SASLA: a roundup of the South African market
05 March 2024
Having attended the SASLA Conference in Cape Town last month, Carmella Haswell provides a roundup of major findings from the Association's key industry discussions
Image: stock.adobe/Chingiz
The South African Securities Lending Association (SASLA) held its annual conference in Cape Town last month, providing market participants with an opportunity to network and discuss key industry topics, including collateral, technology and the changing regulatory landscape.
The Association has 20 members — including banks, pension funds, service providers and asset managers — and is the industry forum for the South African securities lending industry. Its primary goal is to represent the common interests of the industry, promoting an orderly, efficient and competitive market.
SASLA has been instrumental in several market initiatives, including the development of the SA Securities Lending Code of Guidance and the Schedule to the Global Master Securities Lending Agreement (GMSLA).
SFT has produced a roundup of the key findings of SASLA’s industry panel discussions.
Use of local services to benefit SA
Market participants should do what they can to keep post-trade services in South Africa for the benefit of the region, according to Farzana Khan, head of collateral services at Strate.
In reviewing the use of local custodians versus the use of offshore custodians, Khan indicated that, in South Africa, collateral is largely managed bilaterally, which is “very inefficient”.
She continued: “Last year, we heard from Alistair Trotman on how triparty was the norm offshore, but not yet locally. There is a strong case to consider using a local custodian and triparty agent, because of the cost and the ability to automate and optimise collateral on a single platform in South Africa for the benefit of the region.”
Khan highlighted that there are growing opportunities in the market to automate and optimise collateral on the Strate platform.
The South African principal central securities depository and central collateral platform will be completing a proof of concept with the South African Reserve Bank (SARB), which will run from March to November 2024. If implemented into production, this initiative will introduce around ZAR 800 to 900 billion (£32.8 billion - £37.0 billion) worth of assets into a triparty environment.
While comparing the use of local and offshore custodians, Khan said market participants can look to reduce the regulatory cost of doing business for ZAR payments by using a local provider.
“So much of our trading investment opportunity has already been externalised to offshore markets. Let us do what we can to keep post-trade services in South Africa for the benefit of South Africa,” she added.
The panel discussion also analysed the challenges faced by foreign clients when transacting with South African participants.
Kimberley Azuelos, senior securities financing sales, Global Markets at BNP Paribas, confirmed that in terms of securities lending, when transacting with South African participants, there are three main challenges.
The first is the diversification and the reuse of collateral — she explained that when receiving a ZAR asset, it comes at a liquidity cost, “the more diverse the collateral, the better we can repost and reuse it elsewhere”.
The second barrier is the difficulty for a South African-based counterparty to use an international triparty, “that would allow the whole ecosystem to internationalise the flow and to scale up the business”. The third challenge derives from the tax treatment of securities lending transactions, including a requirement to pay stamp duty, which can provide complications when growing a business.
The SASLA conference has, over time, pivoted from a securities lending focus to a more financing repo and collateral focal point, according to Joseph Gillingwater, senior vice president and global head of fixed income securities finance trading at Northern Trust Capital Markets.
This is a trend Northern Trust has noted with other large custodian banks globally. He added: “More recently, we have seen challenges with the US regional banks, the Credit Suisse and UBS merger, all of these things lead to nervousness and will lead to a flight to quality and lead providers to be better at mobilising collateral.”
ESG is critical for influencing investment decisions
The integration of ESG considerations in the financial market goes beyond ethical concerns and has become a major influence on investment decisions, risk management and overall market dynamics, according to Hitesh Harduth, head of securities lending at Standard Bank.
Responsible investing is not a new concept. In the 1960s, investors were already thinking about the ethical and social implications of their investments.
The most recent shift in the ESG space, as noted by Teboho Makhabane, head of ESG and impact at Sanlam Investments, is that the industry is not only looking at ESG from a risk perspective, but at how the market drives capital towards addressing some of the current social and environmental issues.
For Waseem Thokan, head of ESG and research at Peresec, ESG is an “interesting space” with an “interesting historical area of development” which has presented a number of underlying themes and trends to the market.
Thokan states that the nature of the economy and human society creates risks around continuity and sustainability, and asked “to what extent participants can ensure that those long-term systemic risks are managed in a manner that humanity becomes sustainable and its development becomes continuous or self-evident”.
This developing space has produced two main categories of products to help achieve sustainable financing; these are general purpose and use of proceeds.
