South Africa: catching up or leading the field?
November 2015

During a current phase of enhancing its infrastructure towards what is expected of a mainstream market, South Africa is also experiencing marked changes in its asset pools. Asset managers and retirement funds are making increased use of collective investment structures, while the appetite among the asset management community for outsourcing seems to be growing ever-larger.

The Johannesburg Stock Exchange (JSE) and Strate, the central securities depository (CSD), have implemented several initiatives to make the South African market more attractive to domestic and international investors. The top priority for JSE is migration of the equities settlement cycle from T+5 to T+3, set to take place in the middle of 2016. Bringing the country closer to international best practice, this move will reduce counterparty exposure and liquidity risk, while freeing up capital for broker-dealers.

Since mid-2013, JSE has overhauled its technology platform, enhanced its broker-dealer accounting system (including the automation of corporate actions processes) and introduced a new Equities Clearing System. Introducing significant efficiencies to the current settlement process, these changes have established a solid foundation for the move to a shorter settlement cycle.

"The market is evolving on the right track," says Jean-Louis Bernardo, Managing Director & Country Head for Societe Generale Securities Services (SGSS) in South Africa. The T+3 project will improve turnover and will give clients an opportunity to increase their volumes. Combined with other projects enhancing efficiency (including off-market exceptions handling for OTC derivatives) and the forthcoming reshaping of Strate's bonds platform (the Debt Instrument Solution, or DIS), the South African market is reinforcing its attractiveness, and repositioning itself as a key market in Africa.

Duncan Smith, who in January this year moved with SGSS from Johannesburg to the UK – taking up the role of Senior Sales and Relationship Manager for Emerging Markets while maintaining an active presence in South Africa – notes how the Bank has seen significant growth in pan-African flows. "An initiative we took a few years ago in approaching the Mauritius regulators to seek a change in regulation allowing SGSS to obtain a remote CSD licence has resulted in significant new interest. We are also continuing to develop our custody capability in Ghana."

South Africa was an early adopter of outsourcing. Beginning in the late 1990s, several fund managers have handed over the management of their back offices and of middle-office functions. Most recently, the JSE-listed financial services group MMI Holdings (trading as Momentum and Metropolitan) appointed Maitland in respect of $30 billion in assets – under a hybrid lift-out model, with Maitland set to assimilate a significant number of MMI's operational staff into its new Johannesburg office.

"We've noticed a marked increase in fund managers' appetite for considering and implementing outsourcing solutions," says Mr Smith. Another developing trend is consolidation of asset pools. "In the pension fund industry, umbrella funds are becoming more prevalent and wealth managers are increasingly considering collective investment structures as platforms to deliver the cost savings demanded by regulators and clients alike."

Hedge funds, facing regulation for the first time under the net of the Financial Services Board, are appointing depositary banks such as SGSS. This year, the Bank has been mandated as depositary by two large South African hedge fund clients. Other wins include a mandate in July as depositary bank for one of the country's largest Collective Investment Scheme fund management groups, ABSA Fund Managers.

Of particular note is spectacular growth in funds under trusteeship for SGSS in South Africa – increasing by 80% year on year, thanks to a combination of organic growth and new clients. As well as the ABSA mandate and new hedge fund business, there has been an increase in managers delivering white-labelled Collective Investment Scheme solutions.

"SGSS in the UK provides a fully integrated wealth and investment management outsourcing solution spanning the full value-chain from execution to custody and providing access to a unique best-of-breed portfolio management platform," explains Mr Smith. We have been appointed by PSG Wealth, the wealth management business of independent South African financial services group PSG Konsult, to provide a comprehensive execution and investment administration outsourcing solution for foreign assets. The services provided by SGSS support the end-investors of PSG's direct-to-client online wealth and broker-dealer platforms."

Outlook for 2016

The switch to T+3 is expected to drive up volumes and boost demand for securities lending and borrowing. In several countries across the continent, including Ghana, the Ivory Coast and Morocco, securities lending is being introduced for local clients and, potentially, international players too.

As legal and regulatory changes begin to bite, there is bound to be a drive to establish lower-cost fund structures. The country's retail distribution review (RDR) is being implemented, while changes to the Pension Funds Act are introducing a low-cost option. More stringent regulations – AIFMD, Common Reporting Standards and MiFID II – will place steadily greater pressures on the investment community. Asset managers, wealth managers and broker-dealers will expect their service providers to support them by adapting quickly to the changes.

SGSS is seemingly well placed, with an experienced team of 90 on the ground in Johannesburg – seasoned and sizeable enough to handle big projects, while nimble and supported by Paris-based systems along with expertise in jurisdictions such as Dublin and Luxembourg.

"I believe a key component to our success is the fact that, in South Africa, we are a fully fledged branch of the Societe Generale group," says Mr Bernardo. "This is very important in terms of asset safety and in terms of liability. Custodians that are banks will continue to have an advantage to those who do not have a banking licence. As the settlement cycle shortens further, it will emphasize the importance of funding arrangements and the capacity to facilitate intra-day liquidity requirements for clients. In addition, SGSS, the securities services arm of Societe Generale, is fully integrated within Societe Generale Johannesburg and provides the advantage of being one of the top 10 global custodians worldwide."





