for their investors in terms of the Companies Act, 2008 and the Financial Markets Act (FMA), 2012.

Transcription

1 Annual Integrated Report For the year ended 31 December 2016

2 As a South African Central Securities Depository (CSD), Strate is licensed to be an independent provider of post-trade products and services for the financial markets. Strate is internationally recognised as a Financial Market Infrastructure (FMI) that is trusted to use its state-of-the-art technology, international expertise and sound risk management practices to support and promote the safety and efficiency of the financial markets. Strate provides electronic settlement for securities including equity, bond and money market securities, as well as derivative products (such as warrants, exchange traded funds (ETFs), retail notes and tracker funds) for the South African market. The company has collateral management services and corporate actions product ranges available within its portfolio of value-added services. It further provides services to issuers for their investors in terms of the Companies Act, 2008 and the Financial Markets Act (FMA), The Strate Brand We have repositioned to keep abreast of the changes within the market and enhance service delivery. To reflect this new strategy, we have rebranded. Our new logo represents a brand that is looking towards the future, while not forgetting the company s roots. The Strate blocks and framework icon represents the company structure and process of moving forward building together to create and execute innovative solutions that add value to the financial markets. Always discovering, represents our endeavour to grow in all directions, explore countless possibilities, and immerse ourselves in the ever-changing technological landscape. It has always been my intent to make a difference in South Africa, by providing innovative solutions that truly brings benefits to the players in the financial markets. Strate has always sought technology that can make a difference, which is why the tagline of Always Discovering could not be more fitting. (Monica Singer, CEO) Integrated Report design by Index Innovation

3 Contents 01 About this Report 6 Scope and Boundary 8 Materiality and Approach 8 Forward-looking Statements 8 Approval of the Annual Integrated Report 8 Contact Details 02 Our Company 11 History 16 Key Terminology 17 Operating Environment 20 Organisational Overview 28 Our Operating Structure 29 Revenue streams, how services are charged and costs 03 How we Create Value 31 Positioning 31 Value Proposition to clients 33 Business Model 36 Strategic Focus Areas 44 Risk Management, Ethics and Compliance 49 Stakeholder Relations 51 Labour Practices, Environment and Social Value 04 Leadership Reviews 56 Chairman s Review 59 Chief Executive Officer s Review 05 Performance Highlights 66 Financial Review 68 Revenue 06 Corporate Governance 73 Introduction to Corporate Governance 74 Board and Committees 07 Financial Information 106 Statement of Comprehensive Income 107 Statement of Financial Position 108 Statement of Changes in Equity 109 Statement of Cash Flows 110 Acronyms 113 Corporate Information 69 Expenditure 70 Liquidity and CAPEX 71 Forward Focus 74 Board of Directors 86 Executive Committee 87 Audit, Risk and Compliance Committee Report 92 Regulatory and Supervisory Committee Report 97 Remuneration Committee Report 102 Social and Ethics Committee 103 Participant Failure Committee (Pfc) 104 Urgent Issues Committee

4 Navigation Further information: indicates where further information can be found online. Read more: indicates where additional relevant information can be found within the report. Information: indicates further information on a topic.

5 01 About this Report 6 Scope and Boundary 8 Materiality and Approach 8 Forward-looking Statements 8 Approval of the Annual Integrated Report 8 Contact Details

6 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information We are pleased to present our 2016 Annual Integrated Report (report). We view integrated reporting as a means to communicate with our stakeholders. This report provides an overview of who we are and what we do; and presents insights into our structure, strategy, objectives, performance, governance and future prospects. Scope & Boundary Strate is a South African Central Securities Depository (CSD) and a licensed independent provider of posttrade products and services for the financial markets. We provide electronic settlement of equities and bonds transactions concluded on the JSE Ltd. These settlement services will be extended to other exchanges (ZARX and 4 Africa Exchange (4AX)) when they commence operation in early We also settle transactions in money market securities. We offer an asset servicing product range which augments the services we offer to issuers in terms of the Companies Act, 2008 and the FMA, This Annual Integrated Report is our primary report to stakeholders and covers the period 1 January 2016 to 31 December It has been prepared following the guidance of the International Integrated Reporting Council s (IIRC) Integrated Reporting Framework (<IR> Framework). All significant items are reported on a like-for-like basis and are comparable with the 2015 Annual Integrated Report. The table below provides an overview of the reports and information prepared on an annual basis: Annual Integrated Report Annual Financial Statements (AFS) Regulatory and the Strate Supervisory Report Supplementary reports Contents Overview of Strate s business model, strategy, performance and prospects Annual financial statements for the year ended 31 December 2016 Strate is a selfregulatory organisation (SRO). Broad-Based Black Economic Empowerment (B-BBEE) certification Corporate governance report Report of the Audit, Risk and Compliance Committee Information regarding Strate s regulatory and supervisory functions (via STRATE supervision) Remuneration report King III report Summarised financial information Directors report Independent auditor s report are provided in a separate report. Principles for Financial Market Infrastructures (PFMI) Assessment Report Strate (Pty) Ltd Annual Intergrated Report

7 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Annual Integrated Report Annual Financial Statements (AFS) Regulatory and the Strate Supervisory Report Supplementary reports Governance & frameworks Companies Act of South Africa, 71 of 2008 King Code of Governance Principles for South Africa, 2009 (King III) IIRC s <IR> Framework International Financial Reporting Standards (IFRS) Companies Act King III FMA, Rules and Directives B-BBEE Act B-BBEE Codes of Good Practice (CoGP) Department of trade and industry (dti) King III Committee on Payments and Market Infrastructures International Organisation of Securities Commissions (CPMI-IOSCO) PFMI CPMI-IOSCO Guidance on cyber resilience for financial market infrastructures Assurance Management assurance Governance oversight by our Audit, Risk and Compliance Committee Board approval Internal controls Internal audit Management assurance Governance oversight by our Board, and Audit, Risk and Compliance Committee Management assurance Regulatory and Supervisory Committee B-BBEE is independently verified by Empowerdex External audit opinion KPMG Board approval Available Also Available in hard copy from Strate s offices. Strate (Pty) Ltd Annual Intergrated Report

8 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Materiality & Approach Matters are deemed material to Strate if they ultimately and substantively have an impact on the company s ability to create value over the short, medium or long-term. Material matters for reporting purposes were determined based on: their ability to impact the achievement of strategic objectives; identified key risks; and feedback obtained from key stakeholders. Our strategic focus areas are responsive to these material matters. Please refer to page 36 for more information on our strategic focus areas. Forward-looking Statements This report contains forward-looking statements. These statements are based on forecasts of future results not yet determinable as they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements apply only as of the date on which they are made. Readers should therefore exercise the necessary care and discretion when reading this report. Approval of the Annual Integrated Report The Board of Directors (the Board) and its committees are responsible for overseeing the integrity and completeness of the Annual Integrated Report. The Board has applied its collective mind to the preparation and presentation of the report and has concluded that the completeness of the material matters dealt with and the reliability of data and information presented, were taken into consideration and have been materially presented per the IIRC s <IR> Framework. The Board approved the 2016 Annual Integrated Report on 29 March Contact Details For further information or feedback regarding this report and its contents info@strate.co.za Strate (Pty) Ltd Annual Intergrated Report

9 02 11 Our Company History 16 Key Terminology 17 Operating Environment 20 Organisational Overview 28 Our Operating Structure 29 Revenue streams, how services are charged and costs

10 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Our Mantra Our pioneering spirit and commitment to excellence makes a difference in a world driven by the need for reliable exchange-of-value settlement systems. In that you can trust. Our Strategic Objectives We strive to have an unmatched performance track record through our operational excellence We are always discovering ways to evolve our core services and find innovative solutions We have stakeholders at the heart of everything we do We aim to build a financially sustainable business We focus on developing our staff and communities to have a positive impact on their lives Our Values Strate (Pty) Ltd Annual Intergrated Report

11 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information History Today, we are ranked in the top 10 CSDs globally. Our pioneering and innovative solutions to deliver reliable exchange of value settlement systems are built on a 18-year foundation of trust. We are dedicated to supporting and promoting the safety and efficiency of the financial market so that the market is one of which South Africans can be proud. Before the days of Strate, South Africa was categorised as one of the worst emerging markets in terms of operational and settlement risk. It used paper-based settlement that required manual share certificate amendment; and exchange by hand of share certificates for cheques. This process was fraught with risk of loss, damage or theft, with some transactions remaining unsettled for months. Trading volumes on the stock exchange averaged only trades daily. Today, there are over average daily trades, showing the growth, advances and efficiencies that have been brought to the market resulting from the IT infrastructure and technology used by Strate for electronic settlement. Even though some investors still hold on to their paper share certificates, over 98% of the value in the market has been uncertificated. Below is a high-level timeline of Strate in the making Unexcor shareholders got together to form CD Ltd October 1995 The first fully electronic settlement through Unexcor and CD Ltd took place 1989 The major clearing and bond settlement banks and the SA Reserve Bank created Unexcor to develop an electronic settlement system for the bond market May 1994 Unexcor was appointed as the clearing house for the South African bond market May 1996 An agreement was signed to design and implement a modern electronic clearing and settlement system for equities that would meet G-30 standards Strate (Pty) Ltd Annual Intergrated Report

12 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information February 1997 July 1998 The Companies Act was redrafted and an amendment to the Custody and Administration of Securities Act was effected to enable the dematerialisation of securities November 1998 Strate was established as the Central Securities Depository for uncertificated equities. (It was initially registered as Share TRAnsactions Totally Electronic Limited, but the acronym has since fallen away) September 1999 Strate successfully implements the settlement system - SAFIRES (South African Financial Instruments Real-Time Electronic Settlement system) and its corresponding front end system SAFE (SAFIRES Front-End), an adaptation of the Swiss system 9 November 1999 First electronic settlement: Shareholders of Harmony Gold Mining Company Ltd were the first to dematerialise their securities through Strate. Strate then began the full dematerialisation of other securities on the JSE Ltd October 1996 Monica Singer was appointed the project manager of Strate with the mandate to implement electronic settlement for equities in South Africa. Since the company s implementation, she has been Strate s only CEO May 1998 The agreement to buy the Swiss system to perform clearing, settlement and depository functions to achieve Simultaneous, Final and Irrevocable Delivery versus Payment, was concluded 1998 The South African Reserve Bank granted Strate permission to integrate its settlement processing directly with its own systems 10 September 1999 A shareholders agreement between Strate, the JSE Ltd, Standard Bank, Absa, First National Bank, Nedbank, Mercantile Bank and Citibank was signed dictating the objectives of Strate and the return on investment requirements November 1999 Netting model for settlement was introduced to enhance efficiency and improve liquidity while also improving risk management Minor tweaks made to Strate s Corporate logo 2001 Strate implements the electronic processing of corporate actions in SA, recording any changes in features or activity of listed instruments Strate (Pty) Ltd Annual Intergrated Report

13 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information 2002 The Money Market Forum was established and a blueprint was issued for the dematerialisation of money market securities Strate Charity Shares (SCS), a registered non-profit organisation and charity donation programme, was created to address the long-standing problem of investors holding small amounts of unwanted shares 2003 UNEXCOR merged with Strate to become SA s licenced CSD. Following the merger, Strate settled both uncertificated equities and bonds 2004 To be relevant to the market, Strate changed its corporate identity and launched a new logo February 2005 The Securities Services Act no 36 of 2004 became effective October 2008 Testing of phase 1 of Money Market settlement system was completed. Phase 1 included the settlement of generic Category 1 and 2 money market instruments, which are discounted and fixed coupon instruments with a fixed maturity date March 2010 System enhancements were made and the electronic settlement of new issues money market securities was implemented June 2010 Strate announces it will offer unlisted companies a facility to dematerialise, clear and settle shares in the Strate environment, including the processing of corporate action events May 2008 Strate earns top international risk rating by Thomas Murray. An AA-rating by Thomas Murray has been maintained since then to the date of this publication November 2008 RMB issued the first electronic money market security to Strate via its CSD Participant Strate Charity Shares donates R to key charities, bringing total donations since inception to R1 million April 2010 Strate successfully implements its Corporate Actions Enhancement Project October 2010 The settlement of money market securities reaches R1 trillion 2010 Strate entered into market consultation in 2010 to replace the old UNEXcor technology and move to a SOR and ISO platform for Bonds. The Business Requirements were finalised in November 2011 Strate (Pty) Ltd Annual Intergrated Report

14 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information August 2011 Testing and implementation of phase 2 of Money Market settlement system was completed. Phase 2 included the settlement of generic Category 3 and 4 money market instruments, which are variable coupon rates with a fixed maturity date and variable coupon rates with a floating maturity date respectively June 2013 The Financial Markets Act No 19 of 2012 became operational, replacing the Securities Services Act No 36 of 2004 October 2013 Strate refines its logo 2011 Strate introduces Segregated Depository Accounts in South Africa to provide a safe-keeping account structure for investors ahead of any insolvency proceeding instituted against their CSD Participant, with full legal ownership remaining undisturbed 2012 The CPSS and IOSCO released new international standards for financial market infrastructures, which include CSDs and Securities Settlement Systems (SSSs). Strate successfully completes a comprehensive selfassessment of its performance against the Principles Clearstream and Strate sign an agreement in respect of Collateral Management Services for South Africa. The services intend to utilise Clearstream s collateral management infrastructure, known as the Global Liquidity Hub, for the management (allocation, optimisation and substitution) of local collateral The last immobilised bond certificate is dematerialised into the Strate environment 2013 A Memorandum of Incorporation was approved and Strate converted from a public to a private company Successfully integrated Clearstream s collateral technology into Strate s systems Strate is appointed as the Secretariat for the World Forum of CSDs from 2012 until Strate acquired the TCS BaNCS MI application to replace its existing settlement systems as part of its greater IT Roadmap Strategy February 2014 Strate amends its CSD Rules to align to the FMA April 2015 Strate launches e-tutor, a free online training portal We began the rollout of the IT Roadmap of which the first phase saw the migration of Money Markets Securities to the new TCS BaNCS MI solution in February 2016 October 2015 Strate implemented a new solution to improve the way that corporate action payments are processed via the South African Reserve Bank (SARB) Strate (Pty) Ltd Annual Intergrated Report

15 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information 2015 Strate embarked on a project to replace our Southern African Financial Instruments Real Time Electronic Settlement System (SAFIRES) Front End, or SAFE, and Money Markets Front End (MMFE) applications with a Centralised Messaging Front End (CMFE) February 2016 Strate migrated its Money Market System to the TCS BaNCS MI April - October 2016 Strate processed complex corporate actions: December 2015 Strate received approval from the Regulatory Oversight Committee (ROC) in December 2015 to become the only South African pre-local operating unit (LOU) for Legal Entity Identifiers (LEIs). The LEI is a 20-digit alpha numeric code, designed to uniquely identify legally distinct entities that engage in financial transactions. It has been designed as a globally recognised standard (through ISO 17442) that can be applied to any organisation or firm involved in a financial transaction internationally April 2016 ZAR X, South Africa s first new stock exchange in more than 100 years, has named Strate as its provider of clearing and settlement services Anheuser-Busch InBev acquisition of SAB Miller. Largest for SA and one of the most historic for Strate as shareholders received the accumulative value of approximately R116 billion in cash entitlements that was executed via the South African Reserve Bank African Bank restructure, where the launch of Good Bank and listing of instruments took place Steinhoff s intention to acquire Australian company, Fantastic Holdings, for AUD 274 million 2016 continued The Strate Academy s online learning portal, e-tutor, received an international Gold Standard Award for Innovation by UK-based publication, Financial Services Research Strate developed new settlement models for new exchanges July 2016 The JSE Ltd s equities market, which has to run on a five business day settlement cycle for the past few decades, moved to a new three business day settlement cycle (T+3) September 2016 Strate Charity Shares (SCS), a registered non-profit organisation and charity donation programme, received its first bond donations. Donations surpass R6 million mark 2016 Strate s Collateral Management Services team concluded sizeable trades in excess of R5 billion, particularly in the secured interbank market Company changed its structure to achieve its new strategy, launching CSD Operations and Fractal Solutions. Bev Furman and Tanya Knowles are the respective Executive Managers Strate completed the development of a Voting Proof of Concept using blockchain technology and demonstrated it to local CSD Participants and Issuers Operating Divisions Strate (Pty) Ltd Annual Intergrated Report

16 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Key Terminology The following key terms are provided to assist readers in understanding the functions that Strate provides and the terminology used within this report. Central Securities Depository (CSD): A specialist financial organisation which holds securities to enable the transfer of ownership through a book entry rather than the transfer of physical certificates. The electronic records of the securities are held at one location where they are available for custody and settlement. Dematerialisation: The elimination of physical certificates or documents of title which represent the ownership of securities so that the securities exist only as electronic records (converting paper-based to electronic records). These are referred to as uncertificated shares. Securities: The collective term for equities, bonds and money market instruments. Settlement: The completion of a transaction, whereby securities and corresponding cash are delivered and received. (Securities are transferred from seller to buyer and cash transferred from buyer to seller.) Further definitions can be found online at Strate (Pty) Ltd Annual Intergrated Report