General purpose can be used for financing for any purpose. With this funding, certain ESG commitments that the borrower or issuer make are placed in legal documentation. The pricing margin adjustment mechanisms link to the achievement or non-achievement of these targets.
Use of proceeds relates to financing specific green, social or sustainable projects. Participants would track the use of proceeds and ensure there is a positive impact linked to the financing that is being provided.
Anneke Lund, executive for sustainable finance at Standard Bank, highlighted that the general purpose and use of proceeds pillars are a lens that firms can apply to any form of financing.
She added: “The market began to use these pillars within corporate funding, but now we see them being applied to companies’ overdrafts, which are being linked to the firm’s commitments around social and green activity. This will eventually become the mainstream way of raising financing.”
The Global Alliance of Securities Lending Associations (GASLA) provides a single voice across global securities lending markets, advocating for transparent and standardised practices that support efficient, liquid and sustainable capital markets, including considerations of ESG factors.
Through active collaboration, GASLA seeks to enable positive and impactful engagement with stakeholders, including regulators, policymakers, and standard-setting bodies across all regions.
According to Michael Wright, SASLA chairman and a member of GASLA, the association has been working with a broad range of securities lending market participants to drive best practice, to support integration of corporate governance policies around voting, stewardship, and active ownership. GASLA advocates that a lender's ability to fulfil their stewardship responsibilities over their underlying investments should not be impeded by their participation in securities lending.
To help market participants combat issues forming from the use of ESG, GASLA has created the Global Framework for ESG and Securities Lending (GFESL), a framework for lenders to see how they can evaluate their securities lending programmes in the context of their ESG policies.
Future of securities finance in SA
The future of securities finance in Africa will be led by more automation, streamlined, efficient processes and algorithmic-based trading, according to Matthew Quinlivan, relationship manager at EquiLend.
For Igor Salzgeber, global head of FIS’ Securities Finance and Collateral product group, shifting focus from post-trade to pre-trade processes and improving rules and mechanisms for pre-trade order matching or decision-making will help reduce fails and post-trade inefficiencies.
He explained that there is a large amount of data that is kept redundant within the market, and so every counterparty has to capture its own copy of a trade, as well as manage all relevant lifecycle events.
“Imagine there was one global trade store, for example on a distributed ledger, where the whole community could use one common ledger to persist their trades and lifecycle manage them — it would eliminate large parts of today’s post trade headaches. However, it would also kill a whole industry that has been established around providing post-trade services,” he insisted.
However, he continued, “the industry is partly resisting these types of innovations and limiting their practical adoption”.
“Leveraging digital assets and blockchain technology will make the life of custody banks, in the traditional sense, difficult and a good amount of services offered by fintechs partly obsolete, because many players established in the post-trade space generate a significant part of their revenues from these ongoing inefficiencies.”
Cloud computing was also a topic of discussion within The Future of Securities Finance in SA panel. Paul Wilson stated that there is a demand for real front-to-back securities finance trading and operations to move to a true cloud, but this is “some way off yet”.
Currently, cloud computing is typically private cloud provision within a primary and a secondary data centre, whereby the provider manages the service for the client. “The model is referred to as ‘cloud’, but it is accurately a private cloud software-as-a-service (SaaS) managed service,” Wilson confirmed.
He added: “It is extremely popular. Since offering it for securities finance in 2018, 80 per cent of our new clients go for this type of service versus on-premise, up from 5 per cent pre-2016.”
The firms still using on-prem are typically in emerging markets, where SaaS or Cloud regulations make it more difficult to provide the service cost-effectively. “Under this model, firms do not need to manage hardware, database administration (DBA), systems administration and other aspects currently typically in house,” Wilson continued.
Avoiding technology obsolescence and risk is a key driver, he added: “A cloud or SaaS provider will upgrade on a very regular basis.” This includes taking care of all aspects of hardware, networking, cybersecurity and authentication routine, since technology moves so quickly.
However, these models do come at a cost. Firms will face a paradigm shift in the way they look at software when moving from ‘on prem’ to cloud.
Wilson said: “Market participants will need to look at the total cost of ownership (TCO) across a longer period of time, including the sunk costs on existing in-house DBA, hardware, system administration and software. However, when reviewing the shift to cloud over a three to five-year period, firms will save money and reduce risk when moving to cloud provision.”
