Workgroup Discussions and Agreement on
Barrier 6: Moving shares between registers and Barrier 9: Off-market Transactions
Barrier 6: Moving shares between registers
The high level process flow of movement of shares between registers was tabled and discussed. It was agreed that from a generic perspective the process flow was correct. Due to security reasons if specific details are required, per market, parties could contact the applicable Transfer Secretaries directly for details of same.
There was some discussion on if “Moving shares between registers” is in fact a barrier or just something we have to live with due to the fact that there will always be moving of shares between registers and legislative and regulatory requirements. After some discussions it was agreed that the focus should be on making the process of moving shares between registers more efficient and expedient to reduce settlement risk and reduce costs.
Pre-trade Securities Lending & Borrowing for transactions where shares are being moved between registers
It was also acknowledged that although the JSE’s Rules stipulate that an investor or member may only transact where a satisfactory borrowing arrangement is in place, where the equity securities are not held by a member (in the case of a proprietary or a controlled client) or CSDP (in the case of a non-controlled client) this is not always adhered to. The reasoning for this is:-
- Where members and/or investors buy on an overseas market (where the settlement cycle is T+3) and sell in South Africa the different settlement cycles work in their favour because if you have a semi-efficient mechanism to move the shares between the registers the shares could be moved from overseas register in time for the South African CSDP to commit to the sale and for settlement to occur on T+5;
- In the case of non-controlled clients it is extremely difficult for the member to establish if a non-controlled client holds sufficient securities with their CSDP; and
- Direct Market Access (DMA), where investors can transact directly on the trading system without the intervention of a securities trader, is growing with international investors.
It was agreed that the only way to facilitate settlement of sales between the markets, especially with moving to T+3, is to ensure that the South African market has an extremely efficient securities lending and borrowing market and securities are available for securities lending and borrowing. Although this adds costs to the transaction this effectively “oils” the settlement of the sale until the purchase has settled, the shares have been moved between registers and the shares returned to the lender.
Pre-trade Securities Lending & Borrowing
Issue / Actions6.1 Efficient and effective Securities Lending & Borrowing market / 6.1.1Ensure that there is an efficient and effective Securities Lending & Borrowing market. Refer Securities Lending & Borrowing Barrier and Activities (B&A_Dematerialization&SLB)for details
6.2 Enforce JSE Rules / 6.2.2 Enforce the JSE Rules regarding a satisfactory borrowing arrangement. Possibly look at adding a further Rule which specifically refers to moving shares between registers, i.e. arbitrage transactions
Education
A lot of the delays with moving shares between registers are due to the fact that a lot of parties, local and overseas, do not understand the processes in South Africa and the current T+5 Rolling Contractual Settlement cycle which will be compounded with moving to T+3. It is important that parties are educated in this regard as well as it is important for the applicable South African to understand the overseas processes. It is vital that all parties, local and overseas, work together towards a common goal of moving shares between registers in an efficient manner and removing inefficient processes.
Education
Issue / Actions6.3 Removal processes / 6.3.1 Global market education on the process of removals and impact on settlement if removals are not done timeously. This includes foreign Transfer Secretaries, foreign brokers, foreign clients as well as local stakeholders.
6.2 JSE Rules / 6.2.1 Market education on JSE Rules specifically the requirement of a satisfactory borrowing arrangement pre-trade
The above may take the form of road show or one-on-one meetings with stakeholders.
Automation
There are a lot of manual, labor intensive processes in place which involves telephone calls and faxes being based between local participants. With the reduction of the settlement cycle these manual process have to be investigated and automated where possible.
Automation
Issue / Actions6.4 Manual processes / 6.4.1 Manual processes must be investigated and where possible
automated. This includes (but is not limited to):-
6.4.1.1Front end into SAFIRES by Transfer Secretaries for removals (similar to the front end that Computershare has with CREST)
6.4.1.2New transaction code for equity securities being moved in and out of SAFIRES
Rolling of Settlement for on-markets
Where equity securities are not moved between registers timeously for an on-market settlement, settlement should be rolled until the shares have been moved.
It was agreed that this will be picked up with the discussions on the Settlement Assurance barriers workshop.
Review Process for SARB Exchange Control Approvals
Numerous delays are experienced for moving shares between registers due to the process of SARB Exchange Control Approvals.
Process for SARB Exchange Control Approvals
Issue / ActionsReview process /
- The process must be reviewed with a view to reduce the process or automate where possible
Barrier 9: Off-market Transactions
A presentation was done for which the following details were highlighted:-
Strate’s Directive SCV “Best Practice for Off-Market Trades” allows for the following Off-Markets:
- Off-Markets;
- Account Transfers;
- Portfolio Moves;
- Securities Lending & Borrowing;
- Corporate Action Trades; and
- Depository Receipts
Strate’s Directive SCV has the following definitions and settlement cycles:
Off-Markets Orders
An ‘off-market’ order is a trade in uncertificated securities which is not concluded through the JSE SETS Trading System and which is reported by the seller and purchaser of the uncertificated securities to the relevant CSD participant for settlement through the CSD.
