Phase 2 of SA’s Money Market Dematerialisation

The ongoing dematerialisation of South Africa’s money market securities is running according to schedule, and all Category 3 securities were issued in dematerialised form from the end August 2011. Category 3 money market securities comprise those securities which have a variable/floating coupon rate and fixed maturity date. Phase 1 of the dematerialisation of money market securities, launched in February 2010, included discount securities and fixed coupon securities with fixed maturity dates.

The dematerialisation of South Africa's money market has been one of the past decade's most important milestones for South Africa's financial markets.

Strate, South Africa’s Central Securities Depository, provides the infrastructure to issue an ISIN (International Securities Identification Number) electronically, record the issue, provide post-trade matching and facilitate the settlement of trades and coupon and maturity payments, as well as keep the record of beneficial ownership of every money market security in issue.

Anthony van Eden, Strate’s Chief Operating Officer, characterises the dematerialisation of South Africa’s money market as one of the past decade’s most important milestones for South Africa’s financial markets:

“The market-led initiative transforms the country’s money market from the previous manual custody, clearing and settlement processes into a fully electronic environment allowing enhanced straight-through-processing and significant mitigation of the former risk profile of this informal over-the counter financial market.”

Van Eden stresses the significance the significant market involvement in the development of the Money Market Securities System. “This has been an industry initiative on which the market has been working for a number of years. It is rewarding to see the electronic transacting of money market securities, as this marks a significant milestone for South Africa and its status internationally.”

He explains that the full dematerialisation process has been divided up into several phases in South Africa, commencing with the more vanilla type of money market instruments to the most complex of such instruments.

Van Eden says that the money market’s Category 3 implementation has a significant impact on the market by further reducing the operational risks associated with the paper-based Category 3 type securities which are currently the more popular securities invested in due to the index linked coupon payments.

“It also reduces the dual systems for all market players currently required to have dematerialised and paper-based systems within their trading and settling environments.”

Van Eden encapsulates the objectives of money market dematerialisation:

• Reduce the identified risks associated with money market practices;

• Improve liquidity in the money market;

• Reduce the costs of money market settlement and custody processes;

• Align SA market practices and procedures with world best practices;

• Level the playing field for all industry participants; and

• Improve the integrity of the money market by creating an environment that is safe, secure, structured, formalised and robust.

Ultimately, says Van Eden, an electronic money market:

• Dramatically reduces the operational and settlement risk exposure, as electronic settlement is both secure and efficient;

• By adhering to internationally accepted settlement standards, it enhances the global status of the SA market, increase its attractiveness to foreign investors and, ultimately, benefit the economy; and

• Makes available accurate and up to date market information, in the process reducing money laundering opportunities.

The dematerialised nominal value of the money market instruments peaked at R500bn in November 2010.

Strate’s activities now encompass electronic custody and settlement in all three – equity, bond and money market securities – of South Africa’s principal financial markets.