STRATE, the South African CSD, says it will soon start work on implementing its plans to streamline the country’s R8,2 – trillion a year bond market.
The plans, published in a document titled “Bonds Blueprint,” follow the merger three years ago of STRATE and UNEXcor, the bond utility. Significant one-off cost savings were achieved as a result of merging the systems of the two organizations, but now the entire bond clearing and settlement system is to be integrated into the STRATE platform.
STRATE says much of the cost savings that result will go straight to market participants, and more will be realized as participants implement the necessary changes themselves.
“We expect the revised processes to yield material improvements in efficiencies,” says Erna Solomon, STRATE’s chief operating officer, writing in the STRATE client newsletter published this week. “The realisation of most future savings is dependent upon market participation and timelines for application integration.”
Solomon emphasizes that the integration follows consultation with market participants and comparison with global best practice. The cost savings will come, says Solomon, from the integration of applications and platforms; exception-based messaging and management; reductions in insurance premiums; automation of manual processes; more straight-through-processing applications; and regulatory integration.
The South African settlement model will be standardized and brought into line with international guidelines, including settlement in central bank money and a full register of beneficial owners, says Solomon. Solomon says the proposed register of owners will improve the quality and reliability of information about shareholders and bondholders, though it is likely to prove controversial with established share registration agencies such as Computershare. “Internationally,” says Solomon, “the trend is towards disclosure with a large focus on prevention of money laundering, anti-terrorism legislation and provision of information to the authorities and issuers. The need for such disclosure has seen CSDs evolving from the sub register concept towards a Share Ownership Register concept.”
However, the idea might not appeal to regulators either. The South African Competition Commission recently blocked STRATE’s bid for a controlling stake in the business of Ultra Registrars (Pty) Ltd. In June last year STRATE announced that it would acquire a 50.4% stake in transfer secretary Ultra Registrars through its wholly owned subsidiary Eyethu Registrars (Pty) Ltd – a transaction that had received the approval of the Financial Services Board but was nevertheless subject to the approval of the Competition Commission. Five months later the Competition Commission declined to approve the Transaction. STRATE and Ultra announced that they would appeal the decision, but have now withdrawn. STRATE CEO Monica Singer says the withdrawal of the appeal follows a request from Ultra Registrar’s board of directors to terminate the agreement for STRATE to acquire a controlling stake in Ultra.
STRATE says market risks will also be reduced through dematerialization and securities lending, as well as higher levels of automation in transaction processing. All immobilised bonds will be converted into dematerialised format prior to the new system being started.STRATE wants banks to apply differential custody fees to encourage the dematerialisation of certificated and immobilized securities.
Solomon predicts the new dematerialised settlement system for bonds, coupled with payment in central bank money, will increase the size as well as the volume of transactions in the South African bond market, and especially in the corporate bond market. “The expansion of the range of bonds instruments for trading is to be encouraged, as South Africa needs to broaden its market reach, particularly in the corporate market,” she writes. “Participants should work together to ensure that the market is both protected and serviced by combining securities systems, standards and approaches while still maintaining a healthy competitive environment.” She emphasises that the closer STRATE gets to international recommendations, the greater the confidence in South Africa’s markets on the part of domestic as well as international investors – which will, in turn, increase trading volumes and liquidity.