Off-Market trades will conform to a T+5 settlement cycle but may be booked until 12h00 on T+3 of the T+5 settlement cycle.
May be rolled for 10 business days after trade date i.e. T+10
Account Transfers
An ‘account transfer’ refers to instances where there is no change in beneficial ownership. The underlying client chooses to transfer securities between their own safe-keeping accounts, either at a single CSD participant or between CSD participants.
A minimum T+1 settlement cycle is required for account transfers between CSD participants. Internal account transfers involving only a single CSD participant may be done on a T+0 cycle.
Not permitted between LDT+1 and RD where there is a Corporate Action (unless it involves only a single CSD participant).
Portfolio Movements
A ‘portfolio movement’ refers to instances where there is no change in beneficial ownership and includes all Strate approved uncertificated securities in the client's portfolio. When the underlying client chooses to change service providers the portfolio movements may take place between:
A minimum T+1 settlement cycle is required for portfolio movements between CSD participants. Internal portfolio movements involving only a single CSD participant may be done on a T+0 cycle.
Not permitted between LDT+1 and RD where there is a Corporate Action (unless it involves only a single CSD participant).
Securities Lending & Borrowing
No definition in Directive SCV
SLB: A minimum T+1 settlement cycle is required.
SLB returns: A Securities Lending Business Partner can initiate a same day return whereas for a non-Business Partner a minimum T+1 settlement cycle is required.
Permitted between LDT+1 and RD.
Depository Receipts
No definition in Directive SCV
A minimum T+1 settlement cycle is required.
May be rolled for 10 business days after trade date i.e. T+10
Permitted between LDT+1 and RD.
Securities Services Act (SSA)
In terms of the Securities Services Act, Off-Market transactions in listed securities are permitted in the following areas:
- Overseas professionals are permitted to transact and report off-market transactions without transacting through an exchange;
- Financial institutions transacting as principal with other financial institutions also transacting as principal subject to the applicable reporting to the Financial Services Board (FSB); and
- Clients transacting between themselves, where there is no intermediary such as a JSE equities member, and report off-market transactions to their respective CSDPs without transacting through an exchange
There was some discussion on ‘client’ as ‘client’ is defined as following in the SSA:-
Quote
“client” means any person who uses the services of an authorised user or a participant, as the case may be
Unquote
Therefore in terms of the above definition all parties who use the services of a CSD Participant are clients. However, it was agreed that the SSA must be read holistically and not just from the view of a CSD Participant.
It was also raised that an Investment Manager/ Fund Manager does not fit into the definition of Financial Institutions and the term is also not defined in the SSA.
This was queried with the Financial Services Board (FSB) for which the following e-mail correspondence was received:-
Quote
The principle is that if it is a person’s business to buy and sell listed securities, you must be an authorised user or effect such business through an authorised user. Only financial institutions trading as principals as defined in the Securities Services Act (“SSA”) may trade off-market with each other, but subject to reporting to the Registrar in terms of section 21 of the SSA. If it is not your business to buy and sell listed securities (which would be difficult to envisage in the case of an investment manager), you may transact off-market, but if you are a defined financial institution, you still need to report such transactions to the Registrar.
Investment managers do not fall within the definition of a financial institution, and are therefore not allowed to transact with each other in a principal capacity off-market if it is their business to buy and sell listed securities, but may transact with each other off-market if the buying and selling of listed securities is not their business. However, as mentioned above, this scenario is most unlikely.
I think we are confusing the issue by referring to “clients” instead of “a person”. The above principle is applicable to any person and not only to clients as defined in the SSA.
Unquote
The SSA, Chapter 3 (Exchanges), Section 19 (Buying and selling listed securities) states the following:-
19.Buying and selling listed securities
A person may carry on the business of buying or selling listed securities if that person –
(a)is an authorised user;
(b)effects such buying or selling through an authorised user;
(c)is a financial institution transacting as principal with another financial institution also transacting as principal; or
(d)is a person who, subject to any condition that the registrar may prescribe, buys or sells listed securities in order to –
(i)give effect to a reconstruction of a company or group of companies by the issue or reallocation of shares, or a take-over by one company of another or an amalgamation of two or more companies; or
(ii)effect a change in the control over management or the business of a company.
Off-markets reported through the Clearing House
Currently off-markets, which includes all off-markets as per Strate’s Directive SCV, are booked directly into SAFIRES and the Clearing House (JSE) is unable to view the off-markets nor see where there are links to on-markets. It is believed that being able to view the off-markets and the links will allow for better risk management of the on-markets (visible risk is manageable risk). At a future date it may also be decided to risk manage certain off-markets to settlement as well and the reporting or more importantly the viewing of the off-markets in the Clearing House will facilitate this move.
It was discussed that it may be easier if the transactions are only reported to the Clearing House by Strate once they have been matched and a back-to-back link created where applicable, as there is a lot of administration and manual involvement until this takes place, i.e. a bottom up approach opposed to a top down approach.
