Market participants expect to see an uptick in demand to borrow securities in South Africa driven by a soon-to-be-introduced shorter settlement cycle. Johannesburg Stock Exchange (JSE), the country's premier bourse, will switch its settlement period from five days to three (T+3) in July.
When the time it takes for the seller to receive payment and buyer to take ownership shortens to 72 hours, it is likely to cause more failed trades. However, it is anticipated that there will be a net benefit to the market – as assets being released more quickly from the settlement process and increased securities lending volume should both drive liquidity.
"We definitely expect to see an increase in demand to borrow securities, especially around the shorter settlement cycle," said Juanita Taylor, head of securities lending at Standard Bank, at the Cape Town event in April. "Ideally, we need to encourage more lenders to come into market, or increase the percentages of assets available for lending, to ensure T+3 is effective."
More than twenty institutions make up South Africa’s securities lending market, including banks, insurance companies, pension funds, asset managers and service providers. A survey of South African lenders last year estimated that around ZAR130bn ($8.5bn) of securities were on loan in the republic at any given time.
JSE’s head of operations for clearing & settlement, Brett Kotze, says the move to T+3 is the biggest financial project for South Africa in over two decades. Kotze, one of the main architects behind the move, says it will align South Africa’s capital markets with global best practice, increase foreign investment and ultimately mitigate systemic and settlement risk.
The project has taken several years and relied on close collaboration between market participants. The go-live date for T+3 is 11 July this year. "We’re now switching to a market and user readiness focus with T+3," Kotze said.
In Europe, a T+2 settlement period was introduced across 27 markets in 2014. Post-trade giant the Depository Trust & Clearing Corporation (DTCC) has recommended shortening cycle for US equities, municipal and corporate bonds from T+3 to T+2 but work on shortening the settlement cycle is still continuing.
Hedge funds boost
The introduction of rules splitting South African hedge funds into two categories, qualified and retail, could mark a watershed moment for the industry, according to market participants at the Global Investor/ISF event.
Gyongyi King, chief investment officer of Johannesburg-based Caveo, a fund of hedge funds, said the legislation should spark some life into an industry which has been "stagnant" for years.
Hedge funds have officially been regulated under the Collective Investment Schemes Control Act (CISCA) since April 2015 but existing hedge funds have until October of this year to comply.
"Apart from market growth, South Africa's hedge fund industry hasn't gathered a substantial number of new investors in recent years," King said. "CISCA – potentially – opens up the hedge fund market to the everyday retail investor and results in increased flows to the industry."
Institutional investors, including pension funds, are also becoming more comfortable with the idea of investing in hedge funds thanks to the legislation, which allows for two types of structures. A Qualified Investor Fund (QIF) is intended for large investors of over R1m ($70,000) and who have a knowledge of the market.
The other form is Retail Hedge Fund (RF), which has no restrictions as to who can invest but must conform to contain criteria in terms of the amount of leverage the fund can utilise as well as the type of derivatives and securities in which it can invest.
Matthew Milne, vice president of prime finance at Deutsche Bank in South Africa, said he expects the country's hedge fund industry to grow "at significant multiples" compared to traditional asset managers due to the new approach.
Although both King and Milne agree that CISCA will place an increased administrative burden on hedge fund managers, they believe that the increase in investor confidence should outbalance the cost of compliance. It is likely to be a gradual process, however, as the market players get to grips with the requirements.
Rules introduced in 2011, which allowed pension funds to invest up to 15% of assets under management into alternative funds, whether local or foreign, failed to live up to expectations in terms of increased business. Other barriers remain, King added, including burdensome regulation in South Africa already in place, making it tough to launch a new hedge fund.