Equity Market Risk Management
On T+3, settlement of cash equities transactions take place, i.e. sellers deliver securities in exchange for cash receipt (DvP), and buyers receive securities in exchange for cash payments (RvP), which is processed through the JSE appointed CSD, Strate, and which achieves simultaneous, final, irrevocable delivery versus payment (SFIDvP).
Lines of Defence
The JSE provides settlement assurance for central order book trades in the cash equity market and employs various measures to affect this. These measures are listed below.
All trading members need to comply with the minimum membership requirements which include financial, capital, management and operational requirements and the appointment of a settlement officer and an alternate settlement officer to assist the JSE Settlement Authority in terms of managing settlement issues.
Members’ capital adequacy is monitored daily by the JSE Market Regulation Division, through the Broker Dealer Accounting (BDA) system. The monitoring of capital adequacy is an effective tool to assess members’ credit risk, liquidity and solvency and is used to flag potential financial stress of a member in order for the JSE to take appropriate and timeous action.
View of Assets
One of the many benefits of the BDA system, maintained by the JSE and utilised by the member firms, is the ability for the JSE to see the securities and cash held by the members on behalf of their controlled clients as well as any securities held by the members for their own account. This view enables the JSE to determine with a high degree of certainty whether the members are able to meet their settlement obligations in relation to controlled client and proprietary trades on settlement date. All members are obliged to use the BDA system. Typically controlled clients are retail clients.
Non-controlled clients are clients are clients where the member does not have control over the clients’ assets and who appoint a Central Securities Depository Participant (CSDP) to act on their behalf. These clients must surrender their share certificate(s)/custody to the chosen CSDP and open an account with the CSDP. These clients will only deal with a broker when wanting to execute a trade and must provide the broker with details of their CSDP account when trading. Typically non-controlled clients are institutional clients.
As mentioned above, non-controlled clients hold their securities and cash with a CSDP rather than with a JSE member. CSDPs commit to settling non-controlled client transactions if the client is in a position to settle. A commit is a legal, but not mandatory undertaking by a CSDP to settle a transaction on behalf of its client. The JSE takes comfort from the fact that the CSDP, who is not the counterparty to a trade, has committed to settling the trade based on information on securities and funds availability.
The JSE requires members to deposit settlement margin with the JSE on T+2 (calculated at EOD T+1) for all transactions that they have introduced to the market and which pose a risk of not settling. Members may claim the margin from their clients. The margin requirement comprises of two components:
Mark-to-Market –Revaluation of the transaction to the current market value as at end of day on T + 1; and
Risk Margin –Potential future losses calculated using parametric value-at-risk (VaR).
Fails Transaction Management Process
The JSE provides settlement assurance to all central order book transactions; to this end it has established detailed fails-management procedures. These procedures take effect should the JSE still have doubt regarding settlement by 16h00 on T+2. Under those circumstances the obligation of settlement for any uncommitted client transaction is assumed by the member that introduced the transaction; this is called reverse substitution or principal assumption. The fails-management process could involve securities or money lending and borrowing (SLB or MLB) or rolling of settlement. If none of these measures are successful the settlement of a transaction will be failed.
The JSE conducts stress testing and exposure monitoring covering all outstanding transactions, and checks daily to ensure that members maintain adequate regulatory capital. These monitoring techniques are conducted in an attempt to identify problems early and to escalate any concerns timeously.
In the event of a member being unable to meet its obligations to another market participant or a client, all client transactions remain valid, clients remain contractually obliged to settle their transactions, and the necessary steps will be taken by the JSE Settlement Authority to ensure that those transactions still settle
The PTS Risk Management and Operational Teams are responsible for ongoing financial and operational risk management of the Cash Equity Market, reporting to the Director of Post Trade Services and acting under delegated authority from the JSE Board.