Coming to a close, the panel also highlighted the potential use of AI to optimise processes and drive new revenue, as well as the importance for South Africa to move to T+1.
Concluding the session, Umesh Vaga indicated that with new innovation comes new challenges and risks, such as cybersecurity threats and regulatory compliance.
The Association has 20 members — including banks, pension funds, service providers and asset managers — and is the industry forum for the South African securities lending industry. Its primary goal is to represent the common interests of the industry, promoting an orderly, efficient and competitive market.
SASLA has been instrumental in several market initiatives, including the development of the SA Securities Lending Code of Guidance and the Schedule to the Global Master Securities Lending Agreement (GMSLA).
SFT has produced a roundup of the key findings of SASLA’s industry panel discussions.
Use of local services to benefit SA
Market participants should do what they can to keep post-trade services in South Africa for the benefit of the region, according to Farzana Khan, head of collateral services at Strate.
In reviewing the use of local custodians versus the use of offshore custodians, Khan indicated that, in South Africa, collateral is largely managed bilaterally, which is “very inefficient”.
She continued: “Last year, we heard from Alistair Trotman on how triparty was the norm offshore, but not yet locally. There is a strong case to consider using a local custodian and triparty agent, because of the cost and the ability to automate and optimise collateral on a single platform in South Africa for the benefit of the region.”
Khan highlighted that there are growing opportunities in the market to automate and optimise collateral on the Strate platform.
The South African principal central securities depository and central collateral platform will be completing a proof of concept with the South African Reserve Bank (SARB), which will run from March to November 2024. If implemented into production, this initiative will introduce around ZAR 800 to 900 billion (£32.8 billion - £37.0 billion) worth of assets into a triparty environment.
While comparing the use of local and offshore custodians, Khan said market participants can look to reduce the regulatory cost of doing business for ZAR payments by using a local provider.
“So much of our trading investment opportunity has already been externalised to offshore markets. Let us do what we can to keep post-trade services in South Africa for the benefit of South Africa,” she added.
The panel discussion also analysed the challenges faced by foreign clients when transacting with South African participants.
Kimberley Azuelos, senior securities financing sales, Global Markets at BNP Paribas, confirmed that in terms of securities lending, when transacting with South African participants, there are three main challenges.
The first is the diversification and the reuse of collateral — she explained that when receiving a ZAR asset, it comes at a liquidity cost, “the more diverse the collateral, the better we can repost and reuse it elsewhere”.
The second barrier is the difficulty for a South African-based counterparty to use an international triparty, “that would allow the whole ecosystem to internationalise the flow and to scale up the business”. The third challenge derives from the tax treatment of securities lending transactions, including a requirement to pay stamp duty, which can provide complications when growing a business.
The SASLA conference has, over time, pivoted from a securities lending focus to a more financing repo and collateral focal point, according to Joseph Gillingwater, senior vice president and global head of fixed income securities finance trading at Northern Trust Capital Markets.
This is a trend Northern Trust has noted with other large custodian banks globally. He added: “More recently, we have seen challenges with the US regional banks, the Credit Suisse and UBS merger, all of these things lead to nervousness and will lead to a flight to quality and lead providers to be better at mobilising collateral.”
ESG is critical for influencing investment decisions
The integration of ESG considerations in the financial market goes beyond ethical concerns and has become a major influence on investment decisions, risk management and overall market dynamics, according to Hitesh Harduth, head of securities lending at Standard Bank.
Responsible investing is not a new concept. In the 1960s, investors were already thinking about the ethical and social implications of their investments.
The most recent shift in the ESG space, as noted by Teboho Makhabane, head of ESG and impact at Sanlam Investments, is that the industry is not only looking at ESG from a risk perspective, but at how the market drives capital towards addressing some of the current social and environmental issues.
For Waseem Thokan, head of ESG and research at Peresec, ESG is an “interesting space” with an “interesting historical area of development” which has presented a number of underlying themes and trends to the market.
Thokan states that the nature of the economy and human society creates risks around continuity and sustainability, and asked “to what extent participants can ensure that those long-term systemic risks are managed in a manner that humanity becomes sustainable and its development becomes continuous or self-evident”.
This developing space has produced two main categories of products to help achieve sustainable financing; these are general purpose and use of proceeds.
General purpose can be used for financing for any purpose. With this funding, certain ESG commitments that the borrower or issuer make are placed in legal documentation. The pricing margin adjustment mechanisms link to the achievement or non-achievement of these targets.
