FINANCIAL ASSET SERVICES COMMENTS AS AT THE 31 OF SEPTEMBER 2004 ON THE SECURITIES SERVICES BILL. AS PUBLISHED IN THE GOVERNMENT GAZETTE. NO 26684 DATED 18 AUGUST 2004

Abbreviations used

CSD - Central Securities Depository

CSDP - Central Securities Depository Participant

SSB - Securities Services Bill

CBO - Change of Beneficial Ownership

SRO - Self-Regulatory Organisation

JSE - JSE Securities Exchange

EXCON - Exchange Control as per the SARB regulations

SARB - The SA Reserve Bank

Chapter I - Preliminary Provisions

No comments

Chapter II - Regulation and Supervision of Securities Services

Section 5. (3) (b) (v)

"the principle that competition between regulated persons should not be impeded or distorted" is agreed by Standard Bank and justifies Standard Bank's opposition to STRATE Limited establishing a central securities register in circumstances where STRATE is the Regulator, STRATE is a monopoly with no alternative supplier. Yet STRATE proposes to provide services directly to Standard Bank's clients and thereby disintermediate it from such clients.

Section 6

Standard Bank would like representation on the Financial Markets Advisory Board

Chapter III Exchanges

Clause 21

The SSB proposes that a financial institution, whether it carries on the business of buying or selling listed securities or not, must report to the registrar any transaction in listed securities resulting in a change in beneficial ownership of those securities and concluded by it outside of an exchange. This could be interpreted to mean that CSDP's will have to report all CBO off-market trades to the registrar. In what format is it required? Is it sufficient that off-market trades are reported to the CSD, which in turn is appointed by the registrar as a self-regulatory organization? If that is not what is intended, whatever the format the reporting to the registrar (not CSD) takes, if CSDP's have to do separate off- market reporting to the registrar, it could have a huge impact on their daily operations.

Chapter IV - Custody and Administration of Securities

Clause 32(3)

Will the proposed amendments of the terms of license for the CSD follow the procedure as set out clause 30(3) so that the interested parties may be made aware of these proposed amendments?

Clause 33(h).

The bill makes provision for a central securities depository to balance & reconcile its records with the records of the relevant issuer every six months (certificated securities), monthly where aggregate not changed (uncertificated securities) & on the business day after, where the aggregate has changed (uncertificated securities). From a CSDP perspective we are not impacted. However, this currently is the duty of the transfer secretary. Does this mean that the CSD takes over some of the roles/responsibilities from a transfer secretary?

Clause 33(j)

The CSD may have access to records of Uncertificated securities administered and maintained by the CSDP. This seems to infer on-site visits and that CSDP's have to comply with this inspection from the CSD.

33 (j) MAY have access to the records of uncertificated securities administered and maintained by its participants.

Does this mean that CSDP's are entitled to NOT supply the information (e.g. ad-hoc BND and monthly downloads) to the CSD and can instead supply it directly to the transfer secretaries or to the underlying companies?

This is an important question, since CSDP's could in theory use it as leverage against STRATE in the ongoing CSR debate (see also the comments under 33 (m) below)

33 (m) This supports the question on 33 (j) above, since the rule says that the depository "must ON REQUEST disclose to -

(ii) an issuer information about the securities issued by that issuer and held by participants in central securities accounts " (this does therefore not apply to the monthly download but rather to the ad-hoc requests).

This does also not contradict 33 (h) which only imposes on the depository the requirement to balance to the records of the participants monthly.

Clause 34

This implies that any person who complies with the entry criteria that is set out in the CSD rules can then be a participant. This opens the door in the future for a central share registry and possible competition within the market as to services rendered. Standard Bank requires that the entry criteria as stipulated in the CSD rules are properly defined.

35 (a) This implies that CSDP's do not have to deposit all shares in STRATE electronically

Clause 35 (f)

The section refers to the functions of a participant (CSDP) - in specific where the participant must disclose to clients and issuers the fees and charges required by it for its services. Does this refer to the fees CSDP's charge for their services or the depository fees they pass on to clients? In addition, does this only refer to every client that CSDP's transact with? Standard Bank does not want this to be interpreted that as a CSDP it has to disclose (publish?) its fees and charges to the general public. Each client, upon becoming a CSDO client, is made aware of the fees being charged (whether depository charges passed on to the client or own transaction fees). However, each client may have different fees, depending on various factors and it is not the same across the client database. The few times that Standard Bank does provide a service to the issuer is in ad hoc downloads where it charges according to the current prescribed fees in the Companies Act as prescribed by the Minister.

Clause 35(h)

The concern is that the word "information" is rather broad. What is implied by "information" this should be more specific. Standard Bank needs to ascertain the type of information, what is feasible and what system changes are required in order to comply with the legislation.

