Our panel in Cape Town discussed the move to T+3, the complexity of trade settlement on the continent and the challenges of building a pan-African business. Chaired by Alan Chalmers
(head of investor services, Standard Bank)Andre le Roux
(head of business development and client management – Africa, Maitland)Duncan Smith
(senior sales and relationship manager, emerging markets, SGSS)Bennie van der Westhuizen
(investors and intermediaries, Africa and Middle East, Standard Chartered)
Funds Global: The past few years have seen a series of regulatory changes affecting the custody market in South Africa. Which measures occupied most of your time in the past year and what will affect you most in 2016?
Van der Westhuizen, Standard Chartered:
Something that’s gathered momentum this year is the move to T+3. It’s taken a significant amount of time within the business, and making sure that in 2016 it lands successfully will take more time. From a market point of view, it’s essential. From a regulatory point too. It’s important to the JSE [Johannesburg Stock Exchange] that this is a successful implementation.
Bruyns, Standard Bank:
T+3 is by far the most important market change for 2016. It’s got somewhat of a stigma internationally around when it’s going to be done. There are three markets in the world that are on T+5, of which we’re one. There’s a clear incentive to deliver this year, hopefully by the first part of July.
The other development we’ve been working on is the Debt Instrument Solution (DIS). Current settlement risk in the bonds/fixed income environment is significant, where we’ve seen settlement runs being extended past normal timelines on a regular basis. We’ve spent a great deal of time with Strate and other market participants on this. After the money market module of Strate’s new BaNCS Market Infrastructure solution goes live, it will give all participants more time to focus on DIS. We hope to see greater traction on the project over the rest of the year.
We’ve also spent time with National Treasury on the electronic trading platform (ETP), which they are attempting to set up to facilitate smaller lots of trades on the bond market. As this depends on the DIS implementation, Treasury wants to push to a month after DIS goes live, but realistically I think it will take around three months after DIS.
Another development is collateral management. While I think it’s a great idea, the process has been largely manual and cumbersome as a result. We’re seeing the South African Reserve Bank (SARB) supportive of the initiative, which should get it going from a bank perspective. It is the right outcome, but there’s still a great deal more work required to make it work seamlessly in this market.
T+3 has been taking up a lot of our time. It’s good for the market and for the country. We’re also seeing a lot of activity on the Debt Instrument Solution side from Strate. Part of what we’re also seeing is the regulation of the hedge funds industry. The regulators are quite active in that space.
Because we have a domestic presence in South Africa and also provide wealth management service offerings out of the UK to South African-domiciled legal entities, the fact that South Africa has been introduced as an Intergovernmental Agreement (IGA) level-one country on FATCA [the US’s Foreign Account Tax Compliance Act] and the advent of the common reporting standards has proved quite interesting.
We’ve also seen some local market changes, some regulation in Egypt and Nigeria where we service a number of CIS [collective investment scheme] management companies. We’ve been quite busy.
Le Roux, Maitland:
As the sole fund administrator among three custodians, I’m very happy to hear they’ve been spending a lot of time on T+3, because so have we.
We’ve also spent a lot of time on the regulation of hedge funds in South Africa as a product. That’s going to take up the best part of this year as the realities set in. The regulation’s been promulgated but the devil in the detail is coming through and we are engaging actively with the regulator to ensure all the administration perspectives are appropriately interpreted.
There have also been changes to the total expense ratio (TER) reporting, where it’s becoming a lot more granular. I hope the custodians have got their systems up and running.
The other interesting thing from an African perspective is in Botswana, where they recently promulgated regulation whereby the local fund management industry needs to perform most of their administration in country. It’s a big change for a small country like that and has wide-ranging cost implications for managers. There is ongoing engagement with the Botswana regulator, who has been pragmatic in responding to the kind of investment in infrastructure that is required by the managers. The reality is that African countries want you to respect their sovereignty, make real investments into the people and support local suppliers. We’re looking to make an investment in Botswana.
Funds Global: What do you expect to be the consequences of the shift to T+3?
In the South African market, we have a couple of big banks and big fund managers and a plethora of boutique fund managers. Training the smaller players to understand the downstream implications from a custodian perspective and from an administrative perspective will be costly. Some of the guys haven’t yet contemplated the impact it’s going to have on them. Client engagement is going to have a large and unintended cost.
The weakest link is your risk. While we can be ready, if one participant on the other side of the trade is not ready, it’s going to put us all at risk. Also, for brokers, the new rules for margining – when they should start providing, putting up margin based on when they commit to trades – is really going to impact their liquidity pools and their sustainability. We haven’t yet modelled the impact and the response from brokers, whether they’re going to pass it on to their clients or counterparts.
Van der Westhuizen:
What hasn’t necessarily been closed out is the funding of settlement accounts with the reduced turnaround time. International financial institutions cannot run overnight facilities. Ironing out that shorter settlement cycle, and deciding when is the funding going to happen, is in progress.