17 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Operating Environment We continually evaluate the operating environment in which we trade, and seek to create value for our stakeholders by achieving our defined business objectives. Innovation is a key objective for each employee to identify ways of providing value to the markets. We consider external factors that could impact or provide opportunities for Strate such as: the business environment, technological advancement, market forces, the financial and political climate, and regulatory and legislative measures to which we are required to adhere. External Environment FMIs, specifically CSDs, are at crossroads. Given the crucial role that CSDs play in promoting the stability of the financial system, it is critical to focus on the robustness and effectiveness of operations. However, the market within which they operate is facing unprecedented change given the exponential rate that newer technologies come to the fore. Due to the global nature of the current business climate, disruption to our business can emanate from numerous disparate sources. Not only do FMIs need to focus on continuous evolution of their core functions to keep abreast of these changes, they cannot be stagnant in a world of disruptive technologies and need to look at other aspects of innovation where they can turn potential disruptive technologies into areas of opportunity. The recent wave of blockchain technologies, robotic process automation, artificial intelligence, financial technology (fintech) start-ups and the emergence of cryptocurrencies are examples of the disruptions that Strate and other CSDs encounter. The economic environment in South Africa is challenging due to developments alluding to political interference in economic policy, alleged misuse of state structures for personal interests, political infighting, concerns around the exploitation of state-owned entities, slow economic growth and extended drought conditions. The political and economic uncertainty that this has created has led to an element of uncertainty for investors. Strate s efficiency is critical to South Africa and its financial markets, as it settles, on average, more than R2 trillion across bonds, equities and money market securities every month. Further Strate market statistics can be found online at Strate (Pty) Ltd Annual Intergrated Report

18 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Regulatory Environment International and local financial market developments impact Strate. Regulatory reforms, a consequence of the Global Financial Crisis, have heightened the role of FMIs, such as CSDs. As such, regulatory reforms are now viewed as key considerations in Strate s business strategies. We are positioned to provide additional services that complement and build on our core competencies, and contribute to the stability of the financial markets. We operate under licences granted by: the Financial Services Board (FSB), which gives Strate the legislative right to be a CSD and clearing house in South Africa (performing such functions without a licence is illegal); and the Payments Association of South Africa (PASA), which authorises Strate to be a payment clearing house (PCH) system operator. We have obligations in terms of our licences and adherence to these is a priority. In terms of our CSD licence, we have the responsibility for: the provision and maintenance of infrastructure for holding, settling and administering uncertificated securities; the issuance, amendment and suspension, where necessary, of rules and directives according to which the market must operate. Strate has a Legal and Regulatory Division staffed by regulatory specialists who draft Strate Rules and Directives; and the supervision of compliance with the Strate Rules and Directives by CSD Participants. Strate is legally obligated to operate as a regulatory authority to ensure its Participants comply with legislation. As a Self-Regulatory Organisation (SRO), Strate issues its own rules and directives that are enforced by STRATE Supervision, a supervisory function that reports directly to the registrar, as well as the legal and regulatory division of Strate as the CSD. STRATE Supervision aims to apply and enforce its supervisory approach consistently, which has been underpinned year after year by growing levels of risk management, as well as the evolution of its thirty supervisory tools it uses to identify, manage and mitigate the various regulatory risks. The supervision function has the potential for conflicts of interest to exist, or be perceived to exist, between the supervisory function and other services undertaken and performed by Strate as the CSD. Appropriate Chinese Strate (Pty) Ltd Annual Intergrated Report

19 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Walls have been established between these functions (CSD or commercial function versus the supervisory function) to avoid confidential information obtained as a result of its statutory powers as a regulator being used, or being perceived to be used, to provide Strate s CSD and other commercial activities with an unfair advantage. The Supervision Division reports to the Chief Executive Officer (CEO) on administrative matters. It reports to the Regulatory and Supervisory Committee and its chairman for all other matters. The National Treasury introduced a new regulatory framework known as the Twin Peaks model of financial regulation for South Africa. The Financial Sector Regulatory Bill (Twin Peaks Bill) will be introduced in a phased approach and involves developing umbrella legislation mainly aimed at the establishment of the prudential regulator, the Prudential Authority (PA), housed in the South African Reserve Bank (SARB), and the Financial Sector Conduct Authority (FSCA), whereby the FSB will be transformed into a dedicated market conduct regulator. The PA s objective will be to promote and enhance the safety and soundness of regulated financial institutions; while the FSCA will be tasked with protecting financial customers through supervising market conduct. Structures will be in place to ensure proper co-ordination between the two authorities and other regulators. The Twin Peaks Bill has the following fundamental objectives (clause 7): financial stability; the safety and soundness of financial institutions; the fair treatment and protection of financial customers; the efficiency and integrity of the financial system; the prevention of financial crime; financial inclusion; transformation of the financial sector; and confidence in the financial system. The Legal Foundation of Strate The sound legal foundation provided by the FMA, paired with the level of understanding that Strate (including its Board, the various committees and management), has in terms of the FMA and the Companies Act, 2008 ensured that effective corporate governance and strong risk management processes are implemented. The electronic ownership records held in the Strate environment are recognised as the legal record of ownership according to the FMA. Strate (Pty) Ltd Annual Intergrated Report

20 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Organisational Overview What we do As a South African CSD, Strate is licensed to be an independent provider of post-trade products and services for the financial markets. Our company is internationally recognised as an FMI that is trusted to use its state-ofthe-art technology, international expertise and sound risk management framework to support and promote the safety and efficiency of the financial markets. Strate: is responsible for the electronic safekeeping of the records of ownership of a variety of securities; provides electronic settlement of equities and bonds transactions concluded on the South African stock exchanges; settles transactions in money market securities; offers collateral management services; and offers an asset servicing product range which augments the services it offers to issuers in terms of the Companies Act, 71 of 2008, and the Financial Markets Act, 19 of In 2016, we implemented changes to the company s structure to prevent the threat of disruptive technologies facing the CSD industry detracting from our focus on our core business and key strategic projects, particularly Debt Instrument Solution (DIS) and Collateral Management Services. As part of the assessment of new initiatives, consideration is given to the impact of potential conflict on core functions and how this will be managed. Management maintains an unequivocal commitment to ensuring that high standards are maintained in the fulfilment of our core functions. Self-regulatory organisation (SRO) Strate is well respected in both local and international financial markets as a SRO. Strong leadership from the members of the Regulatory and Supervisory Committee, especially from its chairman, Rob Barrow, has established solid governance structures. This reaffirms our importance in the financial markets and enables us to fulfil our key strategic objectives (page 10). In the facilitation of settlements, Strate authorises specific organisations (CSD Participants (CSDPs)) to provide custody services to investors. The FMA regulates how SROs, such as Strate, deal with confidential information. Strate (Pty) Ltd Annual Intergrated Report

21 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information What we offer We are continuously discovering ways to evolve our core services using our performance track record and sound risk management framework to ensure operational excellence. Innovation is a key responsibility for all employees across all the divisions within Strate, identifying opportunities in new areas or looking at ways to evolve the core business. We aim to align to international standards, including the Committee on Payments and Market Infrastructures (CPMI) and the International Organisation of Securities Commissions (IOSCO) principles for FMIs. Custody and settlement Settlement Securities transferred from seller to buyer and cash transferred from buyer to seller. The custody and settlement of uncertificated securities is Strate s core function. Our services include the settlement of all transactions concluded on various exchanges, such as 4AX, the JSE Ltd and ZAR X, and those executed off market in listed and unlisted securities and money market securities. We also facilitate the settlement of securities lending and borrowing (including loan and collateral), depository receipts, account transfers and portfolio movement transactions. Strate (Pty) Ltd Annual Intergrated Report

22 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Corporate actions A corporate action is an event initiated by a listed company that affects the securities issued by the company. Strate executes all corporate action events in respect of uncertificated securities for the market. Our corporate actions model provides significant risk reduction and cost savings for clients. Corporate actions enable public entities to: return profits to shareholders in the form of cash dividends; influence the share price through share subdivisions and consolidations, which either increase or decrease the number of outstanding securities and, subsequently, impact the stock price negatively or positively; process share buybacks; and increase their profitability through corporate restructuring (mergers and unbundlings, respectively). The implementation of a new model to process corporate action payments through the South African Reserve Bank has proved to be a success. Strate successfully processed the electronic entries which enabled the conclusion of the acquisition of SABMiller by Belgian-Brazilian group, Anheuser-Busch InBev; the largest corporate action in Strate s 18-year history. Shareholders received in excess of R116-billion in cash entitlements, executed through the South African Reserve Bank. Strate (Pty) Ltd Annual Intergrated Report

23 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information In order to successfully process the deal, and to operate within Belgian law, AB InBev was dissolved to create Newbelco, a Belgian incorporated company formed for the purpose of the transaction. This surviving entity, Newbelco, acquired all of the SABMiller shares. Newbelco will be the holding company for the combined group, and is also listed on the JSE Ltd. AB InBev announced that the combined group will retain the name Anheuser- Busch InBev SA/NV. The R1.5 trillion merger between AB InBev and SABMiller has created the world s biggest brewer. In addition to the historic corporate action, Strate also processed other complex corporate actions, such as the African Bank restructure, where the launch of Good Bank and listing of instruments took place, as well as Steinhoff s intention to acquire Australian company, Fantastic Holdings, for AUD 274 million. Strate (Pty) Ltd Annual Intergrated Report

24 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Collateral Management Services Strate provides Triparty Collateral Management Services to assist the financial markets in the effective and efficient management of their pools of securities that are eligible for the collateralisation of financial obligations. Strate s Collateral Management Service (SCMS) automates the management of bilateral collateral eligibility rules, collateral validation, allocation, substitution, valuation, collateral top-up, and returns across all major asset classes, including cash. A dedicated service team at Strate will support all client collateral service requirements. The Collateral Management Services optimally automates the placement of eligible collateral against exposures with a variety of counterparties to mitigate credit risk. Thereby ensuring that the right collateral is at the right place to cover the right exposure at the right time. More detail on our Collateral Management Services can be found on pages 61 and 71 Strate (Pty) Ltd Annual Intergrated Report

25 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Advanced Data Analytics At the end of 2015 we identified an opportunity for Big Data capabilities. These capabilities will provide an opportunity to develop analytical functions as a service to our clients. During 2016, a data services team was formulated and has been working on implementing a data analytics tool for client subscription that aims to enhance their decision-making capabilities. Innovation As a South African CSD, Strate is committed to staying at the forefront of new developments that affect the financial industry. In response to fast-paced changes in the market, we are proactively seeking change and innovation for the company. Innovation forms part of each employee s objectives across the company, whether it focuses on innovating the core business or identifying other areas of opportunity. It has already been identified that disruptive technologies, such as distributed ledger technology, blockchain, artificial intelligence and robotic process automation, have the potential to change our business model completely. There are a number of opportunities for Strate and the market to embrace these and share knowledge across the sector. Strate is actively exploring and researching their impact on the market as a whole, and their potential to transform our business. We identify opportunities for collaboration and services we offer to the market. In the long-term, blockchain in particular, could lead to the creation of alternative markets, and we are currently pursuing initiatives surrounding this. Strate aims to collaborate with markets to develop standards, partner with regulators, and bring about change in the industry. The term blockchain is used throughout this report to refer to distributed ledger technology (DLT) and blockchain technology. Strate (Pty) Ltd Annual Intergrated Report

26 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Blockchain Blockchain is a digital ledger in which transactions are recorded chronologically and publicly. Blockchain is collectively kept up to date, and transactions are permanently recorded and encrypted. The technology has the potential to provide credibility and trust. It does this through having built-in intelligence and automation. Although blockchain has the potential to disrupt the financial services sector, using it could increase the efficiency of transferring securities other than financial instruments. This will make settlement faster and potentially reduce transaction costs. The principles of blockchain are: Immutability Single Distributed Ledger Transparency Principles of Blockchain Automated / Functional Security Trust Strate (Pty) Ltd Annual Intergrated Report

27 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Other services Services that we provide to meet our clients financial and system needs include information services and information technology services. Information services Highly secure electronic records of securities. At Strate, electronic records are subject to stringent controls, advanced encryption and authentication. Our information services offer high-level security and reliability. The Beneficiary Download (BND) is a securities register containing details of shareholders. Strate produces the BND by collating shareholder positions from information supplied by CSDPs, brokers and approved nominees. Information technology (IT) services Infrastructure that markets use to make financial payments and securities-related transactions. Our suite of IT services comprises: SWIFT Services The South African financial market makes payments and securities-related transactions through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. Strate manages one of Africa s largest SWIFT infrastructures and allows clients access to the SWIFT network through this infrastructure. Strate s centralised SWIFT Services allow market players to save costs and, ultimately, introduce new efficiencies to their own organisations. Gateway Services Strate s Gateway Services provide the South African financial market with an alternate mechanism to send and receive International Organisation for Standardisation (ISO) format messages 1 directly to and from Strate, thereby realising cost savings. The Gateway application processes and routes messages to and from the required Strate target application and stores a copy of the messages on a database at Strate s high availability infrastructure. The messages are stored for five years and thereafter archived. 1 An ISO standard for messaging used by institutions involved in securities settlement activities. Strate (Pty) Ltd Annual Intergrated Report

28 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Our Operating Structure In terms of the FMA, a CSD must arrange for the proper supervision of compliance by CSD Participants with the CSD Rules. STRATE Supervision is an independent division within our company that ensures Strate, as the CSD, fulfils the regulatory, supervisory, investigative and enforcement functions as required by legislation. Chinese Walls have been established between Strate s two roles the role of performing security services as an appointed CSD, and the role of a SRO tasked with supervision of compliance by CSD Participants. The Chinese Walls structures prevent STRATE Supervision from sharing confidential CSD Participant-related information with Strate s business units. There are no confidentiality barriers in respect of Strate s business units sharing information with STRATE Supervision where a CSD Participant is believed to be contravening the FMA, CSD Rules and Directives, or introducing risk into the market. Strate (Pty) Ltd Annual Intergrated Report

29 02 Our Company 01 About this Report 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Revenue streams, how services are charged and costs Our revenue is primarily derived from transaction fees through settlement activities, which are ultimately paid for by investors. During October and November 2016, we consulted with the broker community and their input aided a revised equity fee model. This new fee model will move Strate towards a more level playing field in the market. While those executing larger value trades benefit from an economically viable cap and unchanged rate, the lower value trades also attract lower fees. Revenue is dependent on economic conditions that impact trading and corporate actions activity. In turn, this impacts the number of transactions we process. There are various types of transactions we process, fees for transactions will therefore be based on effort and associated cost. Pricing structures are regularly reviewed as clients are sensitive to price increases. We review the fees charged and fee models on an ongoing basis to ensure fair fees and the long-term sustainability of the company. Our cost base is largely fixed and is not impacted by transaction volumes. Fixed costs are primarily related to staff and IT infrastructure. The escalation of costs is carefully managed and we continuously explore opportunities to achieve economies of scale. Many ancillary services we are researching, or have already implemented, assist in this cost management. As Strate is largely a fixed-cost business, the company focuses on its revenue and pricing models. Strate (Pty) Ltd Annual Intergrated Report

30 03 31 How we Create Value Positioning 31 Value Proposition to clients 33 Business Model 36 Strategic Focus Areas 44 Risk Management, Ethics and Compliance 49 Stakeholder Relations 51 Labour Practices, Environment and Social Value

31 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Since inception, Strate has used international benchmarks to ensure we provide world-class post-trade services to the market, helping to make all other aspects of managing these investments easier and less risky. Positioning The trading environment in South Africa comprised one stock exchange, the JSE Ltd in During the next financial year, Strate will extend similar services to the country s newer stock exchanges, ZAR X and 4AX. They primarily provide a platform for raising capital through the creation of securities, which are then traded by investors using stockbrokers. The post-trade environment encompasses the activities that take place after trading in the financial market. Strate operates in the post-trade environment to effect ownership changes. In this context, our positioning and differentiation is important, as it explains the financial markets segment in which the organisation operates and for which it creates value. There are several other entities involved in the post-trade environment with similar, but varying, needs. We have grouped these entities based on the similarity of their needs and have designed our products and services accordingly. Value Proposition to Clients Our clients are one of our most important stakeholder groups when we deliver on our mantra. Therefore, satisfying their needs is essential for ensuring our sustainability. Client groups include: issuers of listed and unlisted securities; authorised CSD Participants; the JSE Ltd and other exchanges; Securities Lending and Borrowing (SLB) business partners; money market business partners; and local and international investors. Strate (Pty) Ltd Annual Intergrated Report