Clause 35(i)

Does this still mean that all the pledge details must be held at the CSDP level. There are practical problems with this. Example being broker accounts. At a CSDP level, all the brokers have one omnibus account, which represents the total of their underlying (controlled) client holdings. As a CSDP Standard Bank has no access to information as to who the actual pledger is. Currently the legislation and the CSD Rules put the onus on the CSDP to maintain the pledge information. Standard Bank would like the SSB amended in order to reflect that it can be maintained at broker nominee level as well and not only CSDP level.

35 (i) MAY deposit securities in the depository - once again suggest there to be no obligation to deposit all securities in the depository.

Clause 36

It seems as if a CSDP nominee company will be approved by the CSD and not the FSB anymore. What is the reason for this? Currently the FSB approves all nominee companies in the STRATE environment.

Clause 38 (e)

If applicable the issuer must comply with section 91A of the Companies Act. What does this mean?

Clause 39(k)

Does this imply that CSDP'S need only report beneficial interest at their SCA level (as per current clause 140A of Companies Act) as they currently do for the BND download or does it imply that CSDP'S can be forced to disclose information (beneficial or otherwise) pertaining to foreign clients' underlying clients (Standard Bank does not have this kind of level of information for foreign clients underlying clients). In most instances, the foreign clients are prohibited by their country laws to disclose their underlying clients details. Many foreign clients have stated that if that is the case, they will withdraw from the South African market.

39 (k) This provides for the Depository to make rules for the participant's duty to disclose to the CSD information about beneficial ownership. This seems to conflict with the questions on 33 (j), 33 (m) and 35 (h)

39 (o) The depository rules must provide for the purposes for which a CSD may issue directives a question here, do the directives issued therefore not have to be in the general interests of the investor/market? If a directive is issued that Standard Bank believes does not meet these criteria then can it be challenged on these grounds?

Clause 43

Please see comments under clause 35(j)

Section 43 - Pledge, or cession of securities to secure debt

We would like this section to be amplified to clarify that:

Under Chapter IV in general

There should be mention as to how transfer secretaries are to be regulated. Who would their regulator be, what rules they have to adhere to etc.etc. They should be regulated in the same vein as the CSDPs.

Chapter V - General Provisions applicable to self-regulatory organizations In general

Where a license for a SRO is refused, cancelled, suspended or where SROs amalgamate or transfer to other SROs, there will be operational impacts on all CSDPs. Transition periods must be taken into account as this may include systems changes to the CSDPs systems.

Clause 50

The bill proposes that the registrar may refuse to renew a self-regulatory organization's license (in this instance STRATE) where it has failed to comply either with the Act or its own rules. It furthers states that the registrar could then either transfer the business to another similar self-regulatory organization (JSE or BESA?) or wind-up the self-regulatory organization. This could potentially impact Standard Bank as a CSDP. The SSB must state that procedures will be put into place to manage such a situation. This will not happen overnight, but provision has to be done for the transition phase. In addition, this transition may result in various system changes that the CSDPs will have to make in order to communicate, process transactions with the similar SRO.

54 A general question here about the conversion of a SRO to another form (the demutualization) this could apply equally to STRATE or the JSE.

The general question is: surely there should be a clause that states that the SRO may change its juristic form (i.e. convert to a company) only if it does not fundamentally increase the risk within the entity?

Chapter VI- Clearing House

No comments

Chapter VI- code of Conduct

No comments

Clause 75

The section covers the buying and selling of listed securities, where these trades are either conclude at an artificial market price or where trading is used to manipulate/influence the market activity and subsequent closing price of such security. It talks specifically about "approving or entering an order buy/sell..." which could mean that this relates to brokers specifically. However, can Standard Bank a CSDP be held liable for acting on behalf of a client which might be found guilty of above, where Standard Bank has acted in good faith, or is Standard Bank expected to check the price of all trades executed prior to committing them for settlement? There is an EXCON implication that happens applies to Standard Bank as a CSDP and an authorised dealer/bank. It would have to review fair market value of all trades as they pertain to South African assets (shares). However, in its meeting with the SARB on ] September 2004, SARB stated that Standard Bank can rely on the JSE surveillance doing the EXCON review of on-market trades for fair market value and thus Standard Bank does not have to scrutinize trades done through the JSE. Standard Bank's concern would be off-market trades. This should maybe be made clear that the JSE is responsible for surveillance of the market price for all trades executed on the JSE.

Comments:

  1. In order to make the Bill user friendly and clear on issues relating to the management of securities we would like the Bill to set out, in a separate section, high level provisions relating to the management of securities e.g. provisions relating to any restrictions on the management of unlisted securities: exclusions, if any, on the definition of "management of securities" such as where management of securities is not a regular feature of a persons business; and regarding any conditions the Registrar may prescribe in respect of the management of securities. This will make it easier to identify the essential provisions relating to the management of securities instead of having to look within definitions and other sections for these provisions.