People are now starting to understand the reality, with the JSE issuing their T+3 model and their processes. Now there’s a grapple for data. We have the information available in our environment, so we’re busy supporting brokers with establishing what the impact is likely to be. The current grapple for data really is around ‘what does this really mean’, because the behaviour of the domestic broker executing doesn’t necessarily change. Behaviour changes with clients.
And once you’ve got the data, you’ve got to cut the data and you’ve got to work out what it means to the broker and what it means to your own firm. You’ve got a knock-on effect as well if you’ve got somebody coming in from, say, London into the market but you’ve got the broker on this side as well. You’ve got to make sure that you understand how the two interact together.
However, I think this is an extremely positive move. South Africa has faced some challenges recently, but remember that we are in the World Federation of Exchanges. If we go to T+3 successfully, and we’ve got the Debt Instrument Solution coming along, that offsets some of the negativity about things like ratings downgrades. The other side to that coin, though, is that you should then make sure that it works and it’s a success.
I’ll also say that the JSE prides itself on running a no-fails environment, but one would think that you’ll have more fails on T+3. But from a securities lending perspective, you can expect shorter credits but more volume on the market, which drives more liquidity.
Funds Global: South African pension schemes are increasingly investing into other African countries, as well as into global developed markets. What support do these clients need and how do you see this client segment evolving?
The pensions market in South Africa is actually very mature. I would argue it’s quite sophisticated as well. Fund managers want to operate a single operating model and a single investment process. Whether it’s private equity or infrastructure into Africa or hedge funds or buying international stocks and bonds, they want a single investment process which is supported by a single operating model.
So, for the service providers, we need to make sure we can connect electronically to African stock exchanges so we can match and settle in those exchanges. People get scared and tense about Africa. The reality is that trading electronically in Africa is actually not that difficult.
I’m going to differ slightly, because I find Africa is not easy for a custodian. As custodians and banks, driving the development of these markets to reach a South African or global standard takes a great deal of time and investment. It requires an on-the-ground footprint to make sure assets are safe, that trades settle on time, and all paperwork requirements and regulations are met. And then we have to support the fund administrator and the asset manager, and ultimately the pension fund, whose assets are in that market.
The important thing is current and relevant information. A fund manager might say, “It’s easy to trade in Africa,” but we’ve spent a lot of time and capital in supporting clients – on what’s happening in the market from day to day, whether it’s economic data or information about market or broker risk. We support them in making the right decisions where possible.
The difficult question in Africa is always liquidity. I understand Andre’s point about it being easy to execute and, having personally worked on the ground in a number of markets for a stockbroker prior to joining Société Générale, it may be. Execution is the simple part. People forget that in these markets, a guy comes around from the exchange and knocks on the door and says, “Here’s a letter, we aren’t settling and we’re sending the trade back to the broker.” For portfolio managers, it might seem seamless, but the operations guys at the back are literally running around trying to get the cash and securities in the same place to settle the trade.
Van der Westhuizen:
We’ve invested a significant amount in standardising systems across our whole footprint, including Africa. In the background, there is another volume of work the client naturally won’t be a part of, but is essential all the same – for example, settling trades, engaging with local regulators, managing infrastructure providers and ultimately ensuring the transaction is a success. Investing into regional stock exchanges presents valuable opportunities for investors, but will take a bit of time yet from a seamless trading perspective.
Funds Global: Do South African firms have a head start over other international players if they want to build a business across the African continent? How important is it for your firm to build a pan-African business and what is your growth outlook for the continent?
Van der Westhuizen:
Standard Chartered as an entity has been in the region for over 150 years. From a securities services perspective, we acquired Barclays’ regional custody business in 2010 and then Absa’s South African custody business in 2013. I think markets can be challenging, if you are starting from scratch. There are other international providers that are quite vocal about setting up shop. Standard Chartered remains positive around Africa’s custody services potential, having launched custody services in another five new markets since our acquisition of Barclays’ regional business.
South Africa certainly has a big head start, and South African firms have been moving into Africa for many years. Secondly, we’re here on the southern tip of Africa – it’s very different in Africa from a culture perspective, but we’re quicker to adapt. But there are similarities – if you land in Zambia, it feels like it could well be a town in South Africa. And all the familiar South African brands are there.
From Standard Bank’s perspective, we’ve sold most of our subsidiaries outside of Africa – including our Russian business, the Argentinian bank and the 60% of the London-based global markets business. We’re deploying all that capital into Africa. We’ve opened our representative office in Côte d’Ivoire and we’re looking to open our bank there around the end of this year or beginning of the next. We’ve also recently opened a representative office in Ethiopia. So there’s massive investment for us into Africa and our focus is building out Africa.
It’s not going to be easy – in understanding exactly how to manage risk, how to think about capital and liquidity, or how quickly we can move in these markets. But those are key aspects which would also be challenging to international players.
To Charl’s point, some countries want bricks and mortar on the ground. I’d also insist on local presence if I was in the government of a country. I’d want to have my people come up the economic ranks because that’s what I’m there for as executive in government. It does make sense. Sometimes we see the cloud as the answer but it’s quite an interesting process to go through.
