Varied fortunes for the South African bond market
Against a backdrop of varying fortunes for emerging markets, South Africa was upgraded to investment grade by Standard and Poor's in February of this year, providing a significant boost to the access of South Africa's domestic bond market to international markets. The South African bond market is showing itself to be one of the most liquid of developing markets, with trading volumes on the South African Bond Exchange for the year up to December 31 1999 exceeding R9,514 trillion ($1,368 trillion). In the present year to July, domestic turnover has increased comparative to the previous year by 16%. The recent political unrest in Zimbabwe, as well as adverse perceptions of the African continent arising from other regional problems, have combined with increasing domestic inflation rates and a stronger dollar, however, to dampen much of the previous year's enthusiasm. While the 1999 year saw trading in the over-the-counter (OTC) off-shore market in South African bonds of approximately R1.7 trillion (most of which was settled locally) the participation by non-residents in the bond market this year has fallen off dramatically.
The growth of the bond market in South Africa is accounted for by greater borrowing by government-owned parastatals, increased market-making activities by significant corporate issuers and banks and growing participation by non-residents following the elimination of a number of barriers to non-resident investors after the election of the new democratic government in 1994. In March 1995, the dual currency mechanism applied by the South African government was abandoned in favour of a unified currency, with exchange control limitations continuing to apply, but in a progressively relaxed form, in respect of South African residents.
The South African Bond Exchange (BESA)
BESA was licensed as a financial exchange in 1996 and is subject to regulation under the Financial Markets Control Act. The exchange has traditionally been primarily a central government bond market although debt issues by local government, public enterprises and large corporates have grown over recent years. At present BESA provides a total of 212 listing in respect of 29 issuers.
BESA membership is limited to corporates only and minimum admission standards apply. Members are classified as either trading members (who may trade for their own account and on behalf of clients) or broking members. There are 76 registered members of the exchange, most of whom are banks or trading houses.
Members must comply with minimum capital adequacy requirements (which are largely in line with the Capital Adequacy Directive of the European Union) and are required to maintain fidelity guarantee insurance. A Guarantee Fund provides cover to members and their clients in relation to defaults by market participants. BESA intends implementing a margining system in the last quarter of 2000 to ensure that members' profits or losses are closed out at the end of each day of trading on the basis of closing prices quoted by the exchange.
Types of listed bonds
Until relatively recently, the bulk of listings have comprised fixed or floating rate notes, zero coupon bonds and medium term note programmes. Over the course of the past 10 months, the two largest South African Banks, ABSA Bank and Standard Bank have both listed Tier Two bonds of R750 million and R1.2 billion respectively. A number of asset-backed securities are expected to be listed shortly. Restrictive regulation of loan stock, primarily in accordance with the South African Banks Act has hampered the development of more sophisticated products although the Registrar of Banks is expected to issue an updated set of regulations relating to capital markets later this year.
South African bond options are traded on an OTC basis, although trading occurs in accordance with largely uniform contract terms. Bond futures generally trade at prices on a limited range of government bonds through the South African Futures Exchange.
Settlement and trading
The BESA trading floor was closed in 1998 and in February 2000 BESA introduced an electronic automated trading system for bonds, known as BATS, which provides at this stage for electronic reporting of trades but will be developed shortly to provide for full electronic trading.
In November 1997 BESA brought itself into line with the G30 clearing and settlement recommendations for securities markets. Trades on the Exchange are settled on a t+3 basis.
The bulk of scrip on the Exchange is immobilized in a central depository, which is independent of the Exchange and is owned by the large clearing banks. A system of electronic net settlement (ENS) is applied and trading in bonds is conducted by way of entries in electronic sub-registers maintained by participants in the central depository. The ENS system has served to minimize the gross settlement risks and has effectively reduced the risk of tainted scrip to negligible levels.
Pricing of government bonds is managed through a system of primary dealers. Eleven significant banks quote "buy and sell" prices on seven benchmark government issues upon request, and weekly auctions are conducted by the South African Reserve Bank on behalf of the Department of Finance.
Deneys Reitz Attorneys
Tel: +27 11 833 5600
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