In 2016, South African National Treasury introduced an exemption from securities transfer tax ("STT") for listed securities that are transferred outright (as opposed to pledged) as collateral, provided that such transfers adhere to a number of conditions that were outlined in the definition of a "collateral arrangement" in the Securities Transfer Tax Act, 2007. Then, in 2017, the period for which a collateral arrangement was permitted to remain outstanding and exempt from STT was extended from 12 months to 24 months.

Now that the initial flurry of excitement has died down and the various industries have had time to try to structure collateral arrangements into their derivative, securities lending and other structured deals, a few uncertainties have come to light.

Sub-paragraph (a) of the definition states, in relevant part, that a collateral arrangement is one in which "a person (hereafter the transferor) transfers a listed share ... to another person (hereafter the transferee) for the purposes of providing security in respect of an amount owed by the transferor to the transferee."

Firstly, the definition seems to set up a narrow bilateral relationship for purposes of the collateral transfers – the transferor must be the owing party and the transferee must be the owed party. An arrangement in which an affiliate of the owing party posts collateral on the owing party's behalf might be excluded from the exemption. In the securities lending space, a model similar to the European agency programmes, in which the owing party posts collateral into a pool maintained by the agent, might also be excluded.

Secondly, there is debate about the meaning and restrictiveness of the phrase "in respect of an amount owed". The Shorter English Oxford Dictionary defines "owe" as "be required to pay or repay (money, or in kind)". In the context of option transactions, for example, it is not clear whether a delivery or a payment that may (or may not) be payable by either party on expiration constitutes an amount owed. Where parties conclude an interest rate swap (and, as will soon be the case, the OTC derivative provider is required to collect initial margin), it is not clear whether the possibility of a potential payment due from the provider's client will constitute an amount owed.

Sub-paragraph (b) states that the arrangement cannot, inter alia, be "for the purposes of keeping any position open for more than 24 months". The term "position" is not defined, and as such it is not clear whether it refers to the secured debt or to the finance meaning of "position" as a long or short market commitment in respect of a security.

Sub-paragraph (c) states, in relevant part, that the transferee must "contractually agree in writing to deliver an identical share ... within a period of 24 months from the date of transfer." The term "transfer" is similarly not defined, and there has been debate as to whether the date of transfer refers to the date on which the instruction was entered by the transferor (or T in the Johannesburg Stock Exchange's ("JSE's") settlement cycle), the date on which the securities clear into the transferee's account (or T+3 in the JSE's settlement cycle) or somewhere in between.

Finally, the hanging paragraph at the end of the definition states that it "does not include an arrangement where the transferee has not transferred the identical share... to the transferor within the period." This phrase has raised questions about the consequences of a secured party's assignment of its rights and obligations under a transaction. Connecting this requirement with sub-paragraph (a), there is a risk that if the assignee (rather than the original transferee) returns the identical shares to the transferor, the collateral arrangement definition has been broken.

Nevertheless, the STT exemption for collateral arrangements has been a welcomed by, among others, participants in the securities lending and derivative markets. Hopefully with time market practice and interaction with regulators will clarify the above points.

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