Our recent virtual market advisory event, Strate Nexus, was an opportunity to update our clients and stakeholders on how Strate serves the financial market in South Africa.

“We serve the financial market through creating sustainable financial market infrastructures and platforms that meet world-class principles of governance,” André Nortjé, Chief Executive Officer, told participants. Strate’s three core offerings: CSD Services, Collateral Services and Integration and Data Services have the overall aim of promoting interoperability, enabling efficiencies, mitigating risk and optimising the use of capital for the South African security services industry, he added.

The markets faced a double test this year with the COVID-19 lockdown and extreme market volatility, said Nortjé. Yet the entire market ecosystem was resilient with no failed trades as stakeholders worked together and supported each other, he said.

Nortjé expects that next year could be a “really tough year” as South Africa faces stunted economic growth, policy uncertainty and structural issues – all exacerbated by the COVID-19 pandemic.

“But the capital markets are resilient and innovative. I am convinced we will get through this and be better for it on other side,” he said.

Guest speaker, Pete Redshaw, Practice Vice President, Global Financial Services – Research and Advisory at Gartner, shared various scenarios to plan for the effect COVID-19 could have on the cyber environment for financial services companies.

Prior to the pandemic, the financial sector was already facing disruption, including moving from people-led to machine-led processes and systems. A recent Gartner survey of chief information officers worldwide found that COVID-19 has accelerated many of the changes already in progress. Notably, it has increased organisational reliance on technology, shifted the allocation of more funding to digital acceleration and grown headcount in the technology area.

Redshaw warned: “This will not be the last crisis we go through. We have a conveyor belt of crises coming along.”

Expect subsequent waves of COVID-19, economic recession, unemployment, trade wars, political upheaval and climate change to significantly affect customer demand and consumer behaviour, he said.

But Redshaw’s final words offered hope. “Where there is a crisis, there is also an opportunity,” he said. “Financial services companies could find that the latest crisis is their chance to accelerate ahead of their competition.”

Head of CSD Services, Gregory Naicker, discussed how Strate supports its clients through digital enablement.

Also, Farzana Khan, Head of Collateral Services, spoke about collateral management services in a post COVID-19 world.

And Rudi Steenkamp, Head of Technology & Data Management, gave an update on application programming interface (API) enablement through Strate Integration Services.

2020 has been a turbulent year for financial markets worldwide. The COVID-19 pandemic has caused unforeseen price volatility in the South African market with large swings in mark-to-market positions increasing demand for cash – cash which could usually be raised through repurchase transactions (repos).

There are some limitations to the buy/sell back repo transactions that dominate the South African market – and the pandemic-led demand for cash has highlighted this.

Some of the constraints of buy/sell back repos can be alleviated by adding classic repos as an alternative tool that can expand trading and funding opportunities. Yet the South African market has been slow to adopt classic repos despite the global trend in this direction.

A repo is simply a collateralised loan where one party borrows cash and promises to return it at a pre-specified date with interest, and puts up securities as collateral.

For years repos have been used in the financial markets as a contractual sale with a promise to repurchase at an agreed future date, and to obtain and utilise cash at favourable rates under the internationally recognised Global Master Repurchase Agreement (GMRA). Typically, there are two types of repo transactions that can be structured under a GMRA: the classic repo and the buy/sell back.  The South African market predominantly operates within the buy/sell back market with this market legacy built on simplicity and convenience, in times before COVID-19.

Buy/sell backs do not require variation margin to be exchanged between parties, nor do they allow for security substitutions. Any capital events are priced into the transactions upfront. While these terms simplify the transaction, they may also generate unintended consequences for the market, including:

• In the absence of variation margin, the cash provider may stipulate higher funding rates, placing extra pressure on a cash strained market
• Higher cash rates could price players out of the market, forcing them to sell stock in the open market to raise cash for obligations such as margin for derivative positions
• In times of stress, the supply of stock to honour lending positions or on-market trades can prove to be challenging. Given that buy/sell backs do not facilitate substitutions, this in effect can “lock up” stock within a buy/sell back until term or early termination
• Without the ability to substitute stock when required, traders may be forced to source required stock from alternative avenues, quite possibly at a premium
• Lastly, upfront deal pricing, without the ability to margin, adds risk in turbulent times

Classic repos could alleviate some of the intended consequences of buy/sell backs. Classic repos, which are automatically covered under standard GMRAs, differ from buy/sell backs in the following ways:

• The exchange of variation margin which limits risks associated with daily price fluctuations
• Substitutions are allowed under classic repo meaning that alternative, acceptable collateral may be swopped with placed collateral, under the consideration of the collateral receiver/cash provider
• Any capital event payments are processed independently and passed through to the collateral giver/cash receiver on the payment date of the event and are not priced in upfront. This allows the collateral giver to potentially earn a better return than if it was priced into the repurchase consideration

Simply put, it can be difficult to realise the benefits of the classic repo without efficient processes in place to execute substitutions and daily margin calls. In view of this, the global trend is to outsource the administration of classic repo transactions to a third party provider who can generate margin calls as well as instruct and facilitate security collateral substitutions, while still monitoring custody.