32 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Each client group fulfils a specific role, and the value proposition of our products and services is different for each group. However, common underlying themes exist in that the value proposition: removes principal risk; reduces risk for clients in the post-trade market segment by providing an electronic solution as an improvement on the previous paper-based system; reduces costs for clients in the post-trade market segment; enables efficiencies for Strate and its clients; creates revenue-generating opportunities for Strate and its clients; and assists clients in achieving their key deliverables and meeting their obligations in the financial markets. Further details on our stakeholder engagement can be found on page 62. A full list of Strate s products and services can be found on our website: Innovation We are committed to continuous innovation and to bringing efficiencies and world-class IT infrastructure to the financial markets in South Africa. In 2016 we exemplified innovation through: thought leadership in blockchain; receiving the e-tutor Global Innovation Award; and big data, which will enable us to serve as the primary custodian of three real-time databases (bonds, equities and money markets) more effectively, offering the consolidation of large volumes of data for varying levels of analytic functions as a service to our clients. Innovation is the mainstay of our sustainability. Strate must keep adding value and Always Discover ways to evolve. Communication Communication with clients is vital and several communication media are used, depending on the nature and purpose of the engagement. These include individual or face-to-face meetings, industry forums, newsletters, the media, Strate s website, educational workshops, publications and material, and company circulars. Further detail can be found under stakeholder engagement, page 62. Strate (Pty) Ltd Annual Intergrated Report

33 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Business Model Our business model depicts Strate s value creation process. It illustrates the core activities of the company and the key sources of capital used to provide the products and services we offer to the market. Key resources: inputs and outcomes Several resources are required for Strate to operate successfully. Knowledge of the financial markets and skilled IT capabilities are imperative to business success. Intellectual Intellectual resources include our licence to operate as a CSD, a clearing house, and payment system operator for all markets. Operating procedures and protocols are in line with CSD Rules and Directives. We have developed market-specific systems and interfaces and are continually exploring new technologies to improve our service and offerings. Human By harnessing the specialised skills and knowledge of our people, we can achieve our strategic objectives and create value. Our co-sourcing model in various areas (particularly IT) relies on external support from vendors. This model enables us to mitigate risks and ensure the continuity of critical functions. Financial Strate must ensure a sound financial position. Our central role in the financial markets requires the business to have sufficient reserves and funds to ensure the sustainability of operations, regardless of turbulent conditions. Per the FMA, it is mandatory for a CSD to remain financially sound. Manufactured Information technology (IT) Our IT infrastructure is a key enabler of services. IT includes various systems and applications required for the daily processing of transactions. The infrastructure includes mainframe and open systems architecture, enterprise storage, and networks (such as wide area, local area and the SWIFT networks). Strate (Pty) Ltd Annual Intergrated Report

34 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Strate does not develop any of its core IT applications in-house, but relies on partners with international expertise in each area. This has improved the quality and time frame of delivery of the applications that are required to fulfil our duties as a CSD. Infrastructure To attract and retain international investment in South Africa, it is essential for us to provide CSD services at the highest global standards. The large initial investment required to acquire and maintain a world-class infrastructure enables us to provide a service that is comparable with our international counterparts. Social and relationship Our stakeholders Our stakeholders are core to all that we do, and our focus remains on adding value to our clients. Details on our relationship with each stakeholder group are provided on page 50. Key Partnerships Selecting appropriate parties to support applications is a crucial element to our success. Several parties that have been with the business since inception play a key role in the maintenance, development and enhancement of services. The initial funding and continuous support from our shareholders have been instrumental in our success. The business has also developed and cemented relationships and international alliances that provide immeasurable assistance in keeping us updated with international developments and trends. Strate (Pty) Ltd Annual Intergrated Report

35 Key Resources Our Business Activities Our Outputs Our Outcomes The resources we use to create value The core activities that Strate specialises The products and services we deliver to our stakeholders The outcomes of our business activities Intellectual Records of Ownership Strate provides world-class post-trade services to the market Operational Excellence Licence to operate as a CSD, a clearing house and payment system operator for all markets. Operating procedures and protocols in line with CSD Rules and Directives. Developed market-specific systems and interfaces. Human Knowledgeable and supportive Board of Directors. Specialised and skilled employees focused on innovation, creativity and thought leadership. Financial Funded by equity and reserves. Strong cash generating ability through operations. Strate is responsible for the electronic safekeeping of the records of ownership of a variety of securities. Information Technology Strate s IT infrastructure is a key enabler of services. It includes various systems and applications required for the daily processing of transactions and highly secure electronic records of shareholding. Processing Transactions Strate effects ownership changes. The custody and settlement of dematerialised securities are Strate s core function. Information Services Beneficial Download (BND) is a securities register containing information of dematerialised holdings. Information Technology Services Our IT Services provide electronic records of shareholding and secure transmission of information related to financial transactions. Strate uses the following networks for the relay of electronic information: SWIFT Services Gateway Services Strate supports and promotes the safety and efficiency of the South African financial markets. Provision of high-quality services. Investment in projects to ensure organisational growth. Effective management of risk. Innovative Solutions Continual evolution of core service and innovative solutions. Stakeholder Centricity Stakeholder satisfaction. Financial Viability Manufactured Servicing Assets Profit and cash flow generation to ensure sustainability and financial viability of the company. Robust Information Technology (IT) (applications and infrastructure) to meet business objectives in terms of availability, resilience and reliability. Alternate operating facilities to ensure business continuity. Social and Relationship Servicing streamlined, reliable, single-source issuer notifications and events initiated by a listed company. Managing Collateral Collateral management is the method of granting, verifying, Custody and Settlement Electronic settlement of equities and bonds transactions concluded on the Johannesburg Stock Exchange on a SFIDvP basis in Central Bank Funds. Electronic exchange and settlement of transactions off-market in money market securities. Dividends paid to shareholders. Learning and Growth Investing in staff development. Contributions to corporate and social initiatives. Clients Employees Regulators and government Suppliers and partners Communities and advising on collateral transactions in order to reduce credit risk in unsecured financial transactions. Innovation We are always discovering ways to evolve our core services and find innovative solutions. Strate also facilitates the settlement of Securities Lending and Borrowing (including loan and collateral), Depository Receipt, Account Transfers and Portfolio Movements transactions. Corporate Actions Strate Asset Servicing (SAS) executes all corporate actions and events in respect of dematerialised securities Knowledge sharing for the market through a product range which brings efficiencies and cost reductions to its users. Collateral Management Services Our collateral management services provide centralised, automated optimal management of services on a T+3 basis

36 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Strategic Focus Areas Our core business remains strong and we continue to place an emphasis on areas requiring improvement, in particular, innovation and meeting our clients expectations. The CSD industry is set to transform at an unprecedented pace and we face several potential risks. It is imperative that we continue to look for growth opportunities across the company to remain sustainable. Strate needs to entrench its two-pronged strategic approach (core services and innovation) to succeed we recognise change as a constant reality. We are focused on building up our reputation as a trusted third party for the financial markets in order to: continue to enhance and maintain our core CSD business and expand our products and services where the core technology platforms enable this; successfully implement important market projects in , which are crucial in meeting our clients needs and for the betterment of South Africa s financial markets; and determine our strategic direction (post-2018). Under each of our strategic objectives, we have strategic focus areas that drive the achievement of our goals. Strategic Objective Strategic focus area 2016 Operational excellence Innovation Financial Viability Stakeholder Centricity Core purpose IT roadmap application consolidation Disruptive technologies such as distributed ledger technology Pricing of equities settlement services Collateral Management Services Market collaboration Strate (Pty) Ltd Annual Intergrated Report

37 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Operational excellence Core purpose As a South African CSD, we are licensed to be a trusted third party for the financial markets. The custody and settlement of uncertificated securities and the effective management of risk are our core functions. As a selfregulatory organisation (SRO) and through the effective operation of a world-class CSD, we are dedicated to ensuring and improving the integrity of the South African financial market. Our settlement services apply to the settlement of securities (equity, bond and money market instruments). We also facilitate the processing of SLB transactions (including loan and collateral), depository receipt transactions, account transfers and portfolio movement transactions. Providing these services to the highest standard is and will continue to be a strategic focus area. IT roadmap application consolidation Strate uses independent applications to service the different asset classes, namely, equities, bonds and money market securities. Strate is using the Tata Consultancy Services BaNCS Market Infrastructure (TCS BaNCS MI) product to replace the existing bond settlement system. Following further investigation, the opportunity was identified to consolidate other asset classes (equities and money market securities) onto the same TCS BaNCS MI platform. In 2014 Strate finalised the multi-year IT roadmap as a three to four-year application and infrastructure replacement project, with internal long-term benefits such as cost reduction and efficiencies. The IT Roadmap envisages the migration of the asset classes to the new platform in three phases, namely: TCS BaNCS MI Money Markets (implemented in 2016); TCS BaNCS MI Bonds (Debt Instrument Solution (DIS)) (planned for mid- 2017); and TCS BaNCS MI Equities (between the last quarter of 2018/first quarter of 2019). The TCS BaNCS MI Money Markets project was successfully implemented in February One of Strate s main focus areas is our commitment to the successful implementation of DIS to replace the existing bonds infrastructure. This is a significant project for the South African market, and we are collaborating with the market participants to ensure adherence to project timelines. Strate (Pty) Ltd Annual Intergrated Report

38 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information The market s momentum on DIS has increased significantly since the implementation of T+3. We are pleased with the traction gained and the necessary attention and resources that the project is receiving from all market participants. The most important component of this project is the migration of data from multiple sources to the TCS BaNCS MI system. A detailed internal data migration strategy document was drafted and all internal migration-related testing is conducted using this strategy. Issues encountered during testing will be used to update the strategy and procedures before re-testing. Data migration workshops commenced in October In February 2017 Strate migrated the latest version of the TCS BaNCS MI code into production. This includes fixing bugs, rectifying incidents raised following the money markets implementation, and a new data schema to factor in the bonds asset class. Main challenges and outlook We set an ambitious timeline to deploy the IT roadmap. The parties involved are vital to its success. Should these timelines not be adhered to, there is a risk that scripted testing will be delayed, ultimately delaying implementation. Data migration for the CSD Participants and exchanges is also a key aspect of this project. Migrationrelated documents submitted to the market have sought to dispel any ambiguity pertaining to data that will be migrated and tested in the testing phases/cycles. The successful implementation of the National Treasury s Electronic Trading Platform (ETP) is dependent on various tasks currently underway. The determination of the membership criteria, which includes admission and continued participation requirements, is being finalised. The regulatory framework being drafted will stipulate the rules to which the primary dealers will be expected to abide. More detail on our IT roadmap can be found on page 60. Strate (Pty) Ltd Annual Intergrated Report

39 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Innovation Disruptive technologies The pursuit of technological innovation and sustainability is already transforming the financial market. The advent of disruptive technologies, such as blockchain, artificial intelligence and robotic process automation, have created a paradigm shift across global financial markets. Blockchain Our blockchain strategy for 2017 addresses our focus areas and challenges through three main components: Training, education and market awareness: The training and education of our staff to stay abreast of local and international developments, including technology developments and industry trends. Ongoing collaboration with strategic partners (including local market players and fintech start-ups). Thought leadership to position Strate in a blockchain technology environment. Ongoing market education and awareness. The long-term solution for financial markets: Research and development (R&D) to determine the long-term model of financial markets in a blockchain environment in collaboration with local market players, including exchanges, regulators and participants, among others. Short-term solutions: Identify and implement quick wins/ancillary products and services to achieve revenue, cost savings, efficiencies or risk reduction (RECR). Main challenges and outlook Blockchain is a rapidly emerging technology characterised by almost daily developments and innovations. Financial market players will be impacted by this technology, particularly those playing the role of the trusted independent party, and it is essential for organisations to stay abreast of these developments. Strate envisages that the roles of certain market players will evolve. In-depth knowledge and time to market are essential to remain relevant. Strate (Pty) Ltd Annual Intergrated Report

40 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Strate is exploring the progress of other disruptive technologies that are revolutionising the financial markets. Artificial intelligence and robotic process automation are other forms of disruptive technology that are becoming increasingly popular in markets, and we are attentive of their development. Financial viability Pricing of equities settlement services Strate annually reviews fees and fee models to ensure the equitability of its fees and the long-term sustainability of the company. In 2014, a project commenced to revise the model for contract notes and align it to current market practices. It was appreciated that Strate had not adjusted the equity ad valorem fee cap over the last 10 years, in which value traded increased by 119% to R6.5 trillion. After an intensive, long period of consultation with the market and JSE Ltd, new fee model principles were adopted effective 30 January The most significant change was from billing on a multiple account methodology to single account methodology. Strate, in keeping the best interests of the market foremost, will remain revenue neutral for 2017 to limit the cap increase to 21%. In giving some benefit to the larger value trades, the basis point charge will remain unchanged. Furthermore, Strate has decreased the floor by 7,5% to benefit the small to medium brokers. We see this change as our commitment to make fees more equitable across the different types and sizes of market participants. The long term strategy is for the cap to increase by inflation in order to remain at an economically viable level, with a reduced basis point charge and to create further relief for the small to medium brokers by removing the floor completely. Through the development of this new fee model, a revenue leak in the fees recovered from the brokers via the JSE Ltd was identified. This has since been resolved. Main challenges and outlook Successfully implementing the new revenue model to ensure a more equitable method of recovering fees from the brokers is a significant milestone for Strate, as the implementation of the current model proved challenging. Strate (Pty) Ltd Annual Intergrated Report

41 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Preventing any further revenue leakage in the collection of fees from the brokers via the JSE Ltd, remains a key focus area. Collateral Management Services Local and global financial institutions and investors are experiencing increasing regulatory pressure for greater collateralisation of financial transactions, increased capital adequacy, improvement in liquidity ratios, and the movement of more transactions to central clearing platforms. Strate Collateral Management Services (SCMS) is a highly efficient and effective collateral management and mobility offering that reduces operational and credit counterparty risk in the market, and plays a key role in meeting current and future regulatory capital requirements. SCMS offers us the opportunity to diversify our revenue, providing access to new clients and services. It is core to our strategy of being able to leverage off our existing infrastructure to provide Triparty Collateral Management Services (TCMS) to South African financial markets, as the only TCMS provider. In September 2016, SCMS saw its first trades of significant value between the five largest South African banks. The most promising development is that sizeable trades (over R5 billion) were concluded, particularly in the secured interbank (SIB) market. Main challenges and outlook Due to the delays and challenges in the SIB market, revenue targets have not yet been achieved. Clients continue to sign up and on-board for various exposure types. Since the first trades, we have noticed a slow commencement of revenue for SCMS in relation to projections. Despite the delays, Strate has already signed on more than 20 clients (including the big five banks) and started generating revenue. Strate has entrenched itself as the only triparty collateral agent for market initiatives such as SIB and the JSE ITaC project. Strate is well positioned to become a service provider to current and future market initiatives, such as margining for the bonds electronic trading platform (ETP). Strate (Pty) Ltd Annual Intergrated Report

42 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Stakeholder centricity Market collaboration We pursue our objective of stakeholder centricity through collaboration across projects that support the market. These include T+3, DIS and ETP, among others. The T+3 project (a JSE Ltd project aimed at reducing its equities settlement cycle from five business days after the trade (T+5) to three business days (T+3)), was implemented in July 2016 with the collaboration of Strate, the JSE Ltd and the financial market. For more information, see settlement timelines explained, page 43. In collaboration with relevant stakeholders, we are working towards the implementation of DIS to replace the existing bonds infrastructure. Engagement and testing occurs with all participants. We are conducting educational roadshows and disseminating marketing materials to educate all stakeholders on the project and its benefits. The World Bank and National Treasury have undertaken an initiative to implement an ETP for government bond trading. It is believed that this will promote anonymity, price discovery, transparency, fairness and improved liquidity in government bond trading. The ETP project is under the management of the JSE Ltd, and Strate is represented on the various work streams which include: IT/connectivity, settlement assurance, rules/principles, and pricing and operational matters. The expected date for this new bond trading platform is dependent on the successful implementation of DIS. There is much speculation about the potential impact of blockchain technology on the post-trade landscape and its potential to disrupt market infrastructure organisations, such as exchanges, central counterparties, clearing houses and CSDs. Some of these institutions have partnered with vendors and joined consortia to either develop or test blockchain applications. Other collaborative projects that SCMS is working on include: SIB; domestic triparty repurchase agreements; JSE Ltd initiatives (JSE ITaC); SLB; and Over-the-counter derivatives. Strate (Pty) Ltd Annual Intergrated Report

43 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Settlement timelines explained Settlement is the process whereby securities (equities, bonds and money market instruments) are delivered in exchange for payment. To settle a securities transaction, the seller of the security must receive payment and the buyer must take ownership of the security. In the South African market this takes place on an irrevocable basis using a process of simultaneous and irrevocable delivery versus payment (SFIDvP) on a rolling, contractual basis to ensure that the rights of both buyer and seller are equally well protected. T represents the trade date T+n refers to the length of the settlement life cycle counting from the day on which the trade occurred to the day on which the settlement is contractually obliged to take place. The settlement timelines for each market are: Equities T+3 Bonds T+3 Money Markets - real time T+0 On 11 July 2016, the JSE Limited s equities market settlement process was moved from the historic T+5 settlement timeline to a new T+3 environment. A substantial portion of the risks in custody and settlement are related to the length of time that it takes to settle a transaction and this move represented the culmination of extensive collaboration between the JSE, Strate and the broader market to bring the South African capital markets in line with global best practice (as recommended by the International Organisation of Securities Commissions). A shorter settlement cycle has positive implications for the mitigation of risk across the market while also enhancing liquidity management efforts. Strate (Pty) Ltd Annual Intergrated Report

