-party will not settle an obligation for the full value
or any part thereof, either when due or at any time thereafter.
Coupon Rate:
The percentage at which interest is calculated for the Coupon Payments.
Coupon Rate Type:
The type of Coupon Payment which may be at fixed or variable rate.
Coupon Payment:
A Capital Event which involves payment of interest by an Mm Issuer to the
owner of the Money Market Securities.
Coupon Payment Date:
The date on which a coupon will be paid.
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Coupon Payment Interval: The time interval between two consecutive coupon payments.
Coupon Payment Period:
The number of days on which the coupon payment calculation is based.
Custodian:
An entity that undertakes the administration and guardianship of the
Securities committed to its care.
Custody:
The care, supervision and guardianship of property, in the case of
Securities, the certificates belonging to a third party, or if the certificates of
the associated market are immobilised in a depository or dematerialised,
the Securities account of the third party.
Delivery:
The final transfer of a Security.
Debenture:
Debenture is a general debt obligation backed only by the integrity of the
borrower.
A type of debt instrument that is not secured by physical asset or collateral.
Frequently issued in order to secure capital.
Default Coupon Payment Date
Where a Coupon Payment Date is not specified by the Money Market
Issuer, the day of the month on which the Money Market Security was
issued.
Delivery Versus Payment: DVP
The mechanism in an exchange-for-value settlement system, that ensures
that the final transfer of the asset occurs, if and only if, the final transfer of
the payment occurs simultaneously.
Dematerialise / Dematerialisation:
The elimination of physical certificates or documents of title, which
represent ownership of Securities, so that the Securities only exist as
accounting records.
Denomination:
The unit of value constituting the whole or part of the value of a trade
transaction. Hence a larger amount can be broken down into smaller units.
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Discount / Discounted: The amount by which a Security sells below its par value.
The discount rate reflects the discount to the par (or face or nominal) value
of the Security.
Electronic Settlement:
The elimination of the physical transfer of scrip and funds, providing delivery
versus payment, which ultimately results in faster and more efficient
settlement of trades.
End of Day: (EOD)
The time as stipulated in Strate Directive SGA – Operational Market
Windows – Money Market Securities.
Exchange:
A person who constitutes, maintains and provides an infrastructure:
(a) for bringing together buyers and sellers of Securities;
(b) for matching the orders for Securities of multiple buyers and sellers; and
(c) whereby a matched order for Securities constitutes a transaction.
ETME:
Electronic Trade Matching Engine - an application system which is situated
between a Business Partner with a trade reporting role and the Money
Market Settlement System (MMSS) and is used as a bulk matching and
transaction allocation tool that reports transactions for settlement to the
MMSS.
Face value:
Nominal value or par value.
Financial Instrument:
A Security or financial instrument is a claim against a person or institution
for the payment of a future sum of money and/or a periodic payment of
money.
The and/or in the definition implies that either of the payments will be
sufficient, but that both may be promised.
Fixed Interest:
Fixed Interest is a pre-determined amount, which will be paid to an Investor.
FMA Financial Markets Act (No 10 of 2012)
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Fixed Interest @ Maturity: Fixed Interest @ Maturity is a pre-determined amount, which will be paid to
an Investor on maturity of the Security.
Fixed Maturity:
Fixed Maturity is the pre-determined date that the Security will be repaid.
On Call Bonds the maturity can be terminated after one day, by mutual
agreement of the parties concerned.
Fixed Buy Back:
A Sell and Buy Back where the repurchase Settlement Date of the second
leg is agreed when the transaction is executed.
FMA
The Financial Markets Act, (No 19 of 2012), and includes any measure
prescribed thereunder by the Minister or the Registrar.
Full Participant:
―Full‖ Participant - An organisation that maintains custodial accounts of its
own and for their Clients, in the CSD.
Free of Payment:
The delivery of Securities free of any payment.
Gross Settlement:
The settlement of funds or Securities occurs on a trade-by-trade basis.
G30
The Group of Thirty, a private group of prominent, international financial
industry Participants which in 1989 proposed nine standards for improving
the world Securities industry's efficiency and reducing settlement risks. The
G30 standards have been adopted as goals by financial market regulators
worldwide.
ITR:
An internal trade reference number generated by a Trader‘s proprietary
trading or back office system.
Issuer Agent:
An entity that is registered with the CSD as stipulated by Directive and is
appointed by an Money Market Issuer to act as its agent for the issuing of
Money Market Securities.
Issue:
The description given to a new Security.
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Issue Date:
The date on which the Money Market Secuirty is issued.
Issue Period:
The Issue Period is determined by the date of issuance and the maturity
date of the Security.
Issuer:
An organisation that is under an obligation for Securities that it has issued
into the market.
International Securities
Identification Number: ISIN
An internationally recognised Securities identification number which
uniquely identifies a specific Security or other financial instrument in the
international markets.
