The Financial Markets Bill, which was tabled by the National Treasury to Parliament on 4 April 2012, will have significant effects South Africa's financial markets.

This is according to Kelle Gagné (pictured), Executive at ENS (Edward Nathan Sonnenbergs) – Africa's largest Law firm – who says among the Bill's purposes are to conform the legislation to the Companies Act, 2008; lay the groundwork for over the counter (OTC) derivative regulation as contemplated by the G20 countries' recommendations; and align South Africa's financial markets regulation with international norms.

"These international norms include the International Organisation of Securities Commissions' (IOSCO) policies and the International Institute for the Unification of Private Law (UNIDROIT) Convention on Substantive Rules for Intermediated Securities," she says. Gagné explains that the bill, which was developed by the National Treasury and the Financial Services Board in consultation with the JSE Limited and Strate Limited, will replace the existing Securities Services Act, 2004.

According to Gagné one of the major effects of the bill is that, in accordance with the recommendations agreed among the G20 leaders and their Financial Stability Board, trade repositories have been established in a number of overseas jurisdictions.

"This is in an effort to provide greater transparency in respect of prices, information and other elements of the OTC derivatives markets. As a member of the G20, South Africa is also committed to the recommendations," she says.

Gagné explains further that the Financial Markets Bill provides for the establishment and licensing of trade repositories in South Africa. "This is likely to have the result that many of South Africa's OTC derivatives market participants will be required to report their trades to a trade repository," she says.

Similarly related to complying with South Africa's G20 and IOSCO commitments, Gagné says the bill provides, for the first time in South Africa, for the establishment of "independent clearing houses" that are not directly appointed by an exchange.

"The purpose of independent clearing houses will be to eventually facilitate central clearing of OTC derivatives," she says.

According to Gagne, the bill in its current form does not regulate the OTC derivatives market by, for example, setting out which types of OTC derivatives must be reported to a trade repository or stipulating which market participants are obliged to report OTC derivatives.

"Rather, the bill expands the definition of "securities services" to extend regulation to OTC derivatives so as to enable the Registrar of Securities Services to set standards and conditions for the OTC derivatives market in accordance with the regulations to be promulgated by the Minister of Finance," she says.

Meanwhile, in terms of foreign direct investment, Gagné says the bill provides definitions for external authorised users, external central securities depositories, external clearing houses, external clearing members, external exchanges and external participants.

"These foreign entities' ability to participate in South African financial markets will be phased in subject to regulation prescribed by the Minister in terms of section 5(6) of the bill and to the discretion of the Registrar to determine requirements for the various categories' participation in South African financial markets," she says.

Gagné advises that the bill provides for a number of other technical changes, described below:

  • Currently, central securities depositories (CSDs) are only able to hold central securities accounts for central securities depository participants (Participants). The bill would allow other entities, such as external CSDs, to open central securities accounts with CSDs.
  • CSDs will be obliged to assist the Registrar with enforcing the provisions of the bill should it be enacted.
  • New issues of listed securities may only be made in dematerialised form, in line with South Africa's policy of moving towards full dematerialisation for listed securities.
  • The bill amends the definition of "securities" to clarify that the legislation will apply to both unlisted and listed securities, as required by the G20 and IOSCO recommendations.
  • Nominees who open accounts with authorised users of exchanges and nominees who open accounts with Participants will be subject to the approval of the Registrar.
  • To give effect to UNIDROIT, the bill makes certain changes to the ways in which securities are transferred, given as security and/or attached.
    • Transfers of securities will only be able to be effected by CSDs and Participants.
    • Under the current Securities Services Act, 2004, security cessions (pledges) are governed by section 43, which provides for certain notations to be made in the relevant securities accounts (at central securities depository or central securities depository participant levels). The Bill amends the definition of "securities account", with the intended effect of providing for such notations to be made at the level at which the securities are held.
    • Attachment of securities will similarly take place at the level at which the securities are held, against the securities of the relevant affected person. ·
  • The bill tightens the insider trading provisions, including by limiting the currently available defences, narrowing the definition of published information to require wider dissemination prior to legal dealing by insiders and extending the liability of persons trading on behalf of others.

According to Gagné, the Financial Services Board has indicated that it would like to see the bill take effect by the end of the year.

Originally published in Money-Marketing

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.