44 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Risk Management, Ethics and Compliance We provide a world-class service, and pride ourselves in our high levels of operational excellence through the implementation of sound risk management practices. We believe that we are ideally positioned to assist South African financial markets in adopting and ultimately complying with appropriate global best practices. One of the primary drivers in this regard has been the principles for Financial Market Infrastructures (FMIs) issued by the Committee on Payment and Market Infrastructures and IOSCO (CPMI -IOSCO), that formed an integral part of our risk management approach. The safety and efficiency of the financial markets is of utmost importance. As a financial market infrastructure, we are cognisant of evolving threats and adopted a multi-phased approach to the management of risk, including cyber risk. We are committed to ensuring the sustainable growth of stakeholder value through effective risk management as we pursue our strategic objectives. Proactive risk management in an ever-changing operating environment remains an essential contributor to our success. Strate s approach The defined and approved risk policy and framework assist the company in the identification, measurement, monitoring and management of a variety of risks and opportunities that emerge in, or are encountered by, the Financial Market Infrastructure (FMI). Effective risk management and control are essential for sustainable and profitable growth. This means that, within each area of the company, all risks need to be effectively managed. The risk policy and framework provide clear structure, setting out the activities, tools, techniques and practices used to identify and manage the risks the company may face in the execution of its strategy. They further ensure that appropriate responses are in place to protect the company and its stakeholders. This allows Strate to develop and grow in a sustainable and responsible manner. The Board is required to approve the policy and framework annually. Strate is required to take a comprehensive and integrated view of risk. We assess internal risks, risks that may impact external entities, and risks that external parties may bring to the operations of Strate. Risk analysis is conducted in line with the ISO principles of input, processes, output and outcomes. Strate (Pty) Ltd Annual Intergrated Report

45 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Through continual engagement, stakeholders provide valuable input that assists in the identification and effective management of risk. Engagement ranges from direct consultation on an area of possible risk, to understanding the potential risk of implementing a new product or service. In relation to cyber risk, threats are evolving and we continuously engage with relevant stakeholders as the need to maintain awareness is ever-present. New products, services and even clients are assessed to determine the extent to which their introduction could introduce risk to Strate or its existing user base. Risk appetite and tolerance Risk appetite measures the extent and types of risk that the company is prepared to take in the execution of its strategy. Risk appetite is traditionally represented by a range. If risk levels fall outside this range, performance is considered sub-optimal. The risk tolerance statements contained in the risk policy provide for a point at which specific risk levels exceed the organisation s appetite for risk. The Board approved the risk tolerance statements contained in the risk management policy. These are reviewed annually to confirm their continued relevance to the company. Strate (Pty) Ltd Annual Intergrated Report

46 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Management and governance of risk In line with the requirements of the King Code of Governance, the Board oversees, and is ultimately responsible for, the company s risk management process. The Audit, Risk and Compliance Committee plays a central role in liaising with management and internal and external audit to ensure the efficacy of the risk management process. The appointed head of each business unit in the company is responsible and accountable for the management of risk in their area, with oversight by the Executive Committee. Responsibility and accountability for the overall risk management process resides with the head of risk. The company s overall risk management and governance frameworks have introduced comprehensive assessments to ensure the overall effectiveness of all risk management efforts. Combined assurance We employ a combined assurance approach to optimise and enhance the level of risk, governance and control oversight of our risk landscape. Members of management and representatives from internal and external audit form Strate s Combined Assurance Forum. The forum seeks to provide correlation between the company s risk management and assurance processes. Strate (Pty) Ltd Annual Intergrated Report

47 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information The combined assurance model consists of three lines of defence, namely: Line 1: Business operations The establishment and day-to-day operations of an effective risk and control environment. Management assurance through the identification of risks, the implementation of controls, and business improvement actions. Line 2: Oversight functional areas Oversight of business processes and risks. Alignment of strategy, risk and policies. Responsibilities include the introduction of best practice, the provision of assurance regarding the effectiveness of compliance activities and the effectiveness and completeness of the wider system of internal controls. Line 3: Independent, objective internal and external assurance providers The internal audit function is performed by PricewaterhouseCoopers Inc. (PwC). Internal audits are performed on financial systems, compliance with policies and business processes. Audit findings are reported to management and summarised findings are presented to the Audit, Risk and Compliance Committee. Progress on resolving audit findings is monitored to ensure they are appropriately closed out and that the associated risk is mitigated. The Annual Financial Statements contained in this report are a summary of the audited annual financial statements on which KPMG has expressed an unqualified external audit opinion. Key risks Operational risks Operational resilience is essential for the ongoing success of the company. It focuses on preventing any event that could disrupt business processes from having a material impact on the CSD such that it would be unable to fulfil its obligations in the market timeously. This includes the likelihood of inadequate or failed procedures, systems or policies, employee errors, system failures, fraud or other criminal activity. Strate (Pty) Ltd Annual Intergrated Report

48 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Technology risks The provision of reliable technology platforms that sustain the South African financial markets is an essential component of the services provided by Strate to the financial market. A technology-related disruption would have a debilitating effect on the CSD and the broader markets it services. Knock-on impacts could be far-reaching. Strate is committed to ensuring a level of resilience that is commensurate with the responsibilities of the company. Human resource risks As with most organisations, our employees are a key asset. The acquisition, hiring and retention of talented employees are therefore an ongoing focus to drive optimal levels of success. Regulatory risks Strate is a recognised SRO and is expected to perform certain regulatory and supervisory functions. These functions include the issuing of CSD Rules and Directives. Further functions include the authorisation and supervision of market participants, including investigations into alleged regulatory breaches. STRATE Supervision, as an independent division of Strate, fulfils the supervisory, investigative and enforcement functions required by legislation. Any failure, or perceived failure, to execute these responsibilities per the highest possible regulatory standards could have a direct impact on the levels of confidence in our markets as a whole. Strate (Pty) Ltd Annual Intergrated Report

49 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Stakeholder Relations Our stakeholders are at the heart of what we do. Our focus remains on adding value to our clients, developing staff, and contributing positively to the communities in which we operate and other stakeholders. Our dedicated Stakeholder Relations Division established an open and transparent relationship with our stakeholders in the past few years. The team is committed to measuring the levels of satisfaction of all stakeholders and ensuring that areas of concern are addressed. Our stakeholder engagement team dedicates significant time and effort to engaging with stakeholders to gather their insights and establish any risks and opportunities afforded to Strate. Engagement with our stakeholders and a thorough understanding of their needs and expectations are important to our strategic direction and sustainability. We continually seek to improve the quality and effectiveness of our engagements. To meet the different needs and expectations of our stakeholders, it is important that we report and table all material matters to the Board in a dedicated stakeholder relationship report. From the feedback of the engagement process, the following key themes were highlighted. Strate should: continue to assist clients with their regulatory demands; ensure there is consensus among shareholders for the sustainability of the company; and partner with key suppliers to bring innovative and efficient technology to the market. Strate (Pty) Ltd Annual Intergrated Report

50 Our Stakeholders Our material stakeholder relations are with: We create value for our stakeholders by: Material concerns: Responses and outcomes: Clients: who give the company purpose and keep us in business. delivering pioneering and innovative solutions as a trusted third party, supported by a reputation of operational excellence and built on an 18-year foundation of trust. The implementation of T+3. The implementation and testing of strategic projects and market participation. The implementation of the Debt Instrument Solution (DIS) project. Assisted with testing of T+3, and active participation in the implementation of key projects with the market. Continuous efforts to adhere to testing and implementation of timelines and engaging through market education, working committees and roadshows. Employees: who supply the necessary skills and expertise to deliver on our mantra and strategic objectives. offering them competitive remuneration and benefits, flexibility, and learning and growth opportunities. Financial literacy education drive to educate staff on basic financial management issues. Education on certain policies relating to the use of social media. Financial wellness workshops Social media education drive Talent management workshops Talent management. Performance management. Performance ratings were audited by the Executive Committee and adjustments were made where necessary Regulators and government: who enable Strate s environment by providing us with a legal licence exercising our role as a trusted SRO that enables and promotes a world-class settlement Regulatory requirements and compliance. Regulation and collaboration of new services. Engagements with regulatory bodies including one-on-one meetings or workshops. to operate. environment in South Africa. Shareholders: who emphasise governance and ensuring accountability, and building and Resignation of Chairman. Appointment of new Chairman. financial performance. maintaining a financially sustainable business. Emergence of disruptive technologies. Progress of strategic projects. Pricing of service fees. The Board of Directors is provided with continuous feedback and updates in terms of strategic projects and developments on disruptive technology. CEO one-on-one meetings with shareholder representatives to finalise the strategy. Shareholders: who play an instrumental role in our success through collaboration and key strategic partnerships. maintaining productive and progressive relationships, and supporting their businesses. Delivery timelines not met on BaNCS project. Lessons learnt from previous implementation have been incorporated into new products for further implementation. Communities: in which and where we operate. developing them and continuing to have a Community involvement - corporate Participated in various charity activities. positive impact on their lives. social investment.

51 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Labour Practices, Environment and Social Value Our most important asset is our people. In a competitive environment, human resources are key to progress and continued growth. Attrition rates are cyclical and often mirror the economic environment. Staff turnover was 15,5% (2015: 9,5%). Strate recruited 26 new staff members to facilitate growth and fill vacancies. Skills remain a market challenge. Therefore, it is of strategic importance to invest in the surrounding communities and the development and retention of employees. Training and development Strate invested R2,8 million (2015: R2,0 million) in training and development programmes for employees. Our strategic focus in this area offers financial resources, opportunities and facilities to all employees, with the aim of developing competencies and proficiencies. Training prepares Strate s employees for future opportunities, growth and demands. Strate couples its skills development interventions with strategic objectives to achieve service levels that align to the highest quality standards. Sponsored Education and Training (SET) includes assessments or exams that form part of a formal qualification or certificate through a registered and accredited learning institute. Out of a permanent staff complement of 132, 21 employees completed SET programmes in their fields of expertise. On completion of the SET programmes, employees gave a presentation to their respective departments about the experience they gained. They are encouraged to make recommendations on how the company can improve its effectiveness, based on their newly acquired knowledge and skills. Strate s performance management system In 2016 Strate implemented a revised performance management system. Employees ratings are now determined on the achievement of key performance indicators, the rating of which is determined on a more conversational basis rather than being measured on a strictly mathematical basis, as they were previously. Further information on the new performance management system is included in the remuneration report on page 96. Strate (Pty) Ltd Annual Intergrated Report

52 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Safety management Strate is committed to providing employees, contractors and visitors with a healthy and safe working environment in accordance with the Occupational Health and Safety Act, 85 of 1993 (OHS Act). Through a process of continuous improvement, Strate seeks to integrate health and safety into all areas of its operations and activities. A safety and health conscious environment supports preventive and responsive attitudes and behaviour at all levels. Strate complied with the general requirements of the OHS Act by ensuring that employees are trained and inducted on all OHS aspects. The policy is reviewed biennially and communicated to employees. Socio-economic development Strate continually pledges its commitment to assist in improving the lives of individuals and communities in South Africa. The company s socio-economic development (SED) policy, which incorporates corporate social investment (CSI), considers the B-BBEE Codes of Good Practice (CoGP), the Financial Sector Charter (FSC) and the new BEE Act published in the Government Gazette. In our 2015 Annual Integrated Report, we introduced an entrepreneurship programme (ivalue) in collaboration with the Valued Citizens Initiative and the University of Johannesburg. The project aims to provide learners from Kwena Molapo High School (eight African males and 17 African females) and Forte Secondary School (14 African males and 13 African females) with basic business management and entrepreneurship skills. The primary focus areas of this programme are idea generation, business planning and branding. Social objectives include identifying problems and decisions using critical thinking; effective teamwork; and enhancing leadership and management skills. We are pleased to report that the initial project was successful and the learners are benefiting from the real-world experience of running a business. This project will run over a two-year period. Other SED initiatives include the following charities and non-profit organisations: Straight from the ground, University FIMO sponsorship, JSE liberty Life, Discovery Soccer Park, Nelson Mandela Day, Sunflower Fund, Tabernacle, Smiles Foundation, 94.7 Cycle Challenge, Liquid earth, Avril Elizabeth Home, Christ Church Christian Centre, Ebenezer School Fees, Cell C Day, African Children Christian Centre, Kgosi Neighborhood Foundation, and Maharishi Education Trust. Strate (Pty) Ltd Annual Intergrated Report

53 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information Strate Charity Shares (SCS) Many investors own small holdings of securities that would not be financially viable to sell. Strate offers a charity donation programme that allows shareholders to quickly and easily donate those securities to charity. Historically, donations only included equities, but the scheme was expanded in 2015 to accept the donation of bonds. There is no cost to the donor and donations are tax-deductible. SCS is a highly effective mechanism for disposing of holdings of securities that are too costly to sell. We are proud that, by the end of 2016, SCS donations totalled R6,2 million. Transformation B-BBEE The 2015 audited AFS formed the basis for the 2016 B-BBEE audit. Strate was categorised as a level 3 contributor with an overall recognition level of 137,5%. Significant milestones were reached under the categories of ownership, skills development, preferential procurement, enterprise development and SED. During the previous B-BBEE audit, Strate complied with the FSC. A comprehensive B-BBEE gap analysis was conducted during 2016 to establish the areas that require attention by Strate. The proposed new FSC, anticipated to be gazetted during 2017, is more onerous than the previous edition. In anticipation of this, Strate introduced new initiatives to accommodate the new targets and requirements stipulated by the Department of Trade and Industry (dti). Companies in the financial sector are obliged to operate on the basis set out by the FSC. The FSC Codes contain all seven elements of the generic scorecard (i.e. ownership, management control, employment equity, skills development, preferential procurement, enterprise development and SED). During the 2016 B-BBEE audit, the following results were realised: Ownership Strate s shareholders control ownership of the company. This element is controlled by Strate s shareholders and the score remained unchanged since last year, at 13 out of 14. Management and control This element relates to Strate s Board of Directors. Strate s score increased from 1,30 in 2015 to 1,33 in 2016 out of a maximum of 8 points. The appointment of the Chief Financial Officer, who is an Indian woman, resulted in a positive impact on Strate s BEE score. Employment equity Strate s score decreased from 10,04 in 2015 to 8,44 in 2016 out of a maximum of 15 points. This decrease was due to staff turnover of senior African employees. Strate is committed to affording equal opportunities Strate (Pty) Ltd Annual Intergrated Report

54 03 How we Create Value 01 About this Report 02 Our Company 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance 07 Financial Information to all employees. This is reflected in the employee demographics, indicating that African representation at Strate increased from 62% in 2015 to 69% in 2016, of which 37% are African females and 2% are disabled Africans. African representation at senior management level remains a challenge. Skills development R3 million was spent on the development of African employees, of which R1,3 million was spent on African female employees. These amounts include salaries paid to all African employees who participated in Strate s GIBS Leadership Acceleration Programme, learnerships and other SETA-accredited programmes. The overall score for skills development decreased to 8,8 out of 10 (2015: 9,25). This decrease was mainly due to Strate employing one less disabled African female in a learnership programme. Preferential procurement Strate s score for this element increased overall from 12,38 (2015) to 12,64 out of 16. Strate s level 3 contributor status, which, combined with its accreditation as a value-adding supplier (VAS), enables its South African-based clients to claim 137,5% B-BBEE preferential procurement credits for the full value of purchases made from Strate. Strate achieved its target score, although total BEE procurement spend decreased to 114,21% 2016 (2015: 129,97%). Procurement from qualifying small enterprises (QSEs) and exempt micro enterprises (EMEs) decreased from 24,90% (2015) to 11,98%. Procurement from black-owned suppliers decreased from 6,25% (2015) to 4,46%, and from black woman-owned suppliers increased to 4,21% from 0,25% in Enterprise development During 2016, Strate achieved 15 out of 15 for the enterprise development element. The early payment system applied by Strate is still successful and enabled Strate to achieve the maximum 3 out of 15 points. A once-off loan to ASISA contributed the remaining 12 points. Strate s contribution of an estimated 4,2% net profit after tax (NPAT) loan to ASISA resulted in immediate recognition points at a 70% multiplier benefit. This contribution was in the form of an interest-free loan with a seven-year term mandate. Financial and incubation support to industry-aligned SMEs was developed, and Strate is fully entitled to use the ASISA Enterprise Development Fund s portfolio of SME investments for marketing and brand benefit. SED During 2016, Strate continued to support worthy causes and charities in line with the SED policy, which requires the company to spend 0,70% of NPAT to qualifying charities. Strate achieved a score of 3 out of 3 in this category. We also contributed an additional 0,30% NPAT on consumer education initiatives. We continue to achieve good results by meeting most of the B-BBEE targets through new programmes and a sound understanding of the principles that drive transformation. It is important to note that the new FSC, which is aligned to the new B-BBEE Act, was published for public comment and is anticipated to be implemented before the end of Strate (Pty) Ltd Annual Intergrated Report