Strate Collateral Services serves the South African financial market as a third party collateral management provider that facilitates the  automation of the administration of classic repo transactions. Please contact Strate Collateral Services for more information collateralmanagement@strate.co.za

Effective 1 October 2020, Strate is fully operational to support the reporting of unlisted bond transactions in South Africa. Following months of market testing, its secure and effective technology continues to facilitate reporting functions that were previously provided by the Johannesburg Stock Exchange. The Johannesburg Stock Exchange announced earlier this year their decision to discontinue providing this service.

To deliver an excellent client experience, Strate business and technical teams have been working closely with clients and the broader market to ensure the implementation of an effective solution that ensures a seamless and continuous service to the unlisted market.

“We are very proud of reaching this milestone and being able to serve the financial market with greater efficiency and effectiveness,” says Gregory Naicker, Head of CSD Services.

To find out more about how Strate serves the unlisted bonds market, email unlistedsecurities@strate.co.za.

Nigel Payne, Strate Chairman, in conversation with Gregory Naicker, Head of CSD Services, about how Strate’s e-Voting platform performed during Strate’s recent AGM.

The Strate e-voting system ensures that meeting resolutions are not questioned later and the issuer’s ethical integrity is upheld

Efforts to contain the Covid-19 pandemic have driven businesses online more rapidly than expected, but not everyone has been ready for the overnight shift to the digital world. We have seen companies delay their annual shareholders meetings and results announcements while they consider how to conduct them online.

AGMs serve a critical role as they provide one of the few opportunities for shareholders to engage with the company’s directors, raise questions and issues that concern them and vote on matters affecting the business.

The adoption of digital solutions for shareholder meetings is long overdue. SA’s financial markets industry has been grappling with the problem of a fragmented, paper-based environment for shareholder meetings for more than three decades. Most shareholders in SA companies do not attend AGMs but submit a written proxy in advance authorising the chair, or another representative, to vote according to their specified wishes. This is done either via e-mail, hand-delivery to the company, or even by post.

This manual administration has resulted in a lack of voting transparency, increased risk of human error and barriers to communication between companies and their shareholders. The Companies Act allows for companies to convene and hold shareholder meetings electronically, provided this is not prohibited in the issuer’s memorandum of incorporation.

Some SA companies have started to broadcast their shareholder meetings via webcasts, which allows virtual attendees to ask questions, but it does not allow them to cast their votes in real time. Shareholders still have to submit their votes prior to the meeting without the opportunity to make real-time amendments after engaging with directors about their concerns.

Central securities depository Strate serves the financial market through the safekeeping of the legal, digital record of securities ownership. At the heart of what we do is the safeguarding of ownership rights across security types — from equities, to bonds, money markets and participatory notes in collective investment schemes — for public and private markets.  

As the custodian of this register, Strate has worked with SA’s financial market participants and leading global technology provider Nasdaq to co-develop an innovative, groundbreaking technical solution to enable virtual shareholder meetings. The e-voting platform allows investors  to communicate directly with companies and provide a fully digitised experience that seamlessly connects issuers and investors.

The distinct advantage of the e‐voting platform is that it caters for the changing world of work by ensuring that shareholders can participate in a meeting, vote in real time, and change their votes at any time before the meeting closes, from anywhere in the world. This radical change in the way shareholders vote at company meetings allows for greater shareholder participation, voting transparency and efficiency. It also saves time and reduces costs as attendees don’t have to incur travel expenses, especially when it comes to attending meetings in other cities or even overseas.

In a first-of-its-kind in terms of the technical solution and design, the e-Voting platform caters for nominee structures, which means voting control is in the hands of the beneficial owners of shares, who are the ultimate owners of the company, and not the intermediaries. Traditionally, shareholder votes go through a multilevel process via various intermediaries, before reaching the issuer. This takes time, increases the risk of human error, and does not give investors a direct communication line to the company they are invested in.

The e-voting platform alerts shareholders about company meetings so they can register to participate and cast their votes. Shareholders can see their vote has been cast, change their votes in real-time and direct virtual questions to the chairperson during the meeting. The chair is able to view individual shareholder votes — rather than the aggregated vote of financial institutions — making the voice of the shareholder truly heard. The platform provides auditable results immediately after the meeting has closed.

