South Africa
14 December 2010
South Africa has had a good 2010, with available lendable assets returning to their peak levels. But the lack of regulation remains an issue
Image: Shutterstock
The World Cup earlier this year put a real focus on South Africa, showing it as a modern vibrant nation that - while not without its problems - is a beacon to the rest of the continent. 20 years after Nelson Mandela’s release and the beginning of the end of apartheid, the country is increasing its wealth and open for business to the wider world.
While South Africa remains a comparatively small market compared to the Western giants, it has been punching above its weight for some years. While it certainly suffered during the downturn, it has bounced back well, and lendable asset levels are now on a par with those seen three years ago.
New players have entered the market, while many of the existing participants have expanded their offerings. This now means that margins are tighter and many of the specialist desks have had to create new bespoke products to maintain their share of the market.
Education
A lack of knowledge and understanding of how securities lending can influence and benefit the market remains, however. Although the South African market has been growing in recent years, many funds are still wary of securities lending, especially following the downturn.
One of the ways this is being remedied is through education. Local specialist Finsettle has recently teamed up with UK-based training provider FinTuition to help providers in South Africa (and beyond) to gain greater understanding of how securities lending can benefit them.
Regulation
South Africa was one of the few major economies that did not prohibit short selling during the financial crisis. And this was down to the way the market operates. Naked sales are not possible in the market, because all buy and sell transactions are settled contractually on settlement date and cannot be rolled over.
Securities lending as an activity is not formally regulated, and nor are many of the activities of hedge funds. The Financial Services Board of South Africa does oversee collective investment schemes, long term and short term insurance companies and other vehicles, while the Johannesburg Stock Exchange has controls over many of the providers in the market. STRATE, South Africa’s central securities depositary also carries out regulatory duties.
Securities lending activities, then, operate under guidelines laid down by the South African Securities Lending Association (SASLA). SASLA works closely with ISLA, and prescribes scrip lending and borrowing activities.
But the lack of formal oversight has restricted the market, say some players, who argue that a lack of structure is putting off overseas investors. Few investors put their money into hedge funds, and - in practice, if not necessarily in theory - only locally registered banks are allowed to deal directly with non-resident investors.
Growth
The lack of regulation means that most industry participants feel that major strides are unlikely at the moment, and organic growth will be slow but steady over the coming years.
But there is one area where securities lending providers are becoming more and more excited. South Africa is now a comparatively mature market, but the Southern African countries are starting to slowly embrace securities lending and related instruments, leaving the providers with the local knowledge in pole position. Several banks have made significant investments in the likes of Botswana and other sub-Saharan nations, and it’s expected that growth will be rapid.
In 2009, HSBC launched its SA synthetic DMA platform and expanded its Market Access product to a number of neighbouring countries, including Nigeria, targeting an increasing number of investors with an interest in this part of the world.
“We have high hopes for many of these markets,” says a spokesman for one South African bank. “We have given ourselves the opportunity to kickstart the market here - as they become more sophisticated and more funds look to invest in this area of the world, we are going to be able to service the investment that comes in. We don’t expect there to be enormous growth straight away, but there will be business and we are in a prime position to take advantage of that.”
It’s not straightforward, though, as head of business development at Finsettle Ted Hampson explains: “Common challenges are faced by the different exchanges across Africa, which include liquidity in the markets, standard or similar governance and reporting principles, effective and standard settlement cycles at T+?, effective use and/ or adaptation of technology, movement to electronic trading systems, the need to increase bandwidth, education of companies towards listing as a capital raising alternative, consumer education related to investing in a stock exchange, effective available research, education and training of market participants, customer management systems and techniques, navigating the needs of different exchanges, countries and regions as further trust is fostered for all to take advantage of the future opportunities. These common challenges present business opportunities for those with vision....”
While South Africa remains a comparatively small market compared to the Western giants, it has been punching above its weight for some years. While it certainly suffered during the downturn, it has bounced back well, and lendable asset levels are now on a par with those seen three years ago.
New players have entered the market, while many of the existing participants have expanded their offerings. This now means that margins are tighter and many of the specialist desks have had to create new bespoke products to maintain their share of the market.
Education
A lack of knowledge and understanding of how securities lending can influence and benefit the market remains, however. Although the South African market has been growing in recent years, many funds are still wary of securities lending, especially following the downturn.
One of the ways this is being remedied is through education. Local specialist Finsettle has recently teamed up with UK-based training provider FinTuition to help providers in South Africa (and beyond) to gain greater understanding of how securities lending can benefit them.
Regulation
South Africa was one of the few major economies that did not prohibit short selling during the financial crisis. And this was down to the way the market operates. Naked sales are not possible in the market, because all buy and sell transactions are settled contractually on settlement date and cannot be rolled over.
Securities lending as an activity is not formally regulated, and nor are many of the activities of hedge funds. The Financial Services Board of South Africa does oversee collective investment schemes, long term and short term insurance companies and other vehicles, while the Johannesburg Stock Exchange has controls over many of the providers in the market. STRATE, South Africa’s central securities depositary also carries out regulatory duties.
Securities lending activities, then, operate under guidelines laid down by the South African Securities Lending Association (SASLA). SASLA works closely with ISLA, and prescribes scrip lending and borrowing activities.
But the lack of formal oversight has restricted the market, say some players, who argue that a lack of structure is putting off overseas investors. Few investors put their money into hedge funds, and - in practice, if not necessarily in theory - only locally registered banks are allowed to deal directly with non-resident investors.
Growth
The lack of regulation means that most industry participants feel that major strides are unlikely at the moment, and organic growth will be slow but steady over the coming years.
But there is one area where securities lending providers are becoming more and more excited. South Africa is now a comparatively mature market, but the Southern African countries are starting to slowly embrace securities lending and related instruments, leaving the providers with the local knowledge in pole position. Several banks have made significant investments in the likes of Botswana and other sub-Saharan nations, and it’s expected that growth will be rapid.
In 2009, HSBC launched its SA synthetic DMA platform and expanded its Market Access product to a number of neighbouring countries, including Nigeria, targeting an increasing number of investors with an interest in this part of the world.
“We have high hopes for many of these markets,” says a spokesman for one South African bank. “We have given ourselves the opportunity to kickstart the market here - as they become more sophisticated and more funds look to invest in this area of the world, we are going to be able to service the investment that comes in. We don’t expect there to be enormous growth straight away, but there will be business and we are in a prime position to take advantage of that.”
It’s not straightforward, though, as head of business development at Finsettle Ted Hampson explains: “Common challenges are faced by the different exchanges across Africa, which include liquidity in the markets, standard or similar governance and reporting principles, effective and standard settlement cycles at T+?, effective use and/ or adaptation of technology, movement to electronic trading systems, the need to increase bandwidth, education of companies towards listing as a capital raising alternative, consumer education related to investing in a stock exchange, effective available research, education and training of market participants, customer management systems and techniques, navigating the needs of different exchanges, countries and regions as further trust is fostered for all to take advantage of the future opportunities. These common challenges present business opportunities for those with vision....”
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