55 04 56 Leadership Reviews Chairman s Review 59 Chief Executive Officer s Review

56 04 Leadership Reviews 01 About this Report 02 Our Company 03 How we Create Value 05 Performance Highlights 06 Corporate Governance 07 Financial Information Chairman s Review Introduction This is my first review as the recently appointed Chairman of the Board of Directors of Strate and I wish to acknowledge the outgoing Chairman s invaluable contribution to the company. Bobby Johnston s knowledge of the market and his technical expertise were indispensable components of the company s success. It is comforting to know that this knowledge is not lost to the company, as Bobby has made himself available on a consultancy basis in the future. Operating and delivering in challenging times The year under review was another lacklustre period for South Africa and the global economy. Among numerous challenges, ratings agency downgrades were constantly looming; our constitutional democracy was put to the test; and the sustained low economic growth rate and the persistent high unemployment rate remain points of concern for the country. Despite this operating context, Strate remains robust as a CSD, and our performance demonstrates our resistance to tough economic conditions. However, if economic conditions remain subdued, it could take its toll on us in the longer-term. Opportunities and challenges Strate is prepared to embrace new opportunities and is well positioned to introduce innovative and responsive clearing, settlement and asset servicing systems to the financial markets in South Africa. Over and above focusing on operational excellence and delivering on our core services, we are overhauling our bond clearing and settlement system with new advanced Debt Instrument System (DIS) technology that will take the entire market forward using global best practice and standards. Strate committed considerable resources to ensure that the DIS project s timelines are adhered to and that the overall market-wide implementation in 2017 is conducted smoothly. We are cognisant that the Electronic Trading Platform (ETP) for government bond trading, a project due to be implemented by National Treasury, is dependent on the successful implementation of Strate s DIS technology. Strate (Pty) Ltd Annual Intergrated Report

57 04 Leadership Reviews 01 About this Report 02 Our Company 03 How we Create Value 05 Performance Highlights 06 Corporate Governance 07 Financial Information Maintaining our high standards of operational excellence in meeting our settlement obligations as a CSD is non-negotiable. The fixed income market can certainly look forward to the benefits of our DIS technology, as well as successfully meeting the challenge of delivering our projects to bring further benefits and efficiencies to the market. Strate s success lies in its independence and good corporate governance. We continue to be a trusted and independent party in the market, which is evident by us offering CSD services to new stock exchanges. As reported by the media, a number of stock exchanges have applied for licences and will need to appoint a CSD to provide post-trade settlement services. Two exchanges, ZAR X and For Africa Exchange (4AX), have publicly stated and formally appointed Strate as their CSD. We look forward to working with our current and new clients in the years ahead. It is pleasing to note that the dispute on the recovery of fees mentioned in the 2015 report has been settled. Our regulatory environment The introduction of new international and local regulations, which aim to protect the financial markets from systemic risk, are placing an increasing amount of pressure on financial market players. Strate is very cognisant of these pressures - where businesses are not only expected to improve their operational performance, lessen costs and change the way in which they operate to meet greater regulatory demands - and continues to look at ways to assist market players with solutions to address these challenges. As a Board, we proactively consider our regulatory environment and attempt to keep abreast with new regulations that could prospectively impact our business landscape. The impending introduction of the new Financial Sector Regulation Bill (FSRB), which is known as the Twin Peaks model of financial regulation for South Africa, will have an impact on Strate. As a financial market infrastructure (FMI), we currently report to the Financial Services Board (FSB) as our regulator. However, under the new model, a prudential authority housed in the South African Reserve Bank (SARB) will be appointed and the FSB will be transformed into a dedicated market conduct regulator, named the Financial Sector Conduct Authority (FSCA). We are keeping up to date with these changes and I am confident that Strate will continue to act as a highly competent self-regulatory organisation (SRO). Strate (Pty) Ltd Annual Intergrated Report

58 04 Leadership Reviews 01 About this Report 02 Our Company 03 How we Create Value 05 Performance Highlights 06 Corporate Governance 07 Financial Information Governance Our approach to corporate governance enables us to create value for our stakeholders and deliver on our mantra. The majority of directors is independent and it is a Registrar s licensing condition to uphold the independence of the Board. We are currently exploring how we can welcome and implement the changes presented to us by the new King Code on Corporate Governance (King IV). Our approach to corporate governance enables us to create value for our stakeholders and deliver on our mantra. The majority of directors is independent and it is a Registrar s licensing condition to uphold the independence of the Board. We are currently exploring how we can welcome and implement the changes presented to us by the new King Code on Corporate Governance (King IV). Appreciation I extend my gratitude to Strate s participants, shareholders and the JSE Ltd for their continued support and for being the reason our core business exists. As a Board, our priority is to continue to deliver on our mantra and act in Strate s best interest while considering our stakeholders. I thank Monica Singer and her executive team for their commitment and diligence in fulfilling their duties, and every Strate employee for contributing to, and driving towards, another year of innovation and operational excellence. Rob Barrow Chairman Strate (Pty) Ltd Annual Intergrated Report

59 04 Leadership Reviews 01 About this Report 02 Our Company 03 How we Create Value 05 Performance Highlights 06 Corporate Governance 07 Financial Information Chief Executive Officer s Review For over 18 years, Strate has taken pride in providing the post-trade environment with world-class infrastructure. We are pioneers in finding innovative solutions to deliver reliable exchange-of-value settlement systems was another year during which we extended our track record of success and further developed the standpoint of South Africa s financial markets. The country continues to rank highly in the financial market development pillar of the World Economic Forum s Global Competitiveness Index, which proves our financial system is robust. The central, pivotal role Strate plays in the South African financial markets must never be undermined. We pride ourselves on the reputation we have earned since inception, which is built on a strong set of values, as well as our sound governance, independence and commitment to excellence. Strate has an obligation towards the various markets that we serve by leveraging off our core services, and failure to perform the CSD function is not an option. We need to reinforce our core business to ensure that we operate seamlessly on a day-to-day basis and deliver on our strategic projects. We have our finger on the pulse of financial technology to ensure we continue to evolve. The need for innovation and change has become an unquestionable, and an equally important part of operating a successful organisation. For years, Strate has incorporated innovation into each employee s performance objectives to motivate employees to identify opportunities across the board, whether it relates to the evolution of the core business or the exploration of other areas. If there is a new technology that adds further value, Strate embraces it and will work with its stakeholders to improve South Africa s financial markets. The rise of disruptive technologies, specifically blockchain, has provided new technology to be leveraged across global financial markets. In the same way that the Internet has transformed the way in which people exchange information, blockchain and distributed ledger technology are transforming the way people will exchange assets. Should companies ignore the change, they will be left behind. To balance our need to remain relevant and keep abreast of the threat of disruptive technologies facing the CSD industry, while remaining focused on delivering on our core business, we recognised the need to implement changes to the company s structure. Strate (Pty) Ltd Annual Intergrated Report

60 04 Leadership Reviews 01 About this Report 02 Our Company 03 How we Create Value 05 Performance Highlights 06 Corporate Governance 07 Financial Information Highlights The versatility and security of Strate s corporate actions system enabled some large and complex corporate actions to be processed. The largest value corporate action by far was the Anheuser-Busch InBev (ABI) acquisition of SABMiller (SAB). Strate was required to settle R116 billion from ABI to the shareholders of SAB. This was accomplished through the National Payment System of the SARB in central bank funds where no party was subject to credit risk and the settlement was processed seamlessly. Regarding the settlement of corporate actions in central bank funds, Strate leads the world, which gives credit to South Africa s sophisticated banking system. Other complex corporate actions included that of African Bank with the launch of the Good Bank and multiple financial instruments, in place of the troubled entity which preceded it. Strategic progress Operational excellence We strive for an unmatched performance track record, and drive this through a series of strategic focus areas and key projects. Strate has always sought technology that brings development and growth, which is why the tagline of Always Discovering could not be more fitting. In these fast-paced times of change, it is imperative that we continue to be dedicated to innovation. IT roadmap We successfully completed the first phase of our IT roadmap by migrating our money market system to the TCS BaNCS Market Infrastructure (TCS BaNCS MI) during February The implementation of TCS BaNCS MI Project for Bonds (Debt Instrument Solutions (DIS)), as the second phase of the roadmap, is underway. User acceptance testing continued into early We are fully aware of the reliance of National Treasury s Electronic Trading Platform on DIS, and we look forward to the successful Strate (Pty) Ltd Annual Intergrated Report

61 04 Leadership Reviews 01 About this Report 02 Our Company 03 How we Create Value 05 Performance Highlights 06 Corporate Governance 07 Financial Information implementation of the Strate DIS project during We remain devoted to the successful implementation of DIS, as it is Strate s priority project. The final phase, the TCS BaNCS MI Project for Equities, is expected to enter the fold between the last quarter of 2018 and the first quarter of 2019, subject to the successful implementation of DIS. We look forward to a far more streamlined service offered to clients in 2019 as we decommission the old system and run the TCS BaNCS MI, which will save back office costs and provide substantial benefits to the market. New exchanges Strate s success lies in its independence and good corporate governance. We continue to be a trusted and independent party in the market, which is evident by us offering CSD services to new stock exchanges. At the beginning of September 2016, the FSB notified the market that it had granted ZARX and 4AX exchange licences, with conditions. Strate was appointed the CSD for both exchanges and will continue to explore further opportunities with other bourses. We look forward to working with our current and new clients in the years ahead. Collateral Management Services Strate s Collateral Management Services (SCMS) aim to provide a cost-effective automated solution for givers, receivers and intermediaries associated with the securities lending market, the five largest South African banks. In September, SCMS administered trades of substantial value for the first time. However, due to delays and challenges in the secured interbank market, revenue targets were not achieved. Management believes that SCMS is ideally positioned to take advantage of the upcoming regulatory changes, which will provide a tipping point in terms of revenue generation. Forecasts predict that ideal revenue generation will be achieved in line with these regulations between 2018 and Advanced data analytic services At the end of 2015, our team realised the opportunity to enhance the company s data services capabilities. These capabilities are an opportunity to provide us with an in-depth understanding of predictive trends, an analysis to influence our own strategy, and to develop analytical functions as a service to our clients that allow them to make informed decisions. Strate (Pty) Ltd Annual Intergrated Report

62 04 Leadership Reviews 01 About this Report 02 Our Company 03 How we Create Value 05 Performance Highlights 06 Corporate Governance 07 Financial Information I am pleased with our appointment of a qualified data scientist and the development of a dedicated data services team. In the forthcoming year, we will implement technology that will enable us to harness our big data intelligence and launch a data analytics tool for client subscription. These analytics comply with various legislation and align to our duties in terms of the Financial Markets Act and Companies Act. The benefits of the big data capabilities will be fully realised once we have the ability to pull data from external sources. T+3 During 2016, history was made in the South African equities market as the JSE Ltd, which had run on a five-business day settlement cycle for the past few decades, moved to a new three-business day settlement cycle (T+3). This formed part of a project spearheaded by the JSE, which was initiated in 2013 with various stakeholders. This move was in line with global best practice as recommended by the International Organisation of Securities Commissions, mitigating both systemic and settlement risk. In a media release, the FSB explained that a substantial portion of the risks in clearing and settlement has been directly related to the length of time it takes for trades to settle. A shorter settlement cycle has positive implications for the volume of transactions, market liquidity and the opportunity cost associated with the provision of collateral, the release read. Strate and the market played a key role in the successful implementation of the JSE s T+3 project, demonstrating the positive impact of collaboration in the financial markets. Strate was fully committed to working with the market to make the JSE s T+3 settlement cycle a reality and we commend the JSE for a successful implementation. Cyber Governance The safety and efficiency of the financial markets is of utmost importance. As an FMI, we recognised that cyber governance is key and the ability to resume operations quickly and safely after a cyber-attack is paramount. We have taken the necessary steps to ensure that Strate adheres to the CPSS-IOSCO Principles and have implemented a Cyber Resilience Plan within Strate. Ongoing education of Strate employees took place together with regular evaluation. Strate (Pty) Ltd Annual Intergrated Report

63 04 Leadership Reviews 01 About this Report 02 Our Company 03 How we Create Value 05 Performance Highlights 06 Corporate Governance 07 Financial Information Financial viability Although we are a for-profit company, we do not set an objective to maximise on profit. Our revenue of R445,5m for 2016 exceeded forecast by 5% and expenses of R309,2m were 4% lower than projections, resulting in R112,1m of NPAT for the year. Strate recognised that it was experiencing a leak in revenue through the Ad Valorem fee, which is charged to the brokers and recovered via the JSE Ltd. This has since been resolved. Strate played an integral role by proposing a new revenue model. Please refer to the financial review on page 66 for further information. Stakeholder centricity South Africa s financial market s key success factor is its ability to work together to achieve key market-wide projects and initiatives. Strate s success over the years can be largely attributed to the collaboration with strategic partners and alliances that we established with other CSDs and forums. Our relationship with the issuers is the best it has ever been in the history of Strate. It has taken an extensive amount of time and effort by our team to restore these relationships to the point where no matters of concern were raised at any of the issuer forums in London, Johannesburg or Cape Town. The issuers are also interested in working with Strate on the proxy voting solution using blockchain technology. Strate chaired the Liquidity Alliance (LA) sub-committee to research blockchain initiatives for cross-border collateral mobilisation. We also signed a letter of intent with Russia s National Settlement Depository (NSD) to forge a partnership that will create solutions using the blockchain. Our emphasis on governance continues to be of strategic importance and must be in the best interest of the financial markets. We remain committed to these sound governance principles. Learning and growth The wellbeing of our highly esteemed employees is a crucial element to the future prospects and sustainability of Strate, especially in the face of global competition. We strive to ensure the positive morale of our staff and take pride in being regarded as an employer of choice. We invest in various retention and growth initiatives to build relationships with our staff. Strate (Pty) Ltd Annual Intergrated Report

64 04 Leadership Reviews 01 About this Report 02 Our Company 03 How we Create Value 05 Performance Highlights 06 Corporate Governance 07 Financial Information Over the years, Strate s DNA has become ingrained with the passion to positively impact and change the lives of the community. Strate Charity Shares (SCS) continues to serve as an independent non-profit organisation and charity donation programme, which addresses the long-standing problem of investors holding small and unwanted shares or bonds. We embrace giving back to the community, regardless of the economic conditions we face. Strate is committed to supporting South Africa s transformation goals. Although the new BEE Codes pose a challenge for the whole industry, we are continuously looking at ways to improve our score and contribute to transformation. Appreciation We said farewell to Bobby Johnston in I am grateful for the role Bobby played since Strate s inception, as my mentor and as Strate s Chairman for the past five years. Bobby is succeeded by Rob Barrow, who has served on Strate s Board as a director for a number of years and has a wealth of expertise and knowledge spanning more than two decades in the capital markets. I look forward to working with him in his new role as our Chairman. We also welcome Ashnee Maharaj, our newly appointed Chief Financial Officer. Anthony van Eden left the employment of Strate as at 31 August 2016 and we wish him the best in his future endeavours. I would like to recognise and express my gratitude to the people of Strate our Board of Directors, the Executive Committee and our employees. You are the heart of our organisation, and your relentless efforts to drive the company forward are invaluable. Our collaborative successes are tangible proof of your devotion to our mantra. Lastly, to our participants, shareholders and stakeholders, thank you for supporting Strate this year. Your loyalty will continue to be rewarded. Monica Singer Chief Executive Officer Strate (Pty) Ltd Annual Intergrated Report

65 05 Performance Highlights 66 Financial Review 68 Revenue 69 Expenditure 70 Liquidity and CAPEX 71 Forward Focus

66 05 Performance Highlights 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 06 Corporate Governance 07 Financial Information Financial Review We improved our bottom line by 8% to R112,1 million. Overall, 2016 was a positive year, following an exceptionally good 2015, during which we exceeded the R100 million NPAT mark for the first time since inception. The recognition of a significant amount of revenue, relating to the recovery of equity ad valorem fees arising from the fee dispute with the JSE which was underpaid in prior years, contributed to our performance. It is encouraging to note that, despite our investments in research and development (R&D) activities, cyber security enhancements and company rebranding, our cost-to-income ratio remains at 69%. Performance Summary Earnings Net profit after tax (NPAT) increased by 8% to R112,1 million (2015: R103,5 million). Earnings before interest, tax, depreciation and amortisation (EBITDA) is 3%, lower at R179,1 million (2015: R185,0 million), mainly due to R&D expenses related to blockchain incurred in Revenue increased to R445,5 million (2015: R404,5 million). 49% of the variance is mainly attributable to the additional revenue recognised in 2016 as a result of the resolution of the fee dispute with the JSE. The balance is due to higher settlement volumes and values traded during the year. Settlement volumes in the equity market increased by 4% year on year. Operating expenditure increased by 11% to R309,2 million (2015:278,0 million), attributable to: higher technology costs associated with the maintenance of dual systems until the complete BaNCS MI suite is implemented; additional advertising and marketing spend due to the rebranding exercise; and R&D activities undertaken during the year. Cash flows remained strong, and improved to bring our cash balance to R269,8 million (2015: R224,9 million). Strate (Pty) Ltd Annual Intergrated Report

