The very nature of Strate's activities means that issuers of listed and now also unlisted securities gain from the vast array of benefits that Strate has brought to the market. These benefits include:
Electronic Custody of Shares
Under Strate, shareholdings are recorded electronically by each of the CSD Participants and collated at a Participant level within Strate for equities and bonds. In the money market environment, the custody of these securities occurs in a Securities Ownership Register (SOR) in Strate. These electronic records provide issuers with the database of investors for the dematerialised portion of their register. The records of the Participants are reconciled daily with the records kept by Strate, where the total balance of dematerialised securities is kept. Investors receive regular statements that take the place of share certificates.
This is in stark contrast to the inefficiencies that abounded in the financial markets prior to the introduction of Strate. For example, in the equities environment, forgery, loss and theft associated with paper share certificates heightened the risks associated with trading.
The seller was required to submit their share certificate to their broker for further submission to the Transfer Secretary, who issued a new certificate in the name of the buyer.
This manual process was risky, administratively burdensome and time consuming.
Accuracy of the Register
The electronic register in Strate is updated on a T+3 basis for equities and for bonds, and T+0 basis for money market securities when the simultaneous transfer of securities and funds takes place. This means that all trades are reflected on the register of investors for dematerialised securities in the Strate environment, as there are no outstanding securities transactions. Listed and unlisted companies wishing to obtain an accurate record of their investors find themselves in a far more efficient position in the Strate environment.
Electronic Execution of Corporate Actions
Strate executes all corporate action events in respect of dematerialised securities for the market. The benefits of Strate's corporate actions model cannot be underestimated given the significant risk reduction. Cost savings in the corporate action arena are accredited to the Safe Custody Account (SCA).
Corporate actions are executed electronically in a quick and secure manner (for example, interest, dividends, etc.). Payments are transferred electronically with same-day value, eliminating the costs and risk associated with cheque payments. Issuers and investors therefore benefit from a dramatically increased level of efficiency and cost effectiveness and, most importantly, the elimination of market claims.
Security of Strate's System
The electronic record of shareholding in Strate is subject to extensive controls. This is thanks to the sophisticated encryption and authentication in the coding of the software where the security of the electronic records has never been compromised. Furthermore, Strate utilises the renowned SWIFT network for the relay of electronic information. SWIFT is a network owned by the major banks in the world and is therefore the provider of choice for all major financial institutions globally. This is one of the most secure networks in the world with consistent 99% up time since its inception.
As one of the highest users of the SWIFT network globally, Strate also provides SWIFT network services to other financial institutions and large corporates in South Africa. This provides a cost effective mechanism for them to utilise the SWIFT network without having to contract directly with SWIFT, giving them access to a reliable and secure communications channel, which ensures delivery of instructions between counterparties timeously and without fear of interception or tampering. As an alternative to SWIFT, Strate also offers clients access to its state-of-the-art VPN infrastructure, which also offers high levels of encryption, non-repudiation and guarantees of delivery.
Electronic Settlement of Transactions
At the point of settlement, the electronic records are updated real-time via book entry.
Settlement via book entry is both secure and efficient. It is no longer necessary for the seller to submit his share certificate to his broker for further submission to the Transfer Secretary, who issues a new certificate in the name of the buyer.
Rolling settlement refers to a settlement environment in which transactions (securities and funds) become due for settlement a set number of business days after trade. Rolling settlement represents a significant departure from the “account period” methodology employed in the past by the equities market whereby trades of any given week were settled on Tuesday of the following week. Investors now know precisely when their trade will settle and can plan/budget accordingly.
The ‘account period’ methodology of the paper-based settlement environment operated on an indefinite basis; some transactions remained unsettled for months. As every day is a trading day, under Strate every day is also a settlement day thereby eliminating this particular weakness of the past.
Investors obtain the assurance that their transactions settle on the specified settlement day. The appropriate cash and securities accounts are debited / credited on settlement day and the risk of delayed settlement and loss of earnings is significantly reduced.
Simultaneous Final Irrevocable Delivery versus Payment (SFIDvP) Strate is proud to be amongst those CSDs who have achieved true Simultaneous, Final, Irrevocable, Delivery versus Payment (SFIDvP) in Central Bank funds. This has been accomplished with the use of the Continuous Batch Processing Line (CBPL) functionality for equities, the Continuous Processing Line (CPL) for bonds and the Real-Time Line (RTL) for money market Securities in the National Payment System at the central bank.
In terms thereof, payment obligations must be provided for in the South African Multiple Options System (SAMOS) managed by SARB, before the settlement run can be commenced.
Connectivity Through SAMOS
In 1998, the South African Reserve Bank granted Strate permission to integrate its settlement processing directly with their own SAMOS. The main benefit that SAMOS brings to the South African financial markets is that it provides for final and irrevocable payment.
Similarly, Strate provides the investor with contractual settlement and finality of ownership transfer for all instruments settled.
By synchronising securities ownership transfer through Strate with cash payment through SAMOS, the market is able to provide local and international Investors with SFIDvP. SAMOS provides for final and irrevocable payment settlement, while Strate provides the investor with real-time settlement and finality of ownership transfer. By making the SAMOS settlement infrastructure available for the settlement of financial market transactions, the South African Reserve Bank has greatly boosted the capability and competitiveness of the South African financial markets. The interdependence of these two systems is in line with the worldwide drive towards consolidation and the resultant economies of scale.
Increased Market Regulation
The sound legal foundation provided by the Financial Markets Act (2012), paired with the level of understanding that Strate (including its Board, the various sub committees and management) has in terms of this Act and the Companies Act, 2008 ensures that effective corporate governance and strong risk management processes are implemented.
Securities Ownership Register (SOR)
The concept of a SOR for the equities and bond markets has long been a discussion point between stakeholders in the South African market. There can be no doubt, however, of the risk mitigating benefits that this structure would bring to investors. By its very nature, the CSD maintains a very different risk profile from that of other entities functioning in the industry. In the specific case of Strate, it does not hold a banking licence and is, therefore, also not involved in the granting of credit in any way. These benefits have already been derived for the money market environment and they would prove to be hugely beneficial in the management of systemic risk within other markets.
The SOR for money markets obviates the onerous controls over paper certificates and provides a real-time transactional audit trail of primary and secondary market trading. All money market securities are allocated an International Securities Identification Number (ISIN) in real-time via Strate allowing Straight-Through-Processing (STP) of the security from inception to maturity.
Good corporate governance has become an imperative and the CSD is not different. Strate endorses the principles of accountability, integrity and transparency underlying the Code of Corporate Practices and Conduct as contained in the King Report on Corporate Governance for South Africa.
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