What have been the key drivers of demand for South Africa’s securities lending market over the past 12 months? How does this correlate with the rest of the continent?
Lloyd Keys: Over the past year, global economic pressures, such as fluctuating interest rates, inflation, and geopolitical tensions, and South Africa's improved macroeconomic stability have driven demand for institutions seeking to manage liquidity and the resultant short selling and hedging strategies that come with this. It has been encouraging to witness the noticeable boost in securities lending activity.
Furthermore, domestic pension funds, insurers, collective investment schemes and other asset managers have been leveraging securities lending to enhance portfolio returns, mirroring global trends, which has contributed to increased liquidity and supported the increase in lending activity.
Although the stats have shown a decrease in net sales by non-residents, discussions with offshore counterparties have been extremely positive around South Africa and we remain optimistic that this generally positive sentiment will translate to increased international investor exposure to South Africa's equities and bonds.
Similar trends have been observed across Africa, particularly in markets like Nigeria and Kenya, but South Africa’s more developed financial infrastructure and regulatory environment give us an edge in attracting institutional players.
Can you explore the barriers to market facing international participants looking to enter South Africa? What steps should regulators be taking to ease this process?
Keys: South Africa’s exchange control regulations, tax requirements, and stringent compliance requirements can create hurdles for international players. Differences in settlement cycles, technological infrastructure, and collateral standards may also be a deterrence.
Although we are an attractive emerging market and South Africa remains one of the most developed financial markets in Africa, when we compare ourselves to global markets in North America, Europe, and Asia, the depth and liquidity of South African securities are often dwarfed in size.
Regulators can definitely look at harmonising with international standards and aligning local regulations with global practices to ease compliance which could support a more simplified onboarding process.
The simplification of exchange control regulations and streamlining cross-border tax compliance will make the foreign exchange processes more straightforward for international investors.
Michael Wright: South Africa has one of the most developed securities lending markets in Africa, but it is small from a global perspective. While some local regulations have been a barrier, the main issue is collateral. The industry is working with regulators on how we can become more competitive. The data indicates that just under 50 per cent of the market is traded offshore.
SASLA’s Collateral Forum was set up to discuss issues facing the South African financial markets. Can you expand on the current problems facing the use of collateral in the region?
Keys: Many participants continue to rely on bilateral agreements, which can be inefficient and the access to high-quality liquid asset (HQLA) — which seem to be more of an inflexible collateral eligibility criteria in a triparty-based system — is often limited due to regulatory capital requirements.
Triparty arrangements, as seen in North American and European markets, could definitely improve efficiency in certain areas and reduce operational risks, but the wholesale adoption in South Africa is still quite far away and will require significant infrastructural upgrades and regulatory alignment.
Wright: The forum was created to allow for greater participation of the South African financial markets in the collateral discussion. The need for optimisation and mobilisation is driven by the continued growth in the demand for collateral in the South African financial markets, mostly because of strengthened regulatory requirements.
Farzana Khan: One of the problems that our market currently faces is the introduction of restrictions in respect of re-use when receiving securities on an outright transfer basis under a ‘collateral arrangement’ since 2023. This has added complexity to the South African collateral management landscape and limits collateral optimisation opportunities to some extent. We had hoped that this change would encourage greater market adoption of triparty services in South Africa, given the innate ability of the triparty platform to strictly adhere to the re-use restrictions while providing automation, efficiency and risk mitigation benefits. However, this has not been the case.
Another problem is the implementation of Phase 4 of the Uncleared Margin Rules (UMR) in South Africa, with multiple parties expected to come into scope in September 2025. As demonstrated with great success in the developed markets, triparty agents play a key role in managing the exchange of regulatory initial margin (IM) and we expect South Africa to follow suit in this regard, but there is still lots to be done from a readiness perspective, including the clarification of the legal framework required to support this in SA.
There are also other exciting initiatives on the horizon that will ultimately drive the transition to triparty collateral management (TCM) in the near future. These include a TCM proof-of-concept with the South African Reserve Bank (SARB) in Q3 2025, that will enable seamless access to any surplus inventory that banks may hold and offer true collateral mobilisation and optimisation opportunities in the face of growing collateral demand like IM.
We are also looking forward to the implementation of triparty repos from Q2 2025 in collaboration with the JSE, that will empower market participants to raise liquidity using general collateral baskets while benefitting from the automated post-trade collateral management related to this.
How do you anticipate the advancement of the COFI Bill will impact the South African market? What other regulatory initiatives are grabbing your attention?
Keys: The Conduct of Financial Institutions (COFI) Bill has garnered both praise and criticism as it focuses on the ethical conduct and transparency of financial institutions with improved consumer protection at the heart of the bill.
This being said, the heightened compliance requirements of the COFI Bill will significantly increase operational costs for financial institutions, particularly smaller firms. These stricter regulations coupled with increased costs, may result in these costs being passed on to customers, which creates its own ethical dilemma.
The one-size-fits-all approach needs to be carefully assessed, and I believe that the unique characteristics and needs of different and niche financial service providers need to be considered.
Notwithstanding this, the COFI Bill’s long-term goals, such as increased trust in the financial system, improved consumer protection, and alignment with international standards (like MiFID II), should not be ignored.
Wright: South Africa currently has no reporting requirements for securities financing transactions (SFTs), but in March last year, the Financial Sector Conduct Authority (FSCA) released a general communication on the legal entity identifier (LEI) which included a paragraph about the possible regulations for SFT markets, which would include the reporting of SFT transactions. This paragraph read:
"Securities Finance Transactions (SFT): As part of the policies identified by the FSB to increase transparency across SFTs, the FSCA is in the process of formulating a Conduct Standard for the SFT market in South Africa. The proposed Conduct Standard will include a number of new rules for market participants, including a requirement for counterparties to SFTs to report the details of any SFTs they have concluded, as well as any modification or termination thereof, to the FSCA. It is envisaged that in the reporting of SFT transactions, the Conduct Standard will require the use of an LEI."
Strate, South Africa’s central securities depository (CSD), was granted a licence in late 2024 to operate as the country’s first trade repository by the FSCA.
As the UK and Europe journey to achieve a shorter settlement cycle. Where does South Africa stand in respect to T+1? Is the region likely to follow suit?
Keys: South Africa’s move from T+5 to T+3 took many years. Moving to T+1 would require further upgrades to clearing and settlement systems and would be impacted by a number of challenges. Changing settlement cycles carries high costs of infrastructure modernisation for all market participants.
While T+1 is desirable to align with global markets, progress will likely be gradual at best and there is limited readiness among market participants for shorter cycles at this time, and it would also be contingent on market consensus and would require significant resource allocation from all market participants.
Wright: The move to T+1 settlement has the headline aims of reducing counterparty risk exposure and unlocking tied-up liquidity in the settlement process. Improving settlement efficiency should be a priority and a mandatory condition prior to any reduction of the settlement cycle.
To allow for a compression of the settlement cycle, all of the steps between the execution of trades and the settlement should be enhanced and automated where possible.
Looking ahead, what are SASLA's core objectivesfor 2025?
Keys: As we are members of the association, I would like our focus to be on expanding collaboration with regulators, international investors, and local participants to address systemic issues. We will continue engaging in meaningful dialogue with our regulators and improve policy development to ensure South Africa’s securities lending market remains competitive globally. In addition, we will continue hosting forums and educational initiatives to demystify securities lending for beneficial owners.
Wright: Securities lending is facing increased regulatory scrutiny and SASLA will need to engage with regulators to ensure the South African market remains attractive for both institutional clients and the offshore markets.
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