67 05 Performance Highlights 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 06 Corporate Governance 07 Financial Information Table 1 Five-year summary: Strate (Pty) Ltd Annual Intergrated Report

68 05 Performance Highlights 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 06 Corporate Governance 07 Financial Information Revenue Revenue per market segment Figure 1: Revenue per market segment (%) m Table 2: Revenue earned per market segment 2016 R m 2015 R m Variance R m Variance % Equity 367,2 331,0 36,2 10 Bonds 61,1 57,7 3,4 6 Money markets 17,2 15,8 1,4 9 Total Revenue 445,5 404, Equities revenue (82% of total revenue), increased by 10% year on year due to higher settlement and trade volumes, and increased average contract note values. Bonds revenue (14% of total revenue) increased by 6% year on year due to higher settlement volumes and the value of assets under custody. Money market revenue (4% of total revenue) increased by 9% year on year due to higher settlement volumes. Strate (Pty) Ltd Annual Intergrated Report

69 05 Performance Highlights 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 06 Corporate Governance 07 Financial Information Revenue per service The diagram below depicts the percentage contribution to revenue per service offering. Settlement services revenue, which accounts for 71% of overall revenue, remains the largest contributor and highlights the impact of this service on Strate s overall profitability. Figure 2: Contribution to revenue per service (%) Expenditure Personnel costs Personnel costs increased by 16% (R20 million) to R142 million (R122 million). The main contributors to the increase were average CPI increases on gross remuneration, additional headcount recruited during the year and a reduction of remuneration capitalised to projects. Depreciation and amortisation Depreciation and amortisation reduced by 27% to R41 million in 2016 (2015: R56 million). This was largely due to accelerated amortisation of our core settlement system in 2015 to align with the implementation of its replacement, TCS s BaNCS MI technology. Strate (Pty) Ltd Annual Intergrated Report

70 05 Performance Highlights 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 06 Corporate Governance 07 Financial Information IT costs Technology costs increased by 19% to R83 million (2015: R70 million) mainly as a result of dual maintenance expenditure on both existing technology as well as the new BaNCS MI platform. Other operating expenditure Other operating expenditure grew by 40% to R42 million (2015: R30 million). This is mainly attributed to R&D initiatives on disruptive technology, and increased advertising spend on rebranding and marketing initiatives. Liquidity and Capex The company aims to ensure that it maintains a minimum balance that is equal to six months cash operating expenditure. The minimum balance for 2017 is set at R150 million (2016: R135 million). Excess cash is used to fund capital expenditure and distributions to shareholders, and is being actively managed by our newly formed internal Investment Committee. While the company is not, currently, subject to externally imposed capital requirements, it has assessed its capital adequacy against the draft regulations being issued in terms of the Financial Markets Act and is satisfied that it will meet the regulatory requirements when these are formally introduced. Strate (Pty) Ltd Annual Intergrated Report

71 05 Performance Highlights 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 06 Corporate Governance 07 Financial Information Cash flows generated from operations improved during the year, bringing our cash balance to R269,8 million at year-end. This is after capital expenditure of R35 million (2015: R45 million), 56% of which relates to our investment in terms of the IT roadmap as well as collateral software development in respect of IRESS and ITAC. Capital expenditure for 2017 is estimated to be R99,8 million, 58% of which relates to continued efforts relating to the IT roadmap, and 22% in respect of the refresh of our IT storage infrastructure. This will be fully funded from our cash reserves. We continue to remain fully funded by equity and are satisfied that this is appropriate in the short to medium-term. Forward Focus Collateral Management Services There are encouraging developments regarding our Collateral Management Services offering, such as the JSE ITAC project, which is progressing well. In addition, regulatory developments to support the services are expected to be rolled out at the end of 2017, and SARB has agreed to be involved in testing the services. Despite revenue targets not being achieved, we are confident that SCMS will be a significant revenue stream for us in the near future. We are excited about the prospects of servicing newly licensed exchanges and look forward to profitable and mutually beneficial relationships. Cost containment in our business is key, and we are confident that once the full BaNCS MI suite is implemented, we will begin to see efficiencies in our business processes and a positive impact on our bottom line through cost reduction. Strate (Pty) Ltd Annual Intergrated Report

72 06 Corporate Governance 73 Introduction to Corporate Governance 74 Board and Committees 74 Board of Directors 86 Executive Committee 87 Audit, Risk and Compliance Committee Report 92 Regulatory and Supervisory Committee Report 97 Remuneration Committee Report 102 Social and Ethics Committee 103 Participant Failure Committee (Pfc) 104 Urgent Issues Committee

73 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Introduction to Corporate Governance The Board and Executive Committee strive to create and maintain a culture of good governance across the business. Good governance is linked to the company s philosophy, which incorporates its purpose, vision and values. The Board faced a number of resignations during the 2016 financial year, which left the Controlling Body without a quorum for a two and a half month period between 14 September 2016 and 1 November Following shareholder intervention, certain non-executive directors were reappointed, thus reinstating the quorum. It should be noted that this took place during a period between meetings. Strate continues to practice high corporate governance standards, which contribute to the ongoing sustainability of the company, enhancing long-term shareholder value creation, and ensuring that stakeholders benefit from Strate s continued success. The Board is responsible for ensuring that the company adheres to sound corporate governance principles and is accountable to shareholders, while also considering the interests of other stakeholders, such as clients, employees, suppliers and regulators. Governance extends beyond compliance with codes, legislation and regulations. Corporate governance processes are continually reviewed and improved to align with internal requirements and to ensure adherence to legislation, regulation and best governance practices. This report sets out the key governance principles adopted by the Board in governing the company. The Board endorses the principles of accountability, integrity and transparency as contained in the King Code for Corporate Governance (King III). King III principles The Board confirms that the company has, in all material respects, applied the King III principles during the 2016 financial period. The company will perform an evaluation against King IV principles during the year. Click to view a table indicating Strate s application of the King III principles. Strate (Pty) Ltd Annual Intergrated Report

74 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Board and Committees The Board has six permanent committees to assist in the execution of its responsibilities, as follows: Audit, Risk and Compliance Committee Regulatory and Supervisory Committee Remuneration and Nominations Committee Social and Ethics Committee Participant Failure Committee Urgent Issues Committee Further information pertaining to Strate s Board and committees can be found on Strate s website: Board of Directors The names and details of the directors and the alternate directors in office at the date of this report are as follows: Strate (Pty) Ltd Annual Intergrated Report

75 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Board of Directors Mr RJG Barrow (70) CA (SA), Advanced Management Programme (UCT) Independent non-executive Chairman 8 years in service Committees Regulatory and Supervisory Committee # Remuneration and Nominations Committee Participant Failure Committee Urgent Issues Committee Experience Rob has a background in audit of financial institutions at PricewaterhouseCoopers (PwC) and joined the JSE Limited in 1992 where he filled the position of Director: Surveillance and gained experience in stock exchanges and stock broking. After leaving the JSE Limited and spending time as an independent consultant, he became the Deputy Executive Officer of FSB and in 2005 became Executive Officer. He has extensive experience in regulatory and supervisory matters. Rob is also a director on the SARB board. Ms MJ Singer (56) BAcc (Wits), CA (SA), FInstD Executive director 19 years in service Committees Participant Failure Committee Urgent Issues Committee Audit, Risk and Compliance Committee^ Remuneration and Nominations Committee^ Social and Ethics Committee Experience Monica was previously a consultant for the World Bank and the Technical Director at the South African Institute of Chartered Accountants (SAICA) before joining Strate. She was CEO of Strate since its inception in 1999 and is vicepresident of African Middle East Depository Association (AMEDA). Mr C Bruyns* (40) CA (SA) (University of Pretoria) Non-executive director Nine months in service Committees None Experience Charl is with Standard Bank Group for 11 years, working in the investment management and banking business. At the investment management business, he was head of the quantitative analytics team and headed the fund valuations team. During his career at Standard Bank he fulfilled the role of Chief Financial Officer (CFO) of the Corporate and Investment Bank business in Africa, CFO and Chief Operating Officer (COO) for the Transactional Products and Services business, and Treasurer for the African business. Strate (Pty) Ltd Annual Intergrated Report

76 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Board of Directors Mr PL Campher (68) BEcon (Stellenbosch) Independent non-executive director 13 years in service Committees None Experience Leon has 13 years of experience with Old Mutual as an investment analyst and portfolio manager. He founded Syfrets Managed Assets in 1985 and was portfolio manager and Chief Executive Officer (CEO). In 1993 he was a founding member of Coronation and served as CEO of Coronation Asset Management and executive director of Coronation Holdings. In 2002, he retired due to ill health. In 2003, Leon was instrumental in the formation of Investment Management Association of South Africa (IMASA) where he served as CEO until At that time he was instrumental in the formation of Association for Savings and Investment South Africa (ASISA) and serves as CEO. Directorships include, among others, ASISA, International Investment Funds Association, Sun International, BUSA (Business Unity South Africa) and JSE Clear. Leon is also Lead Independent Director of Brimstone and Chairman of Equites Property Fund Ltd. Mr CHM Edwards (41) BSocSci Philosophy, PGDip Management (UCT) Non-executive director 9 months (since 2014 held positions of either director or alternate director) Committees Audit, Risk and Compliance Committee Experience Chris joined Absa in March 2010 where he is a Managing Principal and head of the Prime Services and Passive Funds businesses. Prior to joining Absa, Chris spent 11 years with Morgan Stanley, based in London, and then Hong Kong. During this time, he held a variety of positions, including responsibility for the distribution within the Prime Brokerage & Listed Derivatives businesses. Chris is a director of Absa Stockbrokers. Mr K Getz (61) BProc, LLM (UCT) Lead independent non-executive director 3 years in service Committees Regulatory and Supervisory Committee Social and Ethics Committee # Experience Keith is an experienced lawyer in the following areas, among others: takeovers and mergers, private equity, corporate restructuring, black economic empowerment transactions, exchange control regulations, commercial law contracts, regulatory compliance, stock exchange listings and generally advising corporate clients nationally and internationally on corporate and commercial matters. Directorships include Mr Price Group Limited and Spur Corporation Limited. Strate (Pty) Ltd Annual Intergrated Report

77 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Board of Directors Dr A Greenwood (45) BSc (Mathematics, Chemistry), PhD (Chemistry, UCT) Four months in service Committees None Experience Alicia is currently director of Post Trade Services at JSE Limited. She has experience in strategy, risk and capital management through various roles at Standard Bank, Discovery, Accenture and AECI. Mr RM Loubser (66) MCom Statistics (UP), BCom (Hons) Accounting (UJ), CA (SA) Independent non-executive director 18 years in service Committees Participant Failure Committee # Audit, Risk and Compliance Committee Remuneration and Nominations Committee Urgent Issues Committee Experience Russell s previous and current positions include CEO and executive director of JSE Limited, member of the Board of Directors of the World Federation of Exchanges (WFE), member of the Board of Directors of the International Federation of Accountants, Chairman of Safex, executive director of Financial Markets at Rand Merchant Bank Limited, Council Member of the University of Pretoria and independent non-executive director at FirstRand Limited. Ceased to be a member of RemNomCo due to reconstitution of the Committee. Ms A Maharaj (40) CA (SA) (University of Natal) Executive director 10 months in service Committees Audit, Risk and Compliance Committee^ Remuneration and Nominations Committee^ Social and Ethics Committee Experience Ashnee has extensive experience in the financial and banking sectors across a broad spectrum of areas including finance, internal audit, insurance, consulting, derivatives and structured finance. She has filled executive positions for 10 years and held CFO positions in Lereko Metier Private Equity Fund, Barclays Venture Capital Division and Momentum Asset Management and Standard Bank Insurance Brokers. Strate (Pty) Ltd Annual Intergrated Report

78 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Board of Directors Ms D Naidoo (44) MCom (Tax), CA (SA) Independent non-executive director 6 years in service Committees Audit, Risk and Compliance Committee # Participant Failure Committee Urgent Issues Committee Experience Daisy spent nine years with Santam Capital Markets and currently serves as an independent non-executive director on the boards of, among others, Anglo American Platinum, Barclays Africa Group Limited, Mr Price Group Limited, Hudaco Industries and Omnia Holdings. She is a member of the Tax Court of South Africa and a trustee of the Discovery Medical Aid Scheme. She also provides risk advisory services and serves on the investment and credit committees of funds. Mr RSM Ndlovu (50) BBusSci (Hons) (University of Zimbabwe) Independent non-executive director 9 years in service Committees Remuneration and Nominations Committee Experience Raymond has extensive senior management and entrepreneurial experience in various sectors in the financial services industry, encompassing investment banking, asset management and stockbroking, since He was previously with Prodigy Asset Management, Metropolitan and Standard Chartered Merchant Bank. He co-founded and was CEO of an institutional stockbroking firm, Noah Capital Markets, for 10 years until July He is currently an Investment Executive at Remgro Limited and serves on the boards of various portfolio companies. Ms NF Newton-King (50) BA, LLB (Stellenbosch), LLM (Cambridge) Non-executive director 5 years in service with a broken period within the year (resigned in Sep 2016 but re appointed in November 2016) (Served as alternate director from 2000 to 2011) Committees None Experience Nicky is CEO of JSE Limited and World Economic Forum (WEF) Global Leader of Tomorrow. She was awarded SA Businesswoman of the year in 2003 and is member of the Board of the World Federation of Exchanges (WFE). Nicky spent five months at Yale University as a young global leader. Strate (Pty) Ltd Annual Intergrated Report

79 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Board of Directors Mr NG Payne (56) BCom (Hons), CA (SA), MBL (Unisa) Independent non-executive director 15 years in service Committees Audit, Risk and Compliance Committee Regulatory and Supervisory Committee Remuneration and Nominations Committee Experience Nigel has a significant amount of experience in financial markets as well as in audit and risk management. He is a career non-executive director who serves on a number of boards including Mr Price Group Limited, JSE Limited, The Bidvest Group Limited, Bid Corporation Limited and Vukile Property Fund Limited. Mr RD Proudfoot* (56) BAcc (Wits), CA (SA) Non-executive alternate director 4 years in service Committees None Experience Ryan has extensive experience in all financial markets and products with specific expertise in trade execution, securities lending, futures clearing, prime broking, custody, market risk management, credit counterparty risk and regulatory requirements (including Basel III). He has served as a Director on a number of boards including RMB Stockbroking Operations (Pty) Limited and SAFCOM (Pty) Limited. Prior and current management board or memberships include the South African Institute of Stockbrokers, SAFCOM Derivatives Risk Committee, JSE Currency Derivatives Advisory Committee, ASISA s Hedge Funds Standing Committee and JSE Bonds Advisory Com. Ms M Ramplin (42) Financial Derivatives and Regulations - Securities Institute Certificate (UK) Independent non-executive director 6 years in service Committees Audit, Risk and Compliance Committee Experience Marilyn has international experience as a trader and investment banker, with expertise in, among others, over-the-counter derivatives, collateral management, risk management, credit counterparty risk and hedge funds. She is the founder of the Hedge Fund Academy in South Africa, serves as an independent non-executive member of the JSE Clear Risk Committee, and is independent director of several companies including RMB CIS Manco, Ashburton, Investment Solutions and JSE Clear. Marilyn has risk, regulatory and derivatives qualifications and obtained certificates from the Gordon Institute of Business Science (GIBS) in Board Leadership and Corporate Strategy. Strate (Pty) Ltd Annual Intergrated Report

80 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Board of Directors * Alternate director # Committee chairperson ^ Attends committee as an invitee Mr MJ Stocks (50) BCom (University of Natal) Non-executive director Eight months in service as director (since 2008 held positions of either director or alternate director) Committees Remuneration and Nominations Committee # Regulatory and Supervisory Committee Experience Murray has been with Nedbank since 1991 with wide securities and banking experience. He provides great input as the settlement / CSDP Participant expert. He has experience across a broad spectrum of areas including treasury, corporate and international banking, Society for Worldwide Interbank Financial Telecommunication (SWIFT), programme management, customer electronic banking, credit card processing, cash and cheque operations, global trade and securities custodial services. Strate (Pty) Ltd Annual Intergrated Report