Use of proceeds relates to financing specific green, social or sustainable projects. Participants would track the use of proceeds and ensure there is a positive impact linked to the financing that is being provided.
Anneke Lund, executive for sustainable finance at Standard Bank, highlighted that the general purpose and use of proceeds pillars are a lens that firms can apply to any form of financing.
She added: “The market began to use these pillars within corporate funding, but now we see them being applied to companies’ overdrafts, which are being linked to the firm’s commitments around social and green activity. This will eventually become the mainstream way of raising financing.”
The Global Alliance of Securities Lending Associations (GASLA) provides a single voice across global securities lending markets, advocating for transparent and standardised practices that support efficient, liquid and sustainable capital markets, including considerations of ESG factors.
Through active collaboration, GASLA seeks to enable positive and impactful engagement with stakeholders, including regulators, policymakers, and standard-setting bodies across all regions.
According to Michael Wright, SASLA chairman and a member of GASLA, the association has been working with a broad range of securities lending market participants to drive best practice, to support integration of corporate governance policies around voting, stewardship, and active ownership. GASLA advocates that a lender's ability to fulfil their stewardship responsibilities over their underlying investments should not be impeded by their participation in securities lending.
To help market participants combat issues forming from the use of ESG, GASLA has created the Global Framework for ESG and Securities Lending (GFESL), a framework for lenders to see how they can evaluate their securities lending programmes in the context of their ESG policies.
Future of securities finance in SA
The future of securities finance in Africa will be led by more automation, streamlined, efficient processes and algorithmic-based trading, according to Matthew Quinlivan, relationship manager at EquiLend.
For Igor Salzgeber, global head of FIS’ Securities Finance and Collateral product group, shifting focus from post-trade to pre-trade processes and improving rules and mechanisms for pre-trade order matching or decision-making will help reduce fails and post-trade inefficiencies.
He explained that there is a large amount of data that is kept redundant within the market, and so every counterparty has to capture its own copy of a trade, as well as manage all relevant lifecycle events.
“Imagine there was one global trade store, for example on a distributed ledger, where the whole community could use one common ledger to persist their trades and lifecycle manage them — it would eliminate large parts of today’s post trade headaches. However, it would also kill a whole industry that has been established around providing post-trade services,” he insisted.
However, he continued, “the industry is partly resisting these types of innovations and limiting their practical adoption”.
“Leveraging digital assets and blockchain technology will make the life of custody banks, in the traditional sense, difficult and a good amount of services offered by fintechs partly obsolete, because many players established in the post-trade space generate a significant part of their revenues from these ongoing inefficiencies.”
Cloud computing was also a topic of discussion within The Future of Securities Finance in SA panel. Paul Wilson stated that there is a demand for real front-to-back securities finance trading and operations to move to a true cloud, but this is “some way off yet”.
Currently, cloud computing is typically private cloud provision within a primary and a secondary data centre, whereby the provider manages the service for the client. “The model is referred to as ‘cloud’, but it is accurately a private cloud software-as-a-service (SaaS) managed service,” Wilson confirmed.
He added: “It is extremely popular. Since offering it for securities finance in 2018, 80 per cent of our new clients go for this type of service versus on-premise, up from 5 per cent pre-2016.”
The firms still using on-prem are typically in emerging markets, where SaaS or Cloud regulations make it more difficult to provide the service cost-effectively. “Under this model, firms do not need to manage hardware, database administration (DBA), systems administration and other aspects currently typically in house,” Wilson continued.
Avoiding technology obsolescence and risk is a key driver, he added: “A cloud or SaaS provider will upgrade on a very regular basis.” This includes taking care of all aspects of hardware, networking, cybersecurity and authentication routine, since technology moves so quickly.
However, these models do come at a cost. Firms will face a paradigm shift in the way they look at software when moving from ‘on prem’ to cloud.
Wilson said: “Market participants will need to look at the total cost of ownership (TCO) across a longer period of time, including the sunk costs on existing in-house DBA, hardware, system administration and software. However, when reviewing the shift to cloud over a three to five-year period, firms will save money and reduce risk when moving to cloud provision.”
Coming to a close, the panel also highlighted the potential use of AI to optimise processes and drive new revenue, as well as the importance for South Africa to move to T+1.
Concluding the session, Umesh Vaga indicated that with new innovation comes new challenges and risks, such as cybersecurity threats and regulatory compliance.
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