South African bond market prepares to welcome foreign members

Firms operating on the Johannesburg-based Bond Exchange of South Africa have welcomed a proposal to allow remote membership of the exchange during a symposium organised by the exchange to discuss the issue.

The question of whether foreign-domiciled participants should have direct access to the local capital market as fully-fledged authorised users has long been a matter of debate, the exchange acknowledges.

However, the consensus reached at the symposium, attended by a wide range of BESA users as well as regulators, the National Treasury and the South African Reserve Bank, will now allow the exchange to flesh out the rules and procedures to allow foreign-based players to join. 'There is no question about if, but rather how and when remote membership will be introduced,' says chief executive Garth Greubel.

The current regulatory requirements prevent foreign participants from becoming BESA authorised users unless they have a local presence. However, the involvement of foreigners in South Africa's capital markets has increased significantly in recent years despite this restriction.

'There is evidence to suggest that the growth in the London market has been at the expense of the local market, local players and BESA,' Greubel says, noting that the continued growth in the offshore market, to the extent that the size of the Rand bond market in London is significant in relation to that of the local market.

This development has prompted a further review of the remote membership issue, reinforced by repeated requests from foreign participants to join the exchange.

Allowing remote membership will require several important market issues to be addressed, notably how foreign participants can be regulated when they fall outside the national regulatory ambit of BESA.

According to Gruebel, the South African bond market is advanced and sophisticated, especially by emerging market standards, and has contributed significantly to the fundamental transformation of the economy since 1994. This is especially evident, he says, in the significant growth in the volumes of South African government bonds traded in the London market off the back of local price discovery.

Commenting on the support shown by local users for opening-up the market, Greubel says key objectives must be borne in mind. 'It is imperative that we secure a vibrant and healthy domestic market in fixed income and other debt securities by seeking a solution that addresses the current fragmentation of volumes between local and offshore markets,' he says.

'It is also important to ensure that the regulatory standards which we have established are not compromised. In addition, the solution to unlocking the potential behind remote membership must also take the current market microstructure into account, and ultimately lead to building a better market for all its players.'

BESA, which received its exchange licence more than a decade ago, is an independent licensed exchange responsible for operating and regulating the debt securities and interest rate derivatives markets in South Africa. Its main roles are to serve as an effective and proactive regulator to the local bond and interest-rate derivatives market and to develop markets and facilitate trade in fixed income securities.

The exchange's services include listing of debt securities issued by central and local governments, state-owned corporations and private-sector businesses, as well as interest rate derivatives contracts, providing centralised price discovery through BESA's ZA Prices platform, offering a trade-capture platform with straight-through processing together with a t+3 net settlement model, selling live and historical data feeds to end-users, and offering consulting and training on topics related to bond market activity.

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