The South African market recently made the big leap from T+5 to T+3. Have you seen the benefits to the market that initially drove the move?
Earl McCausland: Our clients have indicated that this alignment with the core international markets has reduced the settlement exposure and helped to increase operational efficiencies, so the feedback has generally been positive.
Juanita Taylor: South Africa’s financial markets took a major step forward this year to align with global best practice with the successful launch of a shorter three-day equity settlement cycle, known locally as T+3. The idea of a shortened settlement cycle had been contemplated within the local market for many years, and in 2012 the move to T+3 was formally mandated by South Africa’s Financial Services Board (FSB).
In addition to improving the credibility of our local equities market, the shortened settlement cycle also unlocked a number of operational benefits, including harmonisation across international markets—reducing complexities resulting from timing differences between jurisdictions with different settlement cycles.
Capital requirements will fall through a reduction of counterparty settlement risk and more prudent risk management generally. Liquidity will prove, enabling faster reinvestment of assets that are released from the settlement process quicker.
There is also expected to be a reduction in the number of outstanding unsettled trades, which in turn will reduce settlement exposure/credit and systemic risks, while improving operational efficiencies, by causing participants to adapt and modify behaviours.
The transition required significant revisions to many industry members’ core processing systems, with several taking the opportunity to replace old manual processes for automated matching procedures.
The improved market efficiency through straight-through processing was achieved by automating several of the middle- and back-office processes.
South Africa’s transition from T+5 to T+3 over the go-live week went smoothly and the South African market has had zero failed trades to date.
How important was it for the market to secure an exception to the securities transaction tax for equity collateral?
McCausland: Exemption of the securities transaction tax (STT) on equity collateral resulted in opening up the use of non-cash collateral, which has had a positive impact on the liquidity in the market. It also provided a cost-effective alternative to cash collateral, which is expensive to fund. So this was indeed very important for the market to secure this.
Taylor: The STT exemption has allowed the local market to start using outright transfer of equity collateral instead of the cumbersome pledge mechanism. This had allowed the market to clean up the global master securities lending agreement schedule and align it with international best practice. Hopefully this will help the foreign clients to eliminate the cost of raising rand cash and allow them to increase their borrowing from local lenders. The exemption will also allow the market to seriously look at centralised collateral optimisation tools, which rely on the outright transfer of equity collateral.
McCausland: Of course, there is always a time lag between effecting change of this nature and the market adopting the change by amendments to the bilateral agreements, so the impact is currently somewhat muted. Nevertheless, it will filter through.
South Africa’s regulator relies on SASLA to provide securities lending market data. How should this situation be improved upon?
McCausland: To improve the situation, comprehensive participation in the submission of securities lending data is required. Market participants are working to onboard data providers such as DataLend.
Taylor: The broader securities lending industry currently has no requirement to supply data to any of the regulators. The banks are required by the Basel Accord to supply total gross and net exposure reports to the South African Reserve Bank (SARB) on a monthly basis.
The industry is expecting more reporting requirements from the Financial Stability Board and SARB in the near future, especially with recent developments in European financial markets.
The South African market has approached DataLend to help with creating an industry solution for data.
The solution would also include monthly reporting and ad hoc data request from our regulators.
Other African countries are also focusing on their securities lending markets. Should we expect significant growth from these markets?
McCausland: The participation has been in the local in nature but the feedback that we have received indicates that there will be growth in the next 12 months
Taylor: In the current environment is it not expected that high volumes would be traded from a securities lending perspective within the next 12 months, but we do foresee these markets growing significantly over time.
Nigeria has approved securities lending and market making in 2012 and Kenya has recently welcomed comments on the draft Capital Markets (Securities Lending and Borrowing and Short Selling) Regulations 2016.