Following the successful migration of all JSE listed counters to STRATE and the concurrent changes to market practices, the electronic settlement system has found it necessary to review the underlying assumptions on which its charges were originally determined.
Monica Singer, CEO of STRATE Ltd, said that the company had experienced a steep learning curve on its three-and-a-half year voyage through uncharted waters.
“We are now sufficiently familiar with this highly dynamic environment to levy appropriate fees that are equitable to all market participants for the services that they receive.”
Changes to previous assumptions for determining STRATE charges include:
JSE trading volumes have not lived up to expectations. “We expected to settle 19 000 trades a day versus the current 15 000.”
STRATE’s netting model achieved efficiency levels considerably higher than anticipated. “Owing to the efficiency of our netting model, only 40% of trades result in settlement, a far cry from the 67% that we had projected,” Singer explained. “And since our current fee structure is based on settlement volumes, revenues have fallen short of projections while costs have remained constant.”
The fee structure needed to be adjusted to achieve the following objectives:
Ensuring that STRATE recovers all accumulated deficits by 2009.
Implementing a user-pay principle.
Reducing the disparity between charges levied on Controlled Client and Non-controlled Client settlements but at the same time looking after the small investor.
Therefore, from June 1 2002, revised charges will be implemented to include an ad valorem levy.
STRATE’s new fee structure will be as follows:
Current Fee New Fee
On market settlements(Rands per DvP/RvP*) R8-00 R12-00
Off market settlements(Rands per DvP/RvP*)
R20-00 R50-00
PMO/RMO** R8-00 R6-00Reports and queries R8-00 R9-00
Charge on contract notes:
Ad valorem % – on market settlements 0,005%
(All trades of less than R200 000 will attract a charge of R10. Trades ofmore than R1 million will attract a maximum charge of R50)
* Deliver-versus-Payment / Receive-versus-Payment** Pay money only/Receive money only
“We have introduced an ad valorem charge on contract notes of 0,005%, together with a “floor” of R10 for deals worth less than R200 000 and a “ceiling” of R50 for anything above R1m. We believe that this charge is insignificant in relation to the risks which have been reduced or eliminated.”
She drew attention to recent settlement fee increases in London and Singapore. “Even in those markets, where electronic settlement has long been in operation, unpredictable background factors have necessitated fee adjustments.”
She stressed that:
The fees levied by STRATE would inevitably decline over time, since the introduction of electronic settlement had boosted trading volumes in all bourses around the world owing to the resultant elimination of settlement risk. However, this was dependent on many other market factors.
The new fee structure was in line with those applied by CSDs elsewhere in the world. “This is a remarkable achievement, given that STRATE is still in an embryonic stage of development and is still having to absorb high start-up costs.”
Singer maintained that the marginal increase in costs to the market arising from the new fee structure was being more than offset by the huge savings achieved through electronic settlement.
“Back office overheads are in the process of being substantially reduced. Brokers and custodial operators have already managed to cut back or eliminate many of their operating expenses. Delivery, telephone and postage costs have dropped dramatically, along with the interest burden formerly required to bridge delayed settlements.
“Further, there is the unquantifiable benefit of settlement certainty under STRATE, a benefit that accrues to every market participant, not least the investor. Not a single on-market trade has failed under STRATE and all claims on corporate actions have been eliminated.”
Above all, STRATE has brought a major dimension of risk mitigation to the market, especially in the spheres of:
Secure and reliable electronic ownership records, which records were reconciled with STRATE on a daily basis;
Settlement certainty, with all on market trades settling five days after the trade had been effected; and
Simultaneous delivery-versus-payment, whereby the delivery and the payment of the transaction took place simultaneously in central bank funds.
Russell Loubser, CEO of the JSE Securities Exchange, said that the JSE fully appreciated the unforeseen circumstances that STRATE had encountered in recovering its costs.
“The new fee structure is essential to ensure STRATE’s viability. I am confident that the market will understand the huge importance of STRATE being placed in a position to continue providing assurance of settlement and regulatory functions. The old settlement system had unacceptable risks and inefficiencies inherent to it.
“Consequently South Africa was for years rated either last or second last in Emerging Markets when it came to settlement risk. The new system changes all that forever, but this comes at a cost. This is a cost that South Africa must bear if it is at all serious about retaining and developing its financial markets.”
Singer said that thanks to STRATE, South Africa’s settlement efficiency benchmark, as calculated by internationally respected GSCS Benchmarks, had improved by 40,51% in the fourth quarter of 2001. “I have no doubt that the rating will again reflect a dramatic improvement when the statistics for the first quarter of 2002 are published.”
She emphasised that STRATE had taken settlement into the 21st century, in the process creating certainty of settlement, vastly reducing risk and elevating the status of the JSE Securities Exchange to a level that no longer discouraged foreign investors.