81 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Board composition and the independence of directors As at the date of this report, the company has a unitary Board of 14 directors, made up of 12 non-executive directors (of which eight are independent) and two executive directors, as well as two alternate directors. During the year under review, Mr Johnston resigned as a director and Chairman of the Board. Mr Barrow was appointed as Chairman of the Board in his stead, effective 4 November Mr Getz was appointed as lead independent non-executive director, effective 4 November Further information on director appointments and resignations can be found in the directors report in the Annual Financial Statements (AFS). Independence is assessed annually by requesting the directors to complete an independence questionnaire that is based on the King III requirements. The Remuneration and Nominations Committee (RemNomCo) reviewed the completed questionnaires and recommended to the Board that eight of the non-executive directors be classified as independent. In addition to assessing the independence at director level, the questionnaire assessed the classification of directors on the Audit, Risk and Compliance and the Regulatory and Supervisory committees. The roles of Chairman and CEO are separate and clearly defined. This division of responsibilities ensures a balance of authority and power. The Board conduct is such that no individual director has unrestricted decisionmaking authority. Board appointments Directors are appointed by the Board in a formal and transparent manner. The RemNomCo considers candidates and nominates people for appointment as directors. Directors are selected based on their skills, business experience and qualifications. Gender and racial diversity are also considered. All independent non-executive directors are required to retire by rotation at the Annual General Meeting (AGM) of shareholders, and may offer themselves for re-election. Strate (Pty) Ltd Annual Intergrated Report

82 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Director induction and development Newly appointed directors participate in an induction programme. They are introduced to key management and receive a personalised, electronic induction pack containing various documentation. This pack includes, inter alia, the Board and committee charters, statutory information, minutes of previous meetings, and the most recent Annual Integrated Report. Strate is conscious of and continually addresses the need for industry-related training. As part of the directors ongoing development, relevant information is circulated to them regularly, either as part of meeting documentation or on an ad hoc basis between meetings. Directors are invited to attend dedicated training sessions that coincide with certain Board and Regulatory and Supervisory Committee meetings. Board and director evaluation The Board undertakes an annual series of assessments to assess the effectiveness of the Board, committees and the individual contributions of directors, over a three-year cycle (the Steps process). At the beginning of 2017 evaluations of the Board and the committees were performed in respect of the 2016 financial year. A peer review was performed in which directors assessed their own and their peers performance on both the Board and the committees. The assessments included reviews of the various chairpersons of the committees. An assessment was not performed on the new Chairman of the Board, Mr Barrow, due to his short tenure in that position. The evaluations seek to measure the performance of individual directors based on their general contribution, involvement and participation in meetings, as well as the Board composition, appointments, evaluations, and the overall functioning and performance of the Board and its committees as a unit. At its meeting in March 2017, the Board considered and formulated action plans to address the findings of the evaluations. Strate (Pty) Ltd Annual Intergrated Report

83 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Conflicts of interest The company s policy on conflicts of interest applies to all directors and employees. Directors are required to declare their interests in other companies and firms annually. Where a matter for consideration at a meeting is likely to give rise to a conflict of interest or a potential conflict of interest, a confidential section is included at the end of the agenda. Directors with a conflict of interest are required to recuse themselves from the meeting at the time the matter is discussed. Based on the declarations made by each director and which are signed by each director present at Board meetings, no director had a material interest in any transactions with the company during the financial period, other than the interests disclosed in the AFS, all of which are considered as being arm s length. Prescribed officers Only executive directors and, where applicable, their alternates, are viewed as prescribed officers of the company. Directors and officers insurance Directors and officers enjoy the benefit of liability insurance funded by the company to cover instances where they could be held personally liable to the company in cases of negligence, default or a breach of duty or trust. The cover excludes liability resulting from criminal, reckless or fraudulent behaviour. The level of cover is reviewed annually to ensure that it is appropriate. Company Secretary The Company Secretary is suitably qualified and has the necessary experience to perform her duties set out in section 88 of the Companies Act of South Africa, Strate (Pty) Ltd Annual Intergrated Report

84 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Board meetings The Board meets a minimum of four times a year, or more frequently should circumstances require it. Board meetings are conducted according to a formal agenda and directors are required to sign off on their interests at every meeting. Supporting documentation in the form of comprehensive proposals and reports is distributed to directors at least five working days before Board meetings to allow for adequate preparation and to facilitate more relevant discussions at these meetings. Directors have access to all company information and are entitled to obtain independent professional advice at the company s expense, after consulting with the Chairman. Non-executive directors have direct access to the Executive Committee and may meet with committee members independently. Board and Committee Attendance Directors Classification Board Audit, Risk & Compliance Committee Remuneration & Nominations Committee 5 Regulatory & Supervisory Committee 5 Mr RJG Barrow Independent non-executive Chairman 7/7-4/4 7/7 Ms MJ Singer Executive 7/7 4/4* 4/4* - Mr C Bruyns +¹ Non-executive 1/ Mr PL Campher Independent Non-executive 7/ Mr CHM Edwards ² Non-executive 6/6 3/4 # - - Mr K Getz Independent Non-executive 7/ /7 Dr A Greenwood Non-executive 3/ Strate (Pty) Ltd Annual Intergrated Report

85 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Directors Classification Board Audit, Risk & Compliance Committee Remuneration & Nominations Committee 5 Regulatory & Supervisory Committee 5 Mr MR Johnston Mr RM Loubser Resigned effective 29 September 2016 (previously independent non-executive Chairman) Independent Non-executive 3/5 2/3* # 3/3 5/6 # 5/7 # 4/4 3/3 - Ms A Maharaj Executive 6/6 3/3* 3/3* - Ms D Naidoo Independent Non-executive 7/7 4/4 - - Mr RSM Ndlovu Independent Non-executive 6/7 # - 4/4 - Ms NF Newton- King Non-executive 6/7 # - 2/3 # - Mr NG Payne Independent Non-executive 5/7 # 4/4 0/1 # 7/7 Mr RD Proudfoot +³ Non-executive 1/ Ms M Ramplin Independent Non-executive 7/7 2/4 # - - Mr MJ Stocks 4 Non-executive 4/5 # - 1/1 3/7 ^ # Notes ¹ Appointed director on 30 June 2016, rotated to alternate director on 1 August 2016 ² Rotated to director on 6 June 2016 ³ Rotated to alternate director on 6 June Rotated to full director on 1 August The RemNomco was restructured effective 4 November 2016 * By invitation # Apologies ^ Recused from two meetings + Alternate director Attended other meetings that are not reflected in the schedule, in the capacity as an alternate director Strate (Pty) Ltd Annual Intergrated Report

86 Executive Committee Monica Singer CEO Beverley Furman Managing Executive CSD Operations Tanya Knowles Managing Executive Fractal Solutions Ashnee Maharaj Executive Director Finance & HR Dale Connock Chief Risk Officer Dr Maria Vermaas Head - Legal & Regulatory Leigh Bevis Head - Marketing & Business Development Rudi Steenkamp Chief Information Officer Strate (Pty) Ltd Annual Intergrated Report

87 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Audit, Risk and Compliance Committee Report Role, purpose and principal function The Audit, Risk and Compliance Committee is an important element of the Board s system of monitoring and control. It makes recommendations for Board approval on all responsibilities that the Board delegates to it, as well as those imposed by the Companies Act. The committee operated within written terms of reference during the year under review. The terms of reference were reviewed and updated during the year and approved by the Board. Composition and meeting procedures During the year under review, the committee was chaired by an independent non-executive director and its members comprised four independent non-executive directors and one non-executive director. The membership of the committee during the year under review was: Ms D Naidoo Chairman independent non-executive director Mr C Edwards non-executive director Mr R Loubser independent non-executive director Mr N Payne independent non-executive director Ms M Ramplin independent non-executive director At least two non-conflicting members are required to form a quorum. Meetings were attended by appropriate executives, including the Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Information Officer (CIO) and the Head of Risk; representatives from the external and internal auditors; and the FSB, by invitation. The committee obtained assurance from the external and internal auditors that they received full co-operation from management. Strate (Pty) Ltd Annual Intergrated Report

88 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Combined assurance The Combined Assurance Forum (incorporating internal audit, external audit, the CFO, the CIO and the Head of Risk) provides assurance to the Board that the risk management process is integrated into the daily business activities of the company and that the appropriate levels of assurance are obtained where appropriate. Internal audit The internal auditors are responsible for reviewing and providing assurance on the adequacy of the internal control environment according to the agreed internal audit plan. This function has been outsourced to PricewaterhouseCoopers Inc (PwC). The engagement partner is responsible for reporting the findings of the internal audit work to the committee. External auditors The external auditors are KPMG Inc. Mr P MacDonald was appointed as the designated registered auditor. Fees paid to the auditors are disclosed in note 5 of the Annual Financial Statements. Key audit Matters (KAMS) The committee considered and noted the Key Audit Matters contained in the audit opinion of the external auditors. Effectiveness of internal controls Strate aims to maintain a high standard of internal control. After due consideration of information, explanations by management and combined assurance, and discussions with the external auditor on the results of their audit, the committee is of the opinion that Strate s system of internal financial controls is effective and forms a basis for the preparation of reliable financial statements. Going concern The going-concern assumption was reviewed by management during the year. The committee reviewed documentation supporting management s assumption and recommended to the Board the approval of the assessment. Strate (Pty) Ltd Annual Intergrated Report

89 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Risk management The Board has assigned oversight of the company s risk management function to the committee. It fulfils an oversight role regarding the: adequacy of the nature, intent and effectiveness of the risk and control infrastructure; development and maintenance of a comprehensive, dynamic system of internal and external controls to ensure Strate s adherence to the CSD Rules; review of, and compliance with, the risk philosophy, strategies and policies of the company; and review of risk identification and measurement methodologies employed within the company. Ethics Material incidents and issues are brought to the attention of the committee. No unethical behaviour was noted during the period under review. The Code of Conduct is reviewed and recommended to the Board for approval on a biennial basis, and an updated version was approved by the Board in June The next scheduled date for review is the second meeting of the committee in Compliance The committee reviewed the compliance reports, which detail the applicable laws and regulations and the respective compliance risks; the effectiveness of the controls in place; and the respective risk rating of the compliance risks. Strate remained compliant with all legislation relevant to the company. IT governance The Board assigned oversight of the company s IT governance function to the committee. The committee fulfils an oversight role regarding: IT being aligned with the performance and sustainability objectives of the company; delegating to management the responsibility for the implementation of, and adherence to, an IT governance framework; monitoring and evaluating significant IT investments and expenditure; IT forming an integral part of the company s risk management process; and ensuring that information assets are managed effectively. Strate (Pty) Ltd Annual Intergrated Report

90 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information New business The committee considered new business opportunities by reviewing new business proposals. It also ensured that the decisions and recommendations in relation to the proposals fell within the ambit of the core services of the company. Special Purpose Reserve Fund (SPRF) The committee considered proposals for the use of the SPRF based on the mandate of the SPRF and approved all funds spent by the SPRF. All fines collected by STRATE Supervision in its supervisory role are allocated to a separate fund, which is part of the company s reserves. These funds may only be used for the benefit of the financial markets in one or more of the following manners: to fund or subsidise the costs of training or exams provided to the financial markets by Strate; and to fund special projects that would benefit the CSD Participants and/or the financial markets. The committee approved funds that were paid out amounting to R5,1 million in Fees A review of all fees was undertaken and recommendations were tabled to the Board for approval. Whistle-blowing The committee is satisfied that adequate and appropriate provision is made for whistle-blowing. No instances requiring action were raised or identified during the year under review. Sustainability reporting The committee considered the company s sustainability information, as disclosed in this Annual Integrated Report, and has assessed its consistency with operational and other information known to committee members. The committee is satisfied that the sustainability information is reliable and consistent with the financial results. Strate (Pty) Ltd Annual Intergrated Report

91 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information On behalf of the Board, I would like to express my sincere gratitude to my fellow committee members for their efforts and contributions during the year, as well as to management, the auditors and the user community for their ongoing support. Ms D Naidoo Chairman: Audit, Risk and Compliance Committee Strate (Pty) Ltd Annual Intergrated Report

92 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Regulatory and Supervisory Committee Report Roles and responsibilities Strate is internationally recognised as an FMI and is licensed as a CSD in South Africa by the Registrar and the FSB, and operates in terms of the Financial Markets Act (FMA). This licence allows it to provide the electronic settlement of equities and bonds transactions concluded on the JSE Ltd or any other licensed exchanges, as well as settle transactions in money market securities. The Strate Board, as the controlling body, is responsible for compliance with the FMA. Under the FMA, a CSD is given the functions of a self-regulatory organisation (SRO). These functions include making CSD Rules and Directives, and the approval and supervision of CSD Participants, including investigations into alleged regulatory breaches. A CSD must make arrangements for the proper supervision of compliance by CSD Participants with the FMA, and CSD Rules and Directives. The Strate Board has delegated this responsibility to the Regulatory and Supervisory Committee. The Regulatory and Supervisory Committee is an independent committee of the Board, comprising non-executive directors, with the majority being independent. The committee is specifically tasked with overseeing that Strate fulfils the regulatory, supervisory, investigative and enforcement functions that are required of an FMI. Duties assigned by the Board One of the main roles of the committee is to oversee and monitor the securities services activities of the CSD Participants, specifically their compliance with the FMA, and CSD Rules and Directives. STRATE Supervision came into existence in 2001 as an independent division within Strate to ensure that Strate, as the CSD, fulfils these regulatory, supervisory, investigative and enforcement functions as required by legislation. The FMA sets out a framework of basic principles for market regulation, leaving much of the detailed substantive provisions to secondary legislation. Strate is required to regulate the activities of its CSD Participants by making, supervising and enforcing CSD Rules and Directives that comply with the requirements of the FMA. Strate s regulatory functions (namely the issuance and amendment of Rules within the framework of the FMA, and the issuance, amendment and rescinding of CSD Directives) result from these provisions and are performed by Strate s Legal and Regulatory Division. Strate (Pty) Ltd Annual Intergrated Report

93 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information The committee ensures that the activities of Strate are appropriately separated from the supervisory and enforcement activities of STRATE Supervision, i.e. commercial activities versus supervisory activities. This SRO entity has the potential for conflicts of interest to exist, or be perceived to exist, between the supervisory function and the other securities services undertaken and performed by Strate as the CSD. Among other preventive measurements taken, appropriate Chinese Walls have been established between these two functions. Under the Chinese Walls, various structures, procedures and processes have been put in place to ensure that confidential information is not shared with parties other than the Strate Regulatory and Supervisory Committee, the FSB or co-regulators under the terms of agreed-upon information sharing arrangements. The activities of STRATE Supervision and Strate s operations are segregated. A separate regulatory and supervisory report is published annually, which details the regulatory, supervisory and enforcement activities of Strate and STRATE Supervision. Reports can be obtained from Strate s website: This report contains significant information regarding the regulatory, supervisory, investigative and enforcement activities of Strate for the previous 12-month period. Key committee activities for the year During 2016, in line with the CSD s outcomes based regulatory focus, the CSD Rules and Directives (a total of 22 Directives) were reviewed and amended or deleted where necessary, to inter alia: simplify the CSD Rules and Directives; remove duplications; cater for operational and regulatory requirements as required; cater for the settlement of securities processing of transactions in respect of securities listed on new exchanges; cater for the implementation of T+3 in the JSE equities environment; allow for the pledging of securities at securities account level; cater for the introduction of new fines where deemed necessary; and delete obsolete/unnecessary definitions or add new definitions; The key regulatory changes during 2016 included: the deletion of the redundant client mandate provisions; the clarification and enhancement of the audit requirements in respect of CSD Participants; the amendment of various equities operational timelines from T+5 to T+3; Strate (Pty) Ltd Annual Intergrated Report

94 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information amendments to Strate s corporate actions cash processes; clarifying Strate s participation requirements; provision for corporate Participants for securities other than money market securities; and the clarification of the moment of finality of instructions. These new and revised CSD Rules and Directives were circulated to the affected market stakeholders via a Special Gazette. Risks, covering legal and regulatory matters to operational and technology concerns, remained the key themes considered by the committee during Focus was placed on cybersecurity and the market s preparedness for a possible cyber threat. The supervisory fines process continues to be effective. This is evident in the overall reduction in the number of fines being incurred. Notwithstanding this, incidents of debit balances of securities continued to take place during 2016, and the committee had to conduct special purpose meetings to consider the aggravating and mitigating factors surrounding these events. Overall, the past year balanced the committee s attention between regulatory and supervisory concerns or developments. The level of compliance by CSD Participants continues to remain high, with only pockets of operational weakness having to be managed. During the year, there were also significant changes to the senior management team of STRATE Supervision. Following internal restructuring and the creation of two new divisions within Strate, Ms Beverley Furman, STRATE Supervision s Head since its inception in 2001, was appointed as the new Managing Executive: CSD Operations with effect from August Ms Beverley Muir, who worked alongside Ms Furman over the last 15 years, subsequently took over the reigns as the new Head of STRATE Supervision in August The committee extends its gratitude to Ms Furman for her passion and commitment over the years, and further wishes Ms Muir all the best in her new role in leading the STRATE Supervision team. Committee membership and attendance at meetings There was one change to the composition of the committee during Mr Bobby Johnston resigned as both Strate Board Chairman and member of the committee in September The current members continue Strate (Pty) Ltd Annual Intergrated Report

