What Is Next For Africa’s Capital Markets

Infrastructure changes and segregated accounts were among the issues debated at the Nema Africa Conference in London this week.
By Janet Du Chenne(59204)

Remote connections to the local central securities depositories in Africa were one of the many talking points at the Nema Africa conference this week.

Societe Generale Securities Services (SGSS) became one of the first providers to have established a remote link from its branch in Johannesburg to the CSD of Mauritius. The link follows a recent change in Mauritian law, which is expected to spur growth in the country’s capital markets. Institutional investors have found favor with the efficient regime governing Mauritius’ protected cell companies, which allow those investors to tap the African markets via these funds. Through its direct connection with the Mauritian CSD, SGSS can thus service South African domestic and international clients.

In addition to this development, sub-custodians have benefited from the regulation of hedge funds and collective investment schemes in South Africa.

“International investors are examining their relationships with domestic banks across the continent as the volume of business across the continent has increased,” says Duncan Smith of SGSS.

Smith also noted more economic growth in Africa, spurred by the addition of exchanges to the World Federation of Exchanges (WFE), the creation of the Zimbabwean CSD and an increase in the number of initial public offerings across the continent.

The conference also debated the future of omnibus accounts given regulatory initiatives form regulators such as ESMA and Unidroit to minimize the impact of a bank default. A panel on Day 2 revealed that minds were not changed on the preference for segregated accounts in African markets.

Panel moderator Dominic Hobson asked a room full of delegates from different markets across Africa whether their markets would end up having omnibus accounts or segregated accounts. An overwhelming majority of delegates indicated by show of hands that their markets are moving away from omnibus to segregated accounts.

Angela Hardwick, head, product development, RMB Custody and Trustee Services, noted the offenses and penalties that have resulted from a lack of segregation, but added segregation does not offer the protection people think it does. “It’s a question of has the client probed the legislation for the protection they think they are getting. Here they should look at the balance sheet of sub-custodian,” she said.

Dr Maria Vermaas, head of legal, Strate, said segregation is a public matter, not just a financial one. “There is no one size fits all standard. There are recommendations and laws encouraging segregation. There is more than one meaning, however. The talks are currently looking at financial segregation. But it’s a case of how is it done practically, combined with legal concerns. IOSCO may say you have to have rules, and ESMA, Unidroit too may point to segregation but it is putting it all together and seeing whether you have the segregation you need.”

Sharon Hunt, director – EMEA head of network management at Barclays, which covers 80 markets, said the bank adheres largely to the U.K. Financial Conduct Authority’s rules on the safety of client assets and noted discrepancies with other markets: “With the CASS rules we went out to custodians and engaged external legal counsel. On the safekeeping of assets, there was a very diff response in each market. The FCA wants the client’s name and the nominee name. In the U.K., the nominee is just that (no balance sheet requirement). If you look at the sub-custodian in different markets the rules may not meet the FCA standard.”

Moulik Shah, assistant vice president – network management, Capital Group, a California based fund manager said his firm’s preference was for omnibus accounts. “They are more operationally efficient and there is a reduction in custody costs. It also gives us more investment flexibility. For example, if there were a large fund withdrawal and we need to get rid of illiquid asset, we can trade accounts counter claim. In terms of insolvency risk we add it to that local bank, but we need to look at balance sheet of that local bank. Our investors prefer cash omnibus accounts too – they don’t involve a lot of paper work, there is reduction in risk as its easier for us to understand the global custodian’s balance sheet.”

In conclusion, Vermaas said: “We should at least move towards a minimum global standard. It would be good to have segregation but you need some standards otherwise you have segregation with a financial or client specific type of segregation.”