On October 2nd 2012, the financial industry gathered at a conference hosted at the Gordon Institute of Business Science (GIBS) to hear from influential leaders as to whether the financial market could be sitting on the cusp of another crisis. In response, they believe the crisis is not yet over.
Speakers included the deputy governor of the South African Reserve Bank, Daniel Mminele, Monica Singer, Strateʼs CEO, Walter Volker, the CEO of the Payments Association of South Africa (PASA), Nicky Newton-King, CEO of South Africaʼs stock exchange the JSE, as well as the heads of banks and asset management companies, such as Citi Group and Investment Solutions.
The conference was set within the context of the global financial crisis of 2008. Throughout history, there have been a number of crises, including the first major financial crisis in the US in 1819 – almost two centuries ago – and the Wall Street Crash of 1929, which led to The Great Depression.
Regulations and legislation with a focus on risk
Derrick Msibi, the Managing Director of Investment Solutions, said that globalisation, the interdependence of our global financial system, and the extent of the current debt crisis, have the potential to result in a bigger crisis in terms of amplitude and time period.
He added that although it is difficult to predict the next crisis, the market should identify the risks and understand the risk management models while seeking transparency. Governments internationally have recognised this need, implementing regulations and legislation to avoid raising the ghosts of the past.
Nicky Newton-King said that there is a re-regulation of the financial markets with a focus on risk:
We are going to need to be connected in a global manner; we need policy tightenings to build our country going forward.”
She also added that there is a lot of energy focused on risk management capabilities at present.
A safer financial sector serving South Africa
To further strengthen South Africa, the country’s National Treasury (NT) published a document that is a guiding document for the market to ‘provide a safer financial sector to serve South Africa better’. In the policy paper, which was published with the 2011 Budget, NT notes that while the recession is over, the crisis and the results of the crisis still linger as financial stability is not yet secured internationally.
The report states:
In South Africa, our financial sector successfully weathered the crisis, but a million people still lost their jobs. Recognising the need for coordinated international efforts to secure global financial and economic stability, we have committed to important obligations to try to prevent a similar crisis in the future.”
According to Daniel Mminele, the global financial crisis brought to the fore an environment of increased cooperation from regulators and authorities:
The crisis has made us appreciate how there is more interconnectedness in how the financial systems operate.”
He added that a number of interventions that are of interest to the financial system have been implemented.
Financial Market Infrastructures (FMIs)
Appropriate standard-setting bodies have become key for appropriate regulatory frameworks, such as the Financial Stability Board, the Basel Committee, and the Committee on Payment and Settlement Systems (CPSS), as well as the International Organisation of Securities Commissions (IOSCO).
Regulations, such as Dodd Frank in the US and the New Companies Act and the Financial Markets Bill in South Africa have been implemented, financial market infrastructures globally have started to adopt the CPSS IOSCO Principles that were published in the first half of 2012.
It provides 24 principles with more detailed guidance by broadening the scope of the standards to cover new risk management topics. Furthermore, other types of FMIs are included in the Principles, which now include systemically important payment systems, CSDs, securities settlement systems, central counterparties (CCPs), and Trade Repositories (TRs).
According to CPSS IOSCO, FMIs were a ʻsource of strengthʼ during the financial crisis and were generally able to settle obligations when due, giving market participants the confidence to continue transacting. CPSS IOSCO wanted to ensure FMIs are truly resilient as markets tread into an uncertain tomorrow so that they cope with the worst-case scenario.
South Africaʼs resilience in the global market
In South Africa, banks and the financial market have been called ʻresilientʼ by Ministers. During the global financial crisis, the JSE and Strate never closed down and settlement through the CSD never failed. Accordingly, South Africaʼs financial market development rank has climbed to third in the World Economic Forumʼs The Global Competitiveness Report 2012-2013.
A stable financial market that is well regulated not only attracts investors, but it also indicates that a country like South Africa has developed financial market infrastructures that are on par with that of first world countries, offering market services in line with global best practice.
Sound infrastructure is also an essential tool to facilitate the efficiency and stability of the financial market, such as that of the JSE, Strate, or PASA. Take the National Payments System as an example – it serves as an essential infrastructure that contributes to the proper functioning of the markets, helping eliminate frictions in trade, and ensuring safe and efficient financial flows.
Facilitating risk management in the financial market
Strate’s infrastructure and products are constantly evolving to meet the risk mitigation and transparency needs of the financial market. We will soon introduce a Tri-Party Collateral Management service to meet Basel III and CPSS/IOSCO requirements and will be looking to provide a Trade Repository for over-the-counter (OTC) derivatives according to the G-20 requirements.
Whether a crisis is looming, or that financial markets may be in one for some time more, the marketsʼ efforts to promote transparency and adopt regulation and international best practice could equip South Africa for changes on the horizon.
The financial market has to be responsible for the facilitation of risk management through innovative solutions.
The conference aimed to provide decision makers and corporates with the correct tools and knowledge that can equip them to overcome challenges and obstacles, embrace change, and facilitate risk management in the market.