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During a current phase of enhancing its infrastructure towards what is expected of a mainstream market, South Africa is also experiencing marked changes in its asset pools. Asset managers and retirement funds are making increased use of collective investment structures, while the appetite among the asset management community for outsourcing seems to be growing ever-larger.

The Johannesburg Stock Exchange (JSE) and Strate, the central securities depository (CSD), have implemented several initiatives to make the South African market more attractive to domestic and international investors. The top priority for JSE is migration of the equities settlement cycle from T+5 to T+3, set to take place in the middle of 2016. Bringing the country closer to international best practice, this move will reduce counterparty exposure and liquidity risk, while freeing up capital for broker-dealers.

Since mid-2013, JSE has overhauled its technology platform, enhanced its broker-dealer accounting system (including the automation of corporate actions processes) and introduced a new Equities Clearing System. Introducing significant efficiencies to the current settlement process, these changes have established a solid foundation for the move to a shorter settlement cycle.

"The market is evolving on the right track," says Jean-Louis Bernardo, Managing Director & Country Head for Societe Generale Securities Services (SGSS) in South Africa. The T+3 project will improve turnover and will give clients an opportunity to increase their volumes. Combined with other projects enhancing efficiency (including off-market exceptions handling for OTC derivatives) and the forthcoming reshaping of Strate's bonds platform (the Debt Instrument Solution, or DIS), the South African market is reinforcing its attractiveness, and repositioning itself as a key market in Africa.

Duncan Smith, who in January this year moved with SGSS from Johannesburg to the UK – taking up the role of Senior Sales and Relationship Manager for Emerging Markets while maintaining an active presence in South Africa – notes how the Bank has seen significant growth in pan-African flows. "An initiative we took a few years ago in approaching the Mauritius regulators to seek a change in regulation allowing SGSS to obtain a remote CSD licence has resulted in significant new interest. We are also continuing to develop our custody capability in Ghana."

South Africa was an early adopter of outsourcing. Beginning in the late 1990s, several fund managers have handed over the management of their back offices and of middle-office functions. Most recently, the JSE-listed financial services group MMI Holdings (trading as Momentum and Metropolitan) appointed Maitland in respect of $30 billion in assets – under a hybrid lift-out model, with Maitland set to assimilate a significant number of MMI's operational staff into its new Johannesburg office.

"We've noticed a marked increase in fund managers' appetite for considering and implementing outsourcing solutions," says Mr Smith. Another developing trend is consolidation of asset pools. "In the pension fund industry, umbrella funds are becoming more prevalent and wealth managers are increasingly considering collective investment structures as platforms to deliver the cost savings demanded by regulators and clients alike."

Hedge funds, facing regulation for the first time under the net of the Financial Services Board, are appointing depositary banks such as SGSS. This year, the Bank has been mandated as depositary by two large South African hedge fund clients. Other wins include a mandate in July as depositary bank for one of the country's largest Collective Investment Scheme fund management groups, ABSA Fund Managers.

Of particular note is spectacular growth in funds under trusteeship for SGSS in South Africa – increasing by 80% year on year, thanks to a combination of organic growth and new clients. As well as the ABSA mandate and new hedge fund business, there has been an increase in managers delivering white-labelled Collective Investment Scheme solutions.

"SGSS in the UK provides a fully integrated wealth and investment management outsourcing solution spanning the full value-chain from execution to custody and providing access to a unique best-of-breed portfolio management platform," explains Mr Smith. We have been appointed by PSG Wealth, the wealth management business of independent South African financial services group PSG Konsult, to provide a comprehensive execution and investment administration outsourcing solution for foreign assets. The services provided by SGSS support the end-investors of PSG's direct-to-client online wealth and broker-dealer platforms."

Outlook for 2016

The switch to T+3 is expected to drive up volumes and boost demand for securities lending and borrowing. In several countries across the continent, including Ghana, the Ivory Coast and Morocco, securities lending is being introduced for local clients and, potentially, international players too.

As legal and regulatory changes begin to bite, there is bound to be a drive to establish lower-cost fund structures. The country's retail distribution review (RDR) is being implemented, while changes to the Pension Funds Act are introducing a low-cost option. More stringent regulations – AIFMD, Common Reporting Standards and MiFID II – will place steadily greater pressures on the investment community. Asset managers, wealth managers and broker-dealers will expect their service providers to support them by adapting quickly to the changes.

SGSS is seemingly well placed, with an experienced team of 90 on the ground in Johannesburg – seasoned and sizeable enough to handle big projects, while nimble and supported by Paris-based systems along with expertise in jurisdictions such as Dublin and Luxembourg.

"I believe a key component to our success is the fact that, in South Africa, we are a fully fledged branch of the Societe Generale group," says Mr Bernardo. "This is very important in terms of asset safety and in terms of liability. Custodians that are banks will continue to have an advantage to those who do not have a banking licence. As the settlement cycle shortens further, it will emphasize the importance of funding arrangements and the capacity to facilitate intra-day liquidity requirements for clients. In addition, SGSS, the securities services arm of Societe Generale, is fully integrated within Societe Generale Johannesburg and provides the advantage of being one of the top 10 global custodians worldwide."