A pan-African presence is important to us but, to use a cricket analogy, it’s a five-day game – it’s not a Twenty20 where you can go out there swinging. In a Twenty20, if you go out swinging, you’ll get bowled. You need patience and sustained commitment to be successful in Africa
We may be historically strong in north Africa on the Mediterranean but we are also well represented further down the continent too. For example we have recently concluded a 65% majority stake in a bank in Mozambique, the Mauritius Commercial Bank, now Société Générale Mozambique.
I often use the Afrikaans phrase ‘local is lekker’, which means ‘local is good’. ‘Proudly South African’ is one of the great campaigns here in South Africa. Having established our branch here 25 years ago in 1991, we are ‘Proudly South African’ and have since grown headcount in Johannesburg with over 95 people on the ground now, and with the full administrative support of the considerable SGSS presence out of Paris and globally.
Patience is the word. We’re watching the rate of capital market development. South Africa’s economy grew on the back of the mining industry where investments were raised through the capital markets, which are now as sophisticated as anywhere, whereas in many African countries, oil has been a big influence. The big international oil conglomerates have come in, so they haven’t had to necessarily build developed capital markets because capital has come from other sources.
South Africans understand the difference between macro and micro. You can still make good margins if you focus on your niche. I think the key in Africa is not to blindly follow the herd.
Related to that is the pension fund regulation to the extent that people are going to want the pension funds to invest in-country. So for us, that’s also a market indicator.
I would add that Africa’s become quite innovative from a mobile technology point of view and I think if we’re going to see disruption in the financial services industry, it’s going to come out of Africa.
Funds Global: What are the most promising areas of business for you in South Africa and the wider continent, for instance, collateral management, risk monitoring and other ‘value-added’ services?
Last year we launched securities lending in Nigeria, and we are engaging with the local exchange in setting up a derivatives clearing business – those are certainly good opportunities for us. But it’s a painful process because all the tax laws need rewriting to support it. In Kenya, we’ve recently been awarded a new licence by Kenya’s securities exchange to clear derivative instruments. That’s another project that’s going ‘live’ in 2016.
We have many domestic asset management businesses looking to expand into Africa, and looking for us to support them. It’s a privilege for us to partner with them in growing into new markets. However, in South Africa, a possible downgrade would be painful. If it hits, the impact on rates, on inflation and on the ability of businesses to invest would be impacted. It could be a bumpy year.
We’re having conversations with domestic pension funds, where they are looking for bigger balance sheets behind some of their functions that are done for them in the market. It’s an opportunity for us to give them more support and comfort.
Van der Westhuizen:
Nigeria for us is also a positive story. It’s a new custody services market we opened in 2011. We see much opportunity there. Kenya is benefiting from the launch of new custody services products, and we look forward to supporting further development. There are some other markets that are also looking into ETFs [exchange-traded funds]. Another area of growth is in corporate agency, and trust, escrow services and account bank services.
From a fund administration perspective, the Africa story for us is about infrastructure and private equity. We’ve seen a lot of good opportunities. However, the next 18 months are also about broadening our product mix to our existing client base, and helping them navigate the next 12 to 18 months in South Africa.
It’s going to be a tough period. There probably won’t be much new client acquisition. People will want to consolidate, to have single service providers. This reflects the issue of data orchestration, and having more and more reporting in one place, one service. We’re bullish around improving margins and improving service breadth to existing customers.
I would imagine that in times like this, investors may have to hold on and ride out the storm. We’ve seen quite a lot happening domestically. We still have a number of things that are coming down the pipe in the next few months. Part of what we’ve seen is the OTC [over-the-counter] industry no longer being able to trade through an MTF [multilateral trading facility], so you’ve got a few other exchanges now applying for licences. We’re starting to see a lot of interest coming into Africa from the pan-Africa custody offering and from our remote custodian licence in Mauritius.
From an institutional point of view and from the wealth management point of view, there seems to be a lot more interest in people saying that perhaps they should be diversifying offshore. So there’s a lot of local interest in what we’re doing with our international wealth management offering from London.
There’s a lot of opportunity. South Africa to me, in terms of where we’re going, is great. We’ve got a lot of infrastructure here that’s good. We’ve got a good story to sell to the world. Société Générale has had an ongoing commitment to African economies for more than 100 years, the new subsidiary in Mozambique will support growth in the country which has strong growth potential with the recent gas field discoveries.
Yes, Mozambique’s a great story. But one topic that we haven’t touched on is the other market infrastructure that’s on the horizon. There is a new stock exchange in South Africa, A2X, which is waiting for the regulator to issue an exchange licence. This will most likely happen in the next three months. They want to provide a lower, cost-effective trading environment compared to the JSE. So that’s going to be interesting. And then there’s Granite, a new central securities depositary (CSD) that has a licence and is being set up. There are a good deal of developments going on in the market.
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