Daniel Mminele: Reducing systemic risk in South Africa
Remarks by Mr Daniel Mminele, Deputy Governor of the South African Reserve Bank, at the
launch of the T+3 Equity Market Settlement Cycle, Johannesburg, 4 August 2016.
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Good morning ladies and gentlemen.
Thank you to the Johannesburg Stock Exchange (JSE) for inviting the South African Reserve
Bank (SARB) to be part of this significant occasion to mark the launch of the T+3 settlement
cycle for the equity market in South Africa. Thank you for the opportunity to make some brief
remarks this morning. Allow me to start by congratulating the JSE and the T+3 Project Team,
under the guidance of the JSE, on a smooth and successful implementation on the go-live
date on 11th July, which represented the culmination of close collaboration over an extended
period between numerous stakeholders, and including with the National Treasury, the
Financial Services Board, and the SARB. This is indeed a major milestone, as many of us
gathered here today know how much work has gone into this project.
The move to this settlement cycle is a welcome development that contributes towards our
continuous efforts to improve the efficiency of, and reduce the risk in, our financial market
systems and infrastructures. Not only does T+3 in the equity market align this market
segment with the implementation in the bond market, which happened some time ago, it also
aligns the South African market to international best practice. Beyond just creating these
efficiencies and synchronising our markets with the rest of the world, an important element of
this particular initiative is that its benefits are shared by many of us as stakeholders in this
project, be it as companies listed on the exchange, brokers, investors and indeed as
regulators.
The project team at the JSE has done well in highlighting some of the benefits1, and if I can
remind everyone present here today, these include:
• Aligning operational practices of the local equity market to global standards;
• Improving the credibility and operational efficiency of the local market;
Protecting the financial markets through systemic risk mitigation that will follow from
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reduced credit and liquidity risk; and
Through increased credibility, assisting in making South Africa a more attractive
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investment destination to international investors.
These are only a few of the direct and indirect benefits of a shorter settlement cycle, and for
South Africa it comes at a time when the JSE is becoming a home to an increasing number
of dual-listed companies. According to JSE statistics, the share of companies with dual
listings increased from 14 per cent of all companies listed on the JSE in January 2006 to
about 24 per cent in July 2016. As such, harmonising settlement cycles across regions will
help with better cash flow and treasury management, and thus facilitate better and more
efficient allocation of capital.
Reducing systemic risk and contributing to broader financial system stability
In addition to its primary mandate of price stability, the SARB is also responsible for
protecting and enhancing financial stability. We consider financial stability to exist when we
have a financial system that is resilient to systemic shocks, facilitates efficient financial
intermediation and mitigates the macroeconomic costs of disruption in such a way that
confidence in the system is maintained. The focus on financial stability is in line with the
global trends where the regulatory community, in reaction to the global financial crisis, has
been dedicating more effort and resources to reducing risk, achieving greater transparency
and accountability, and improving efficiency in order to establish a safer market environment.
A shorter-settlement cycle will foster a reduction of settlement risk and counterparty
exposure by reducing the time period between trade execution and settlement. The faster
delivery of cash and stock to the seller and buyer, respectively, allows for a reduction in the
risk of financial loss, especially during times of financial stress. The level of
interconnectedness or network structure of the various agents of our financial systems, within
and across borders, speaks directly to the potential risks that may arise from poor or
outdated risk management practices. However, if risk is reduced and continuous risk
reduction strategies are being pursued, such as will be the case with the shorter settlement
period in the equity market, then systemic financial crises are less likely to occur.
Increased market credibility and operational efficiency improving the attractiveness of
South Africa to international investors
Other benefits that this initiative promises to unlock relate to the improvement of the
credibility and operational efficiency of the local market. These benefits should help boost
South Africa's status in the global competitiveness rankings of the World Economic Forum
(WEF). The competitiveness rankings are informed by a number of pillars which are
organised into three main stages of development, factor-driven, efficiency-driven and
innovation-driven. Each stage focusses on different market structure issues, i.e. basic
requirements, efficiency enhancers and innovation and sophistication factors. Financial
market development, for which South Africa is ranked an impressive 12th out of 140
countries, falls under the second stage of development.2 This initiative, together with various
other initiatives that are currently under way in our markets, will help improve the process of
more efficient and safer intermediation of capital, enhance our competitiveness and
contribute to the attractiveness of our markets for foreign investments. As a country that runs
both budget and current account deficits, that are being predominantly financed by short term
foreign capital flows, this becomes rather crucial. The sophistication and depth of our capital
markets also play an important role when the country's credit ratings are being assessed.
Contributing to South Africa's delivery on its G20 commitments
Before I conclude, let me briefly touch on how this initiative also helps South Africa to meet
its G20 commitments. South Africa as a member of the G20 was invited to join the Bank for
International Settlements (BIS) Committee on Payment and Market Infrastructures (CPMI),
and it is also a member of International Organization of Securities Commissions (IOSCO). As
a member of the BIS CPMI, the SARB contributed to the development of the Principles for
Financial Market Infrastructures (PFMIs). The PFMIs update, harmonise and strengthen the
international risk management and associated standards applicable to systemically important
payment systems (PSs), central securities depositories (CSDs), securities settlement
systems (SSSs), central counterparties (CCPs) and trade repositories (TRs).These principles
were published in 2012 and G20 member countries were expected to adopt them and also
apply them in their jurisdictions. South Africa embraced these principles and issued a
position paper to drive their application by identified FMIs in the payment system. Once the
Financial Sector Regulation Bill has been enacted, followed by other consequential
legislative amendments, we will be able to fully adopt the PFMI. It is, however, also
encouraging to note that with assessments of compliance on South Africa as a jurisdiction by
the BIS CPMI/IOSCO, we have been scored quite favourable overall when it comes to the
expected outcomes. Furthermore, we have requested our recognised payment FMIs
(including STRATE) to conduct self-assessments, which were reviewed by our National
Payment System Department prior to engagement with the FMIs on appropriate action going
forward.
In conclusion, let me reiterate that as the SARB, we are pleased with the industry's
collaboration and commitment to align the equity market to international standards, and allow
me to once again convey my appreciation to all stakeholders that had to play a constructive
role since the inception of the project in 2013 right up to ensuring smooth execution in
connection with the recent launch. As previously stated, the shorter settlement cycle will
reduce systemic risk and release funds earlier into the market, thereby increasing liquidity for
local and international investors which will translate to growth in our capital markets and also
enhance public confidence.
With these words, I would like to thank you all very much.