Strate Moves Ahead in the Money Market Environment

by Dale Connock, Head of Risk Management, Strate Ltd

Thomas Edison is credited as being one of the most prolific inventors in history. He was also known for his perseverance and is quoted as having said when questioned on the subject of risk-taking that “The three great essentials to achieving anything worthwhile are; first, hard work, second, stick-to-it-iveness, and third, common sense.”

Over ten years ago a number of the key stakeholders involved in the local money market environment developed a blueprint for the future of money market instruments in South Africa. After a number of years of hard work and unwavering dedication (stick-to-it-iveness), the dematerialization of money market securities is finally becoming a reality accounting for two of Thomas Edison’s three great essentials.

The third, and possibly the most compelling of Edison’s essentials comes to the fore as we consider the benefits South Africa can expect to derive from all the ‘hard work’ and ‘stick-to-it-iveness’ that has been invested in this initiative by experts across the industry thus far.

The new money market environment provides accurate and complete recording in a secure manner which brings significant reduction to the operational risks which have faced our industry.

Originally born out of the very real concern for the risks faced by practitioners on a daily basis in the ‘paper’ world, the new electronic money market system represents leading edge development by the South African market which can rightfully claim a number of world firsts. End-to-end, straight-through processing – from the issue of an ISIN right through to maturity – means that money market securities can, in future, be issued, traded and settled electronically.

Standardized electronic communication between Business Partners, Participants and Strate (South Africa’s Central Securities Depository) using ISO 15022 message types also ensures that each user of the system, each investor and each security issued can be uniquely identified. Trade details cannot be modified or cancelled once they have been matched and each and every change in beneficial ownership can only be effected through the newly developed Electronic Trade Matching Engine (ETME).

A major thrust in the move to an electronic money market has been the threat of theft, fraud and forgeries which has cost our market a great deal over the years. Securities will now be issued into, and retained in, an electronic format in the beneficial owner’s name at Strate. Each and every transfer of ownership will be effected using a process of Simultaneous, Final and Irrevocable Delivery versus Payment (SFIDvP) through the proven and secure inter-bank settlement system operated by the South African Reserve Bank. Gone are the Bearer certificates which needed to be physically presented to the issuer for capital event payment, and the electronic register also means that it is no longer necessary for certificates to be split in order for delivery against trades to be effected.  

The new money market environment provides accurate and complete recording in a secure manner which brings significant reduction to the operational risks which have faced our industry. The new environment also ensures that trades are settled on a gross principal-to-principal basis thus avoiding the ‘fail one, fail all’ constraints associated with netting.

From a reputational perspective, the market as a whole benefits directly through the combating of money laundering. The records maintained by Strate at beneficial owner level are regarded as the ‘definitive record of ownership’ with only foreign nominees being permitted to open nominee accounts. All in all, settlement excellence through the reduction of risk.   

Common sense? We certainly think so.