By connecting to Strate, issuers get a virtual voting solution from the source of the digital securities ownership register, while service providers who facilitate company meetings can easily integrate into our platform to provide a fully digitised front of house solution for their clients.

By providing full transparency to shareholders, Strate e-voting helps build stronger investor relations between issuers and shareholders. The real-time nature of the system, built on a binding ledger, provides auditable, tracked  results for each shareholder. It ensures that meeting resolutions are not questioned later and the issuer’s ethical integrity is upheld. This in turn helps to uphold the integrity of the overall financial market ecosystem.

Strate e‐voting uses global technology provider Nasdaq’s blockchain technology to provide voting records, real‐time access to voting results, accurate records of cast votes and the full chain of proxies. The underlying blockchain technology ensures the integrity and security of the data, as votes are recorded in a tamper-proof ledger, reducing risk. It takes less time to arrange and conduct AGMs, while the legal right of the voting outcome is upheld.

Strate was the first company to hold its AGM virtually using the e-voting solution in mid-May. The results were submitted to the chair to audit as the meeting closed, as is typical with unlisted companies. For listed companies, Strate’s solution requires no human intervention whatsoever. Auditing is undertaken by externally appointed auditors using the immutable ledger to underpin accuracy and security.

Strate and the SA financial market have together created a secure, efficient solution that will forever change shareholder voting.

• Naicker is head of CSD services at central securities depository Strate.

Strate hosted its first remote Annual General Meeting, powered by DLT and Nasdaq. Strate’s e-Voting, which was built in collaboration with the South African financial market and uses world-class DLT and Nasdaq technology is a system that provides fully virtual end-to-end voting, seamlessly connecting shareholders and companies

Strate CEO André Nortjé and Beverley Furman, Head of Operations and Change talk about their recent joint partnership with Nasdaq Tech and collaborating with the South African financial market ecosystem that led to the creation of a revolutionary new electronic voting platform for issuers and shareholders.

Q: Can you tell us a bit about your organization and how you work with technology innovation?

André Nortjé: Strate is one of South Africa’s central securities depositories; the way in which we view innovation is not limited to technology, but considers the innovation value chain, which is a combination of how we deliberate about business models, operating models, and market-adoption models. Strate as a central securities depository is entrusted to keep the electronic records of ownership and settle trades and, as such, we need to connect the ecosystem. When we innovate, we look at the value chain from an end-to-end perspective to identify problems that we can solve either using technology, a business model or an operating model.

Q: You are one of the first major organizations to use this type of blockchain-based e-Voting solution. How did you arrive at the decision to implement this?

André Nortjé: We decided to use blockchain technology to solve the problem of voting in South Africa. Blockchain as a concept is quite difficult to implement in a complicated ecosystems. The e-Voting solution was necessary to solve the problem where the market had a fragmented paper-based environment. The solution was a fairly low-risk implementation therefore we decided to use blockchain technology that was aligned to what we have being trying to achieve, which was a single digital solution for the voting activity. We found a partner like Nasdaq to join us in co-developing what we believe is a world-class solution for electronic voting.

Q: What benefits does this bring for the shareholders in South Africa and how has the new service been received by the issuer community in terms of corporate governance and investor transparency?

Beverley Furman: In moving to electronic voting, and using the application that we’ve co-developed with Nasdaq, there has been the enablement of two main benefits, or themes. One is simplicity and efficiency. The other one is shareholder activism and the voice of the shareholder being heard by the issuer right up until the close of resolutions. Asset managers who have been exposed to the demo of this solution have shown huge excitement because this application allows them to cast their votes and fulfil their fiduciary duties and their corporate and social responsibility. They can cast their votes on the application either for or against or abstaining, and they are representing their clients who are the ultimate beneficial owners of the investments. The solution also allows them to insert commentary. So, for the first time, if they are abstaining from a vote or voting against, they can include commentary and the issuer can take note of why an asset manager is voting in a certain way. That is proving to be of significant value in the asset managers getting their voice heard by the companies that they’re investing in.

Q: Lessons learned that you would like to share with others that are looking to implement a similar solution?

André Nortjé: Change is always difficult, especially if you have to change the ecosystem and the change that is needed from voters, a transfer agency and custodians. The important lesson that we’ve learned through the process is to think carefully about the value proposition to each of the various participants in the value chain of e-voting. Your product should be priced in a way that supports the value that is created for each of the participants. Another big lesson we have learned is that you need to involve the market in the conversations about the change. I think that’s been the success story for us in South Africa, that this solution was co-developed with our technology partner, Nasdaq, as well as the market.

Strate introduces an alternative digital access point for the reporting and matching of unlisted bond transactions to facilitate the trade reporting of call bonds. The new platform offers reduced risk, increased efficiency and an automated coupon and redemption process