Liquidity:
The amount of cash or Securities a corporation holds available, that can be
converted into cash at short notice.
Matching:
The processes by which the ETME identifies, compares and matches the
characteristics of the trade, which have been independently captured by the
trade on behalf of the respective buyer and seller.
Maturity and Maturity Payment:
A Capital Event which involves the repayment of capital by an Money
Market Issuer to the owners of the Money Market Securities.
MFA:
Master File Administration – the administration of the Money Market
Securities Registers maintained in accordance with Directive SGB – Master
File Administration – Money Market Securities.
MMA:
Money Market Association.
MM Issuer:
An entity which issues Money Market Securities.
MMFE:
Money Market Front End.
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MM Securities: Money Market
Security
Money Market Securities means ―Money Market Instruments‖ for purposes
of Chapter IV of the Act that are Uncertificated Securities deposited in the
Securities Ownership Register as Eligible Securities in terms of the Rules.
MM Securities Account:
A Securities Account opened and maintained by or on behalf of a Participant
for a Client, or for itself, in the Securities Ownership Register reflecting the
Client Identification Data of such Client or itself, and the nominal value of
Money Market Securities deposited and all entries made in respect of such
Money Market Securities deposited and all entries made in respect of such
Money Market Securities.
MM Securities Account Nominal
Value:
The total holdings of an Money Market Security in the Money Market
Securities Account.
MMSS:
The electronic Money Market Settlement System that facilitates Securities
Services with regards to Money Market Securities.
Multilateral (netting):
An arrangement among several parties to meet their net obligations.
MM Securities Type:
The type of Money Market Security, determined by the Money Market
Security‘s underlying unique characteristics, which may be classified into
one or more of the Money Market Securities Generic Categories.
MM Securities Register:
The register in the MMSS in which all Money Market Securities issued, and
details thereof, are recorded in accordance with Directive SGB – Master
File Administration – Money Market Securities.
National Payment System: NPS
In the Republic of South Africa, the NPS is the infrastructure that provides
the financial institutions, with the capability for processing the payments that
result from various market related activities.
NNA:
National Numbering Agency appointed by the International Association of
National Numbering Agencies for the allocation of ISINs to South African
Securities.
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Negotiated Interest Rate: The interest rate negotiated between borrowers and lenders.
Nominal: (Value)
The value against which the cost of the transaction is calculated.
On-us:
Settlement through accounting entries within a Settling Bank acting for both
the seller and purchaser of an Money Market Security, or acting for an
Money Market Issuer making coupon and maturity payments, and a
Participant with a Client qualifying to receive coupon and maturity payments
from the Money Market Issuer.
Open Buy Back:
A Sell and Buy Back where the trading parties agree not to fix the
repurchase Settlement Date of the second leg when the transaction is
executed, but such date is agreed between the parties to the transaction at
any time up to Reconcilliation Date of the underlying Money Market
Security.
Participant:
―Corporate‖ Participant - A Participant that opens and maintains Money
Market Securities Accounts in the Securities Ownership Register for Money
Market Securities owned by it.
―Full‖ Participant - An organisation that maintains custodial accounts of its
own and for their Clients, in the CSD.
Par Value:
the Par Value, Face Value, Nominal Value or Redemption Value is the
principal amount at which the Issuer of a Security contracts to redeem that
Security at maturity.
Paying Bank:
An NPS role, undertaken by a registered Bank, which will debit the paying
customer‘s account as a result of a Payment Instruction. The Paying Bank
has to meet the settlement obligation arising from the payment obligation
through SAMOS.
Payment Clearing House: PCH
An NPS role, collectively undertaken by a group of Clearing Banks under a
formal arrangement to exchange Payment Instructions.
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Payment Date: The day on which Capital Events are paid.
Payment Instruction:
An instruction for the transfer of funds to the order of the payee, which
facilitates the processing of payments between financial institutions.
Pledgee:
Pledgor:
The person to whom Money Market Securities have been pledged.
The person who has pledged the Money Market Securities.
Portfolio Movement:
A free of payment transfer, resulting in no change in beneficial ownership,
of a Client‘s Money Market Securities portfolio when such Client changes
Participants.
Position:
The investors position (Security or Cash Holding) is established when an
investor makes an opening purchase or sale based on market trends.
Primary Market:
The market for the issuing of new Securities for the purpose of borrowing or
investing funds.
Principal:
A Trader buying or selling Securities for his own account.
Principal Trade:
A trade transacted by a Principal (Trader) for their own account.
Real Time Line:
A channel through which processing and settlement takes place in real time
(continuously).
Reconciliation Date:
The EOD on the day before Payment Date of a Capital Event.
Reservation:
The process of reserving holdings either to cover sale transactions or as
Security for the payment of purchases.
Risk Management:
The effective use of procedures and systems to manage the risks
associated with any type business.
