Safcom achieves CPSS-IOSCO compliance

December 12, 2012


Today Safcom, South Africa’s clearing house appointed by the Johannesburg Stock Exchange (JSE) to provide services to the local exchange-traded derivatives market, became the first in the world to qualify for CPSS-IOSCO compliance.

CPSS-IOSCO is a global standard for risk management aimed at any organisation enabling the part of a trade that occurs once an investor gives the “buy” command – clearing, settlement and recording of the transaction. The risk is that a party to a derivatives contract may default and fail to perform its contractual obligations, causing losses to one or more parties or a third party.

The standard was designed as part of an international drive towards financial stability in the wake of the 2008 Global Financial Crisis. If clearing houses are ineffective, they could be a transmitter of contagion, financial shocks and default. CPSS-IOSCO compliance demands adherence to a comprehensive set of principles designed to enhance investor protection, promote transparency and reduce systemic risk.

Safcom’s achievement is important to derivative traders because Basel III, the global regulatory standard on banking regulations including capital adequacy, imposes prohibitive capital penalties on banks which deal with clearing houses that aren’t IOSCO compliant. Failure to comply means banks will have to hold up to ten times more capital as surety, which will result in the derivatives market becoming increasingly expensive to trade in, further resulting in a decrease in investments. Basel III was agreed in 2011, and is scheduled to be introduced from 2013.

There is currently R320 billion traded on the derivatives market in South Africa at any time, with R14 billion in initial margins to guarantee settlements.

“The JSE believes that the achievement of IOSCO compliance is a major step forward for Safcom, and an important move to enhance the credibility of the South African market ecosystem as a foreign investment destination,” says Leila Fourie, Director of Post Trade Services at the JSE. “The appointment of a qualifying clearing house in South Africa enables growth in the derivatives market as we approach the implementation of Basel III.”

The achievement was the result of collaboration between the JSE, the banks and Safcom’s other market participants, as well as JSE regulator the Financial Services board, which reviewed and assessed the compliance activities.

Having achieved compliance for clearing in the on-exchange environment, the JSE believes that the next logical step is to work with the market to resolve the need to centrally clear the Over The Counter (OTC) derivatives market. “Internationally, the move is towards OTC derivatives being cleared through a regulated clearing house,” says Fourie. “Having Safcom certified as a qualifying clearing house for exchange-traded derivatives creates a great foundation for the future development of an IOSCO-compliant OTC offering.”

Achieving compliance has been a strategic initiative for the JSE as it enhances risk standards, impacts market credibility and liquidity of the exchange. As part of the compliance, Safcom established an enhanced default fund which further increases protection of investors, while also creating a more equitable line of defense against any possible default event. “In the event of a default or insolvency, Safcom will now absorb the first loss before non-defaulting clearing members. This allows the risk to be spread rather than being carried by the banks alone,” says Fourie.

“Safcom is committed to continually improving its operations and services, and aligning itself with the changing needs of the market. We are aware of the important role played by the clearing house in this space, and are excited to be contributing to the growth and upliftment of the South African financial ecosystem,” she says.

ENDS

Additional information:
CPSS-IOSCO is the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO), a global network of regulators for the securities and futures markets

FOR FURTHER INFORMATION PLEASE CONTACT:

ISSUED BY:
Roz Thomas/ Thamari Claasens
Corporate Communications Consultants
Tel: + 27 11 463 2198
Email: rozt@corpcom.co.za  / thamari@corpcom.co.za  

ON BEHALF OF
Michelle Joubert
Head of Investor Relations
JSE
011 520 7080

About JSE Limited
As South Africa’s only full service securities exchange, the JSE connects buyers and sellers in four different financial markets, namely equities, equity derivatives, commodities derivatives and interest rate instruments. The JSE Ltd offers the investor a first world trading environment, with world class technology, surveillance and settlement in an emerging market context. It is amongst the top 20 largest equities exchanges in terms of market capitalisation in the world.