New York — The Johannesburg Stock Exchange (JSE) is modernizing its major securities processing systems in a bid to put Africa's largest stock market on an equal footing with the world's major exchanges.
An electronic trade settlement system known as STRATE, shorthand for Share TRAnsactions Totally Electronic, is the centerpiece of the JSE's current modernization efforts.
By mid-1998, assuming pending regulatory legislation is passed, STRATE is expected to begin dismantling the JSE's certificate-based trading and settlement system. At that time, STRATE will start testing the first of South Africa's more than 650 listed companies for electronic settlement, a faster, less risky, more efficient means of handling trades. Once the process is underway, plans call for converting at least 50 companies a month until the changeover is completed some time in 1999.
Though the JSE was once viewed as one of the world's most advanced exchanges, it has all but languished since the 1960s, frozen in time by international sanctions imposed during the latter days of the apartheid era. As a result, while the Johannesburg exchange ranks as the world's 18th largest by market capitalization, it ranks only 39th in terms of liquidity, according to Mbendi Information Services of South Africa. Modernization is considered the key to raising the exchange's productivity and profitability.
The first major change in the evolution of the JSE occurred in 1995, when the Stock Exchanges Control Act opened JSE membership to foreign entities and local corporations, particularly banks and other financial institutions. Then, in May 1996, the JSE installed fully automatic, electronic trading, the Johannesburg Equity Trading (JET) system, replacing much of the human intervention in the entry and execution of trades. The exchange also established its first electronic central securities depository, the Central Depository Limited, which currently operates in the bond market. The depository has already captured over 80% of that market's certificates, enabling electronic transfers between market participants.
STRATE's development marks the critical next step in the JSE's development because it should enable the kind of world-class securities processing environment that can draw the attention, confidence, and capital of international investors.
"The electronic settlement system is vital to bring South Africa in line with international practice and to enhance the security and efficiency of settlement in our market," said Monica Singer, STRATE Project Manager. An accounting specialist who has helped the World Bank improve its compliance practices and country- specific financial accountability measurements, Singer envisions a system which will conform as much as is possible to the G30 recommendations.
Promulgated in the wake of the 1987 market crash by specialists from the world's major markets, the G30 recommendations aim to minimize market risk, promote efficiency as well as safety and soundness, and shorten the time between trades and settlements. "However, because we are an emerging market, we want to do so in the shortest time-frame and in the most cost-effective way," she added.
Toward that end, STRATE will be relying on SWIFT, the international financial communications network, for most of its messaging and data movement, domestically and internationally. "It's secure, it provides all the guarantees that we need, it's internationally accepted, it will connect us with everybody in the world, and it will hopefully help us achieve Straight Through Processing," said Singer, a native of Uruguay who migrated to South Africa in 1983. (Straight Through Processing popularly known as STP is the Holy Grail of securities processing, an environment in which a trade is entered once electronically and is not touched by human intervention again, allowing it to go "straight though" to the end of the processing cycle, the settlement.)
In addition to SWIFT's data network, which already has links between South Africa's major financial institutions and should be linked to STRATE by March, the system will also be utilizing SWIFT's messaging formats. This will allow STRATE data to traverse to any point in the SWIFT network, anywhere in South Africa or the world, without having to be re-keyed.
This fuller use of SWIFT protocols distinguishes STRATE from the U.K.'s CREST electronic settlement system which only uses SWIFT's data network as an adjunct to its own proprietary network and message formats. "SWIFT approved our business model at it's recent annual conference," said Singer, "so we're now going to start working on the format of the messages."
Other work currently underway includes hammering out the details of STRATE's ownership structure as a separate legal entity as well as finalizing the rules of a new central securities depository (CSD) for equity trades. The CSD will immobilize or capture all the certificates of designated South African companies, making the paper shares ineligible for trading or settlement. By so doing, it will also dematerialize them, converting them into electronic records, thereby enabling fully automatic trading, clearance and settlement.
The South African Reserve Bank is expected to enable another crucial part of the modernization process by March next year. The bank's National Payments System will mate the electronic delivery of securities with a real-time capability to guarantee payment, also known as a real time gross settlement system. This will allow an ongoing trade-by-trade settlement regime rather than the weekly aggregate batch process called netting used to date.
Sign up for free AllAfrica Newsletters
Get the latest in African news delivered straight to your inbox
Currently, if a trade doesn't settle on a Tuesday, the weekly settlement day, "it gets rolled over to the next accounting period, and the next after that until it settles," said Singer. That's to be replaced by a requirement that trades settle five days after trading, or T+5, backed up by an electronic settlement authority which insures that settlement is concluded within the required time frame. "If it doesn't," said Singer, "that will trigger an automatic buy-in by the settlement authority with penalties charged for failure on S+1 (the first day after settlement)."
Singer wants the system to move to T+3, the range suggested by the G30, once market participants become reasonably comfortable with the new policies.
The new CSD, modeled on the Paris Bourse's SICOVAM system, will be developed from the JSE's electronic broker/dealer accounting system, which interacts with JET. "We will also have dematerialization with withdrawal," said Singer, "so it's the same situation as in the U.S. where you can actually withdraw the paper but you cannot settle with the paper."
All of the initial work needed to launch the system is expected to be completed by May when the required legislative changes to the Companies Act of 1993 are up for approval.
Information about STRATE is available from the web site at www.strate.co.za.
