Most Read Contributor in South Africa, September 2016
The securities lending industry is crucial for maintaining
liquidity in South African financial markets. For the last few
years the securities lending industry has grappled with
difficulties surrounding the provision of bonds and equity
securities as collateral for securities loans.
Traditional South African pledges have proven to be impractical
due to, amongst other things, intraday changes in exposure and the
inability of a secured party to take possession of the securities
that are pledged.
Outright transfers of collateral securities, on the other hand,
would provide the securities lending industry with a practically
workable way to ensure that parties are secured and are able to act
quickly in the event of a default. Arrangements similar to a South
African outright transfer are standard in other jurisdictions.
The introduction of the Financial Markets Act (in particular
section 39(2)) was an important legal step in clarifying the
validity of outright transfers of collateral securities. Market
participants have, however, been unable to avail themselves of any
benefit of this change due to the adverse tax consequences –
including in respect of securities transfer tax and capital gains
tax – that currently may arise on an outright transfer of
Although no specific proposal was made, in the recent South
African Budget Speech, the Minister of Finance mentioned that the
government will look at ways to alleviate these adverse tax
consequences while ensuring that any tax relief on collateral does
not give rise to tax avoidance. The right amendments to the tax
legislation could greatly simplify how the securities lending
industry secures loan exposures, making this vital activity less
risky for everyone involved. Stay tuned!
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In the milieu of global financial markets, securities of various types are often classified as either ‘listed’, ‘unlisted’ or ‘quoted’.
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