This will be discussed in more detail under the Settlement Assurance barrier and is subject to change pursuant to these discussions.
Off-markets reported through the Clearing House
Issue / Actions9.1 Clearing House unable to view off-markets and links to on-markets / 9.1.1Off-markets to be reported to the Clearing House by Strate once they have been matched and back-to-back links created where applicable
Charges for On-market vs. Off-markets transactions
Currently off-markets are charged differently to on-markets by Strate. It is believed that these should be aligned in future.
It was agreed by the workshop committee that although the charges should be aligned in future this is not an activity that has to take place to enable the market to move to a T+3 settlement cycle.
Charges for On-market vs. Off-market transactions
Issue / Actions9.2 On-market vs. Off-market transactions are charged differently by Strate / 9.2.1On-market and Off-market charges to be aligned.
Straight-Through Processing - Automation
Currently there is a high level of errors which requires manual intervention by participants due to the clients’ instructions not going to a sufficient level of detail for clients’ information which prevents the instructions from matching correctly.
SAFIRES functionality does not cater for back-to-back links for all off-market transactions.
Also, due to lack of automation certain Corporate Action entitlements have to be updated to the CSDPs via off-markets. These include (but not limited to):-
- Excessive Rights offers;
- Pro-rata offers;
- Off-lot offers;
- Mix and match offers; and
- Divide Re-Investments Plans (DRIPs)
There is a requirement for these to be automated to stop manual processing where applicable.
Straight Through Processing – Automation
Issue / Actions9.3 Standards to be agreed to / 9.3.1Where current ISO15022 message standards do not adhere to global standards, the applicable messages have to be reviewed and moved to global standards;
9.3.2This includes going into lower account details for non-resident off-markets for matching purposes. ISO15022 to go through the NMPG structure for approval;
9.3.3Once ISO15022 standards have been agreed to and implemented these must be sent to SMPG who will make this available on their website.
9.4 Enhance SAFIRES functionality / 9.4.1Create further back-to-back functionality for all off-market transactions.
9.5 Off-markets done forcertain Corporate Action entitlements / 9.5.1Automate the processing of all Corporate Action entitlements.
Rolling of Off-market settlement
Currently, investors are able to roll their off-market transactions (off-markets and Depository Receipts per Strate’s Directive SCV) up to T+10 whereas on-markets cannot be rolled on the current T+5 settlement cycle. This not only adds complications where there are links between off-markets and on-markets but confusion on the fail trades statistic’s in South Africa as only on-market statistic’s are reported on.
It was acknowledged that on-markets may be allowed to be rolled in future, on the current T+5 settlement cycle as well as the future T+3 settlement cycle, subject to certain criteria and applicable penalties. However, the settlement cycle of off-markets should be aligned to whatever the settlement cycle is for on-markets including any further rolling of settlement of on-markets.
The rolling of on-markets will be discussed further at the Settlement Assurance barrier workshop.
Rolling of Off-market settlement
Issue / Actions9.6 Off-market transactions can be rolled to T+10 whereas on-markets cannot / 9.6.1Align the settlement cycles of off-markets with that of on-markets.
Off-markets between LDT+1 and Record Date (RD) of a Corporate Action
When the South African market went live with electronic Corporate Actions through Strate it was agreed to stop certain off-markets from taking place between LDT+1 and Record Date (RD) (unless the transactions involves only a single CSD participant). The reasoning for this at the time was to stop the record date holdings from moving which caused complications with Corporate Action events and thereby prevent previous owner claims. These off-markets include:-
- Account Transfers; and
- Portfolio Moves
Note:- Strate’s Directive SCV does not detail any limitations with regard to off-markets or Depository Receipts (DRs).
It is believed that the market should be allowed to book the above noted off-markets between LDT+1 and Record Date where the Corporate Action event is a non-elective event. The reason for this is that elections for elective events are required by Strate by RD-2. Therefore if there are any movements after RD-2 amended instructions have to be sent to Strate to amend the elections. This causes administrative problems and may lead to losses should the election not be amended and the default applied. The same thing does not apply to non-elective events as elections do not have to be sent to Strate and CSDPs are paid on their holdings as per RD.
There was some discussion if this should not be allowed for all Corporate Actions events (elective and non-elective events). However, it was agreed that this is not just a matter where previous owner claims may be introduced but an administration nightmare having to amend elections on RD-1 and RD.
It was noted that the rolling of settlement for on-markets, to be discussed under the Settlement Assurance barrier workshop, may introduce previous owner claims. However, in these circumstances the Settlement Authority will manage the rolling of settlement for on-markets and the previous owners claims thereof. JSE will also introduce Rules and Directives to cover this.
Off-markets between LDT+1 and Record Date (RD) of a Corporate Action
Issue / Actions9.7 Account transfers and portfolio moves cannot be done between LDT+1 and RD / 9.7.1Allow Account Transfers and Portfolio Moves to be done between LDT+1 and RD for non-elective events
Same day settlement for certain Off-markets