Lending and borrowing of securities for settlement and strategy is going electronic, thanks to new functionality in the system underlying securities settlement mechanism Strate.
Until now, lending and borrowing of securities (SLB) for settlement and strategy purposes has taken place off-market, a costly exercise with an inadequate level of surety, Strate says.
However, Safires, the system underlying Strate, has new SLB functionality which provides for "business partners" to participate in electronic lending and borrowing.
Business partners can capture trades for SLB purposes with significant cost savings and enhanced levels of security, it adds.
Business partners initiate lending or trading instructions for which they levy a transaction fee and a percentage commission. The advantage of the new SLB functionality is that it requires fewer instructions/messages than the off-market alternative, as a result of which SLB transactions are rendered significantly cheaper for investors in the equity market.
SLB transactions processed via the BP route will incur a settlement charge of R8 per transaction, versus the off-market alternative of R20.
The interim off-market solution will be discontinued in the second quarter of next year, to streamline the market and generate cost savings wherever possible, Strate says.
Strate expects all major lending desks will sign up as business partners. Currently, the JSE, in its capacity as settlement authority, Rand Merchant Bank and Standard Corporate & Merchant Bank have signed up, while Mercantile and Absa are involved in software testing with a view to signing up shortly.
Business partners will pay R75 000 for a "plug and play" SLB solution, excluding hardware. All that is required in addition to the software acquired from Strate is connectivity to the Swift network (Society for Worldwide Interbank Financial Telecommunications), a connection which many lending desks already have in place.
Strate head of operations Iann Seymour-Smith says SLB assumes added significance in the Strate environment, since settlement is contractual.
"Under the paper-based settlement system, there was no obligation or urgency to borrow as settlement was largely unregulated," he says. "In the Strate environment, settlement is contractual and defaulting market players are liable to hefty fines.
"Furthermore, certainty of settlement breeds confidence in arbitraging, which encourages strategic lending and borrowing on the South African market."
Seymour-Smith says the business partners' lending desks are not involved in the transfer of a loan security. Rather, they and the settlement authority act as agents for undisclosed principals. The lender must be anonymous to the borrower and vice versa.
"Effective SLB heightens market liquidity and encourages more efficient pricing," he adds.
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