Clearing & Settlement 15 March 2012 Copyright Limited 2009 1
What is clearing & settlement? The Securities Services Act, No 36 of 2004, provides the following definitions clear, in relation to a transaction or group of transactions in listed securities, means (a) to calculate and determine, before each settlement process (i) (ii) the exact number or nominal value of securities of each kind to be transferred by or on behalf of a seller; the amount of money to be paid by or on behalf of a buyer, to enable settlement of a transaction or group of transactions; or (b) where applicable, the process by means of which (i) (ii) the functions referred to in paragraph (a) are performed; and the due performance of the transaction is underwritten from the time of trade to the time of settlement; settle means to discharge the obligations arising from a transaction in listed securities; 2
Securities traded in South Africa A number of securities are currently traded on the financial markets in South Africa, with more complex, non-standardised products being traded over-the-counter Equities Derivatives Bonds OTC Ordinary Shares ETFs Depository Receipts Traded Index Funds Investment Products Warrants Coins Futures & Options on: Equity indices Bonds Single Stocks Bond Indices Interest Rates Currencies Agricultural Products Commodities All options are on the futures, and not on the underlying asset Government Bonds Parastatal Bonds Corporate Bonds Indices Rand denominated debt securities FRAs Interest Rate Swaps Currency Swaps Equity Swaps Flex Options Strips & Zero Coupons Forwards & Options on: precious metals, base metals, petroleum, etc Credit Derivatives Convertible Bonds Exchangeable Bonds 3
Securities markets landscape The South African trading, clearing and settlement landscape is represented in the following diagram Trading Equities (TradElect) Derivatives (Nutron) Bonds (Nutron) OTC Securities Clearing (BDA) SAFCOM (Nuclears) Bilateral Counterparties Bilateral Counterparties (TMS) Settlement Strate (SAFIRES) Banks (Various) Strate (UNEXcor) Counterparties SARB (SAMOS) 4
Current clearing methodologies Current clearing methodologies by product are described below Equities Broker trades are netted through BDA (controlled clients), and the provides netted figures to Strate members are responsible for settling all trades they introduce guarantees and risk manages central order book trades, and monitors all trades from trade to settlement regulates trading members and ensures settlement occurs Works well and is relatively cheap Derivatives Trades are novated to SAFCOM Clearing members guarantee trades owns and operates SAFCOM system (Nutron/Nuclears) regulates clearing members and trading members Works well and is relatively cheap Bonds and OTC Products No central risk management process is in place Risk management relies solely upon bilateral counterparty limits 5
Read access for monitoring Equities: Risk management The provides settlement assurance for trades that it guarantees, but has recourse to any non-performing party for any losses incurred Capital adequacy requirements (Equities Guarantee Fund) Settlement Authority BDA (Mandatory member requirement) EOD T+3 Members margined on all uncovered positions of clients or proprietary accounts. Members margined on all uncommitted client trades T+4 Uncommitted trades (of non-controlled clients) go into reverse substitution Member/Broker (Separately capitalised entities) Members are ultimately responsible for the performance of all clients they introduce to the market Client A Client B 6
Derivatives: Risk Management The philosophy for the Derivatives Trading is: You stand good for your client Margins for Settlement Ability to set trading and position limits Margins for Settlement Set trading and position limits Client A1 Member A (Maintain Derivatives Fidelity Fund) SAFCOM (Mark to market) Clearing Members deposit minimum margin amount with Clearing House Clearing Member (Maintain R10m surety in favour of CH) Client A2 Member B Client B1 Member pay margin deposits, variation margin and contribution to Fidelity Fund to Clearing Member. Clients pay initial margin to Member (5-8% of full purchase price of contract) Client B2 Clearing Member deposit Members and own contribution to Derivatives Fidelity Fund with. In Event of Clearing Member Default: Apply clearing member s initial margins If insufficient, apply R10m surety provided to clearing member; If insufficient, Safcom calls on clearing members for voluntary equitable contribution to cover shortfall; If insufficient, apply Derivatives Fidelity Fund 7
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