95 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information to maintain strong skills in, and knowledge of, both the securities industry and regulations, and Strate s supervisory, investigative and enforcement activities. Members and observers on this committee recuse themselves when a matter is discussed that involves confidential information relating to any potential conflict of interest situation. The committee met seven times during 2016; four standard meetings, one special purpose meeting to consider CSD Rule and Directive amendments, and two special purpose meetings to consider matters relating to noncompliance by CSD Participants, were held. Special purpose meetings are generally called at short notice to discuss matters requiring immediate attention. Regulatory and Supervisory Committee Charter The committee is satisfied that all material issues arising from its terms of reference have been addressed and actioned. The terms of reference were revised and updated where new responsibilities or activities to be performed by the committee were identified. Looking ahead, the ensuing year will no doubt bring interesting developments in Strate s regulatory and supervisory landscape. The overhaul of financial services regulation, aimed at improving the integrity and sustainability of financial services, is reshaping the industry. The Twin Peaks model will focus on transparency, market integrity and consumer protection. The FMA amendments and its proposed regulations will regulate new aspects and matters in the financial infrastructure. Recovery and resolution draft arrangements are expected in A possible key market disruptor is the potential impact of blockchain technology on financial markets. Numerous discussions with market stakeholders will continue to be held with the aim of analysing the potential impact of blockchain technology on the financial market s regulatory space. The Legal and Regulatory Division, STRATE Supervision and the committee will continue to monitor the developments in blockchain technology and make necessary regulatory and supervisory interventions where necessary. Strate (Pty) Ltd Annual Intergrated Report

96 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information 2017 will see the implementation of a completely new bonds settlement model in the Strate environment. Therefore, much time and effort will be devoted to monitoring CSD Participant readiness for this significant market initiative. Time will be spent on putting in place the requisite regulatory and supervisory frameworks to support this new settlement model. I would like to thank the Strate Legal and Regulatory, and STRATE Supervision teams for their dedication and professionalism during To my fellow committee members, the observers from the JSE Ltd and the FSB, thank you for your continued support, commitment and the robust engagement throughout the year. I am confident that we have collectively put in place an effective regulatory and supervisory approach and strategy to realise any exciting new opportunities that arise, and to manage our material risks so as to effectively deliver on our core responsibilities and mandate during Mr RJG Barrow Chairman: Regulatory and Supervisory Committee Strate (Pty) Ltd Annual Intergrated Report

97 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Remuneration Committee Report This report provides an overview of the company s remuneration philosophy, policies, practices and governance, with particular focus on executive and non-executive directors. Remuneration governance structure The Board is responsible for the company s remuneration policies and is assisted in its endeavours by the Remuneration and Nominations Committee (RemNomCo). RemNomCo operates according to its terms of reference as reviewed and approved by the Board. RemNomCo s chairman reports to the Board after each RemNomCo meeting and attends the AGM to take questions from shareholders on RemNomCo s areas of responsibility. Remuneration governance structure Strate aims to attract, retain, engage and motivate employees of the highest calibre, while at the same time aligning their remuneration with shareholder interests and best practice. All incentives are performance based. In 2016, Strate implemented a revised performance management system. Employees ratings are now determined on the achievement of key performance indicators, the rating of which is determined on a more conversational basis rather than being measured on a strictly mathematical basis, as they had been previously. Strate s performance management system is used to measure employee performance and engagement within the organisation. The performance management system provides management and individuals with the guidelines to support the delivery of Strate s strategy and their personal development. Individual performance is discussed during the performance conversation which includes objectives, key performance indicators (KPIs) based on an individual s job description, personal development areas, stakeholder expectations, the Code of Conduct, innovation and values. According to Strate s vision, objectives, purpose and values, the performance management system aims to motivate and reward top performers in the company. Employees who implement an innovative initiative as part of the performance management system are measured against this rating in the final performance review. Strate (Pty) Ltd Annual Intergrated Report

98 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information The new performance rating scale is depicted in the table below: Score Unacceptable Poor Fair Successful Excellent with innovation Definition Overall, the employee s performance is unacceptable as the employee does not meet their core outputs/deliverables. Significant improvement is needed in all aspects of their work and a documented performance improvement plan should be in place. The employee must show significant improvement in their work to continue to be employed by Strate as per the Incapacity and Management of Poor Work Performance Policy. Overall, the employee does not meet expectations and their core outputs/ deliverables are below standard. Improvement is needed in some aspects of their work and a documented performance improvement plan should be in place. The employee must show improvement in their work in order to continue to be employed by Strate as per the Incapacity and Management of Poor Work Performance Policy. Overall, the employee consistently meets expectations and their core outputs/ deliverables are satisfactory. Overall, the employee consistently meets and frequently surpasses their core outputs/deliverables. Overall, the employee consistently meets and surpasses their core outputs/deliverables. In addition, the employee has successfully implemented an innovative initiative within Strate. Consideration may be given to significant progress made towards the implementation of an innovation initiative. Exceptional The employee delivered a significant, extraordinary and unique contribution to Strate over and above their core deliverables and innovative initiative. Remuneration is conducive to rewarding, developing and retaining appropriate top talent, critical skills and intellectual capital. It also ensures the sustainability and growth of the business based on sound discipline and investment by staff in the results of Strate. Strate (Pty) Ltd Annual Intergrated Report

99 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Remuneration policies and practices Fair and competitive reward is vital to being an employer of choice. To ensure that Strate remunerates its employees competitively, it uses information from a wide variety of industries in South Africa at a national level sourced from an independent service provider. These benchmarks are used by RemNomCo to set the guaranteed base remuneration for employees. RemNomCo considers proposed adjustments to bring staff who are below the 40th percentile of the market in line with this benchmark, while some higher-performing staff will be brought to the 50th percentile. RemNomCo considers total reward information (benchmark information for guaranteed base remuneration, short-term incentives and long-term incentives for individual positions) to evaluate remuneration of the executives. This entails a comparison between the executive s total reward in relation to the latest market indications as furnished by PWC. In 2016, Strate created a new category of employee level. RemNomCo approved a policy change to include a new category of employee level, management, for select employees currently categorised as senior professional. The rationale for the new category was to distinguish those employees whose responsibilities included being second-in-charge, successors in their respective divisions and managing a team, from those employees whose jobs were of a more technical nature and did not include managerial responsibilities. Remuneration structure The remuneration structure consists of the following elements: guaranteed base remuneration; and performance bonuses in the form of: o short-term bonuses (all qualifying staff); o discretionary bonuses (profit sharing for all qualifying staff); and o long-term incentive (key Strate staff in critical roles with specialised skills and knowledge.) Strate (Pty) Ltd Annual Intergrated Report

100 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Of these elements, only the base remuneration is guaranteed. All other elements are discretionary and based on predefined performance deliverables and measurable criteria. PWC completed an independent review of Strate s remuneration policies and practices which was presented to RemNomCo in early Although PWC s recommendation was that the short-term bonuses could be simplified, RemNomCo concluded that Strate s incentive policies were not out of line with market practice and that no changes would be made to the incentive schemes for the current performance cycle. Employment contracts With the exception of the CEO, who has a six-month notice period, the service contracts of the executive directors, heads of divisions as well as general managers of Strate are subject to a three-month notice period. There are no service contracts in place with non-executive directors. The remuneration policy is tabled at the AGM for a non-binding advisory vote, in terms of King III. Job evaluation and benchmarking Job evaluations and benchmarking exercises are performed biannually (in April and September) by independent consultants from PWC to ensure that employees are fairly remunerated. The guaranteed base remuneration is developed around job evaluations, grading of positions, and the associated benchmark information. Strate uses a wide variety of industries in South Africa as this is considered the most appropriate benchmark since its activities are broader than pure financial services. An employee s guaranteed base remuneration is benchmarked between the 40th and 75th percentile of the market on an annual basis according to certain marketability criteria. As per the cost-to-company remuneration and benchmarking policy, where an employee is remunerated above the 75th percentile of the market, the percentage increase granted will be considered by the RemNomCo on an annual basis. It is recommended that affected staff receive an increase which is 2% less than a normal Consumer Price Index (CPI) related increase. Strate (Pty) Ltd Annual Intergrated Report

101 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Executive directors remuneration Executive directors remuneration is disclosed in the annual financial statements. Only executive directors and their alternates, where applicable, are viewed as prescribed officers of the company. Non-executive directors remuneration A comprehensive analysis of the fees and time spent for Board and committee activities was undertaken in Based on this analysis, non-executive directors fees were determined for a three-year period ending December The annual fee during this period is adjusted for inflation. These fee proposals apply to the independent directors, but not to shareholder nominated directors who continue to receive no fees from the company. The fees are subject to shareholder approval each year. The non-executive directors fees for 2016 were approved by the shareholders at the AGM. Non-executive directors remuneration is disclosed in the annual financial statements. Board and executive succession planning The committee considered succession for the Board and Executive Committee and believes that the company has an adequate pipeline and/or a succession plan in place for all key positions. I wish to express my gratitude to the members of the committee and management for their efforts and contributions during the year. I also wish to express my appreciation to Rob Barrow, the previous chairman of RemNomCo, for his significant contribution to the committee over many years. Mr Murray Stocks Chairman: Remuneration and Nominations Committee Strate (Pty) Ltd Annual Intergrated Report

102 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Social and Ethics Committee Report Role, purpose and principle function The Social and Ethics Committee was established by the Board on 30 November The role of the committee is to assist the Board in discharging its social and ethics obligations. The committee is accountable to the Board. The committee operates according to its terms of reference as approved by the Board in November The committee does not assume the functions of Strate s management, which remain the responsibility of the executive directors, officers and/or other members of senior management. Composition and meeting procedures The committee, which comprises three members, is chaired by Keith Getz, an independent non-executive director, The CFO and the CEO are the other members of the committee. The committee will hold its inaugural meeting during the first half of Strate (Pty) Ltd Annual Intergrated Report

103 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Participant Failure Committee (PFC) Role, purpose and principle function The role of the committee is to assist the Board in fulfilling certain duties in terms of the FMA and the CSD Rules, as it relates to the resolution of the insolvency management process in respect of the CSD Participants in accordance with the Act, the CSD Rules and Directives, as well as the participant failure manual. The committee does not assume the functions of Strate s management, which remain the responsibility of the executive directors, officers and/or other members of senior management. Composition and meeting procedures The committee is chaired by an independent non-executive director. In addition, it comprises three independent non- executive directors and the CEO. Meetings are attended by appropriate executives, including the CFO, the Head of Legal and Regulation, the Company Secretary, and the Head of Risk. The committee did not convene any meetings during 2016 as there were no matters that required the attention of the committee. Mr RM Loubser Chairman: Participant Failure Committee Strate (Pty) Ltd Annual Intergrated Report

104 06 Corporate Governance 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 07 Financial Information Urgent Issues Committee Role, purpose and principle function The role of the committee is: to consider and take reasonable action as may be required to resolve an emergency situation in terms of CSD Rule 2.20; and to consider whether a CSD Participant is conducting its business in such a manner that it poses an imminent risk that such Participant may be unable to perform its business or may be acting in such a manner that may be detrimental to the rights and interests, business or operations of other Participants, clients, issuers or the CSD. The committee does not assume the functions of Strate s management, which remain the responsibility of the executive directors, officers and/or other members of senior management. Composition and meeting procedures The committee is chaired by the Chairman of the Board. It comprises three independent non-executive directors and the CEO. The committee did not convene any meetings during 2016 as there were no matters that required the attention of the committee. Strate (Pty) Ltd Annual Intergrated Report

105 Financial Information Statement of Comprehensive Income 107 Statement of Financial Position 108 Statement of Changes in Equity 109 Statement of Cash Flows 110 Acronyms 113 Corporate Information

106 07 Financial Information 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance Statement of Comprehensive Income for the year ended 31 December 2016 Note 2016 R R 000 Revenue Other income Total income Operating Expenditure Personnel expense IT and maintenance expenditure Depreciation and amortisation expense Allowance for impairment on receivables Impairment on intangible assets Other operating expenditure 5 ( ) ( ) (82 533) (41 019) (502) (572) (42 176) ( ) ( ) (69 520) (55 520) (501) (30 227) Profit from operations Net finance income Finance income Finance costs (1 502) (407) Profit before taxation Taxation 7 (43 957) (40 323) Net profit for the year Total comprehensive income Strate (Pty) Ltd Annual Intergrated Report

107 07 Financial Information 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance Statement of Financial Position for the year ended 31 December 2016 Note 2016 R R 000 Assets Non-current assets Equipment Intangible assets Loans receivable Prepayment Investment in subsidiary 1 22 Current assets Trade and other receivables Cash and cash equivalents Foreign exchange contracts Taxation receivable Total assets Equity and liabilities Equity attributable to the owners Stated capital Retained earnings Capital Redemption Reserve Fund Special Purpose Reserve Fund Non-current liabilities Deferred taxation Employee benefits Current liabilities Taxation payable Trade and other payables Foreign exchange contracts Employee benefits Provisions Total equity and liabilities Investment in CD Nominees is R1 Strate (Pty) Ltd Annual Intergrated Report

108 07 Financial Information 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance Statement of Changes in Equity for the year ended 31 December 2016 Stated Capital R 000 Capital Redemption Reserve fund R 000 Special Purpose Reserved fund R 000 Retained earnings R 000 Total Equity R 000 Balance at 1 January Total comprehensive income for the year Profit for the year Transfer (2 204) Dividends to equity holders (42 253) (42 253) Balance at 31 December Balance at 1 January Total comprehensive income for the year Profit for the year Utilisation of the reserve (1 118) (1 118) Dividends to equity holders (51 508) (51 508) Balance at 31 December Strate (Pty) Ltd Annual Intergrated Report

109 07 Financial Information 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance Statement of Cash Flows for the year ended 31 December 2016 Note 2016 R R 000 Cash flows from operating activities Cash generated by operations Interest received Interest paid 17.2 (1 366) (1 026) Taxation paid 17.3 (39 150) (44 758) Dividends paid (51 508) (42 253) Net cash inflow from operating activities Cash flows from investing activities Investment in equipment Investment to maintain operations 8 (4 166) (4 166) (11 815) (11 815) Investment in intangibles Investment to maintain operations Investments to expand operations 9 (30 759) (30 759) (33 002) (29 447) (3 555) Proceeds and disposal of equipment 4 14 Net cash outflow from investing activities (34 921) (44 803) Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Strate (Pty) Ltd Annual Intergrated Report

110 07 Financial Information 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance Acronyms A number of acronyms are used in this Annual Integrated Report. A list of these follows: AFS AGM ASISA BaNCS MI B-BBEE BND BSC CoGP CPMI CSD CSI DIS EBITDA ETFs EUR FMA FMI FSB FSC GIBS IFRS Annual Financial Statements Annual General Meeting Association for Savings and Investment South Africa The Tata Consultancy Services BaNCS Market Infrastructure Broad-Based Black Economic Empowerment Beneficiary Download, also referred to as the share register Balanced Scorecard Codes of Good Practice Committee on Payment and Market Infrastructure Central Securities Depository Corporate social investment Debt Instrument Solution Earnings before interest, tax, depreciation and amortisation Exchange traded funds Euro Financial Markets Act, 19 of 2012 Financial Market Infrastructure Financial Services Board Financial Sector Charter Gordon Institute of Business Science International Financial Reporting Standards Strate (Pty) Ltd Annual Intergrated Report

111 07 Financial Information 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance IIRC IMASA IOSCO ISO IT JSE Ltd King III NPAT OHS OHS Act PASA PFC PwC QSE RemNomCo Safcom SAICA SARB SCS SCMS Securities SENS SET SLB International Integrated Reporting Council Investment Management Association of South Africa International Organisation of Securities Commissions International Organisation for Standardisation Information Technology Johannesburg Stock Exchange King Code of Governance Principles for South Africa (2009) Net Profit After Tax Occupational Health and Safety Occupational Health and Safety Act (No 85 of 1993) Payment Association of South Africa Participant Failure Committee PricewaterhouseCoopers Qualifying Small Enterprise Remuneration and Nominations Committee Safex Clearing Company South African Institute of Chartered Accountants South African Reserve Bank Strate Charity Shares Strate s Collateral Management Services Equities, bonds and money market instruments Stock Exchange News Service Sponsored Education and Training Securities Lending and Borrowing Strate (Pty) Ltd Annual Intergrated Report

112 07 Financial Information 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance SRO SSI SFIDvP SWIFT T T+n TCS WFE Self-regulatory organisation Stakeholder Satisfaction Index Simultaneous, Final and Irrevocable, Delivery versus Payment Society for Worldwide Interbank Financial Telecommunication Trade date Trade + number of settlement days Tata Consultancy Services World Federation of Exchanges Strate (Pty) Ltd Annual Intergrated Report

113 07 Financial Information 01 About this Report 02 Our Company 03 How we Create Value 04 Leadership Reviews 05 Performance Highlights 06 Corporate Governance Corporate Information First Floor, 9 Fricker Road, Illovo Boulevard, Illovo, Sandton, 2196, South Africa Tel: +27 (0) Fax: +27 (0) info@strate.co.za