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Roll-Over:
Occurs when an ISIN has reached its Maturity Date and the parties involved
wish to extend the lifespan of the Security. In the electronic Money Market
these will be handled by maturing the original Security and a new ISIN will
be issued with a new Maturity Date.
Repurchase Agreement or Carry:
Two simultaneous transactions to purchase Securities by an investor from a
bank or dealer and the commitment by the bank or dealer to repurchase the
Securities at the same price at an agreed future date.
Reconciliation Date:
The EOD on the day before Payment Date of a Capital Event
SARB:
South African Reserve Bank.
The South African Reserve Bank is the country‘s Central Bank and one of
their responsibilities is the implementation of monetary policy in South
Africa.
SARB Debentures:
SARB Debentures are short-term fixed interest Securities issued by the
South African Reserve Bank (SARB).
SAMOS:
South African Multiple Option Settlement System.
SAMOS RTL:
The SAMOS Real Time Line payment stream.
Securities lending:
The process where one party borrows Securities from another party, for a
certain number of days at a pre-negotiated rate, usually to secure
settlement obligations.
Secondary Market:
This relates to the trading in the market of previously issued Money Market
Securities.
Security:
Includes certificated Securities and Uncertificated Securities and Money
Market instruments.
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Securities Ownership Register:
SOR
The Central Securities Account comprising the various Money Market
Securities Accounts opened and maintained by Participants.
Sell and Buy Back:
A Repurchase Agreement or carry whereby the intention of the seller is to
sell the Money Market Securities to the purchaser conditional to the
purchaser returning the same Money Market Securities or, if agreed to by
the parties, Money Market Securities with the same or similar characteristics.
SSA:
Securities Services Act, (No 36 of 2004).
Settlement:
The discharge of the obligations arising from a transaction in Eligible
Securities in terms of the Rules and Directives of the CSD, and where
applicable, of the relevant Exchange.
Settlement Date:
The date on which a buyer must pay for the investment, or a seller must
deliver the Securities.
Settlement obligation:
A settlement obligation relates to the settlement of funds between two
entities and in the context of this document is conditional on the delivery of
the underlying Security traded.
Settling Bank:
A bank which is a settlement system Participant in SAMOS and is
responsible for funding the SAMOS RTL for the settlement of transactions,
coupon and maturity payments. The Settling Bank also confirms On-us
settlement of transactions, coupon and maturity payments.
Society for Worldwide Interbank
Financial Telecommunications:
SWIFT
SWIFT is an electronic media for the transference of financial data
worldwide. Its standards and services are recognised and accepted
worldwide.
STP:
Straight through processing.
Strate Clearing and Settlement
Services:
The department within the CSD responsible for communication between
Participants, Business Partners and the CSD relating to settlement
operations.
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Systemic Risk: The risk, that the inability of one market player to meet their obligations
when due, will cause other institutions to be unable to meet their
obligations, thereby endangering the financial system as a whole.
T
Trade Date, the day on which a particular transaction was entered into.
T+ n (T+ 0):
Trade Date plus n Bussiness Days, ―n‖ being the number of Business Days
stipulated in the Directive.
Tailored Maturity Dates:
An agreed date between the Issuer and borrower on which a loan or bond
or debenture becomes due and is to be paid off.
Tap Method:
The Issuing of Securities in a controlled manner, at pre-determined rate and
over a specified period of time.
Tender / Issue:
Issuers of Securities invite potential investors to tender for a stated amount
of Securities on offer. These tenders are normally submitted on a yield
basis and allocated in ascending order of yields bid, until the amount on
offer is exhausted.
Tender Method:
A formal offer to purchase at a stated price, which has been determined by
the purchaser and is bid at the purchaser‘s discretion.
Trade-by-Trade (Gross) Settlement:
The settlement of individual transactions between counter-parties.
Trade Leg:
A trade leg is one half of a buy/sell transaction between two parties.
Trader:
A person / organisation that buys or sells Securities.
Trading:
The act of buying, selling or exchanging things.
Transfer:
The act of transferring can affect the legal rights of the transferor or
transferee, in relation to the Security or funds being transferred.
Unique Client Code:
A code specified and created by the CSD identifying the owner of Money
Market Securities and linking the Money Market Securities Accounts in the
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Securities Ownership Register with the relevant owner thereof.
UTRN:
A unique trade reference number assigned by the ETME to matched
transactions.
Window:
A time period, when a specific process/event or a series of
processes/events is executed. The opening and closing of a window is
triggered by either a specified time or successful completion of the
processes / events and may be of a specified duration.
Yield:
A Security‘s yield to maturity (or redemption) can be defined as the rate that
renders the present value of the cash flow of a Security equal to its market
price.
Yield curve:
The relation between the interest rate (or cost of borrowing) and the time to
maturity of the debt for a given borrower in a give currency.
