Today Safcom, South Africa’s clearing house for Johannesburg Stock Exchange (JSE) listed exchange-traded derivatives, became the first in the world to be certified as CPSS-IOSCO compliant.
The CPSS-IOSCO Principles for Financial Market Infrastructures (FMIs) were introduced in the aftermath of the global financial crisis to ensure that the essential financial market infrastructures (such as payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories) are robust and thus able to withstand financial shocks. These FMIs are responsible for recording, clearing and settling transactions in financial markets.
Part of the reason for introducing these principles is that if clearing houses are ineffective, they could be a transmitter of contagion, financial shocks and default. CPSS-IOSCO compliance demonstrates adherence to a comprehensive set of principles designed to enhance investor protection, promote transparency and reduce systemic risk.
Safcom’s certification as compliant is particularly important to derivative traders because Basel III, the global regulatory standard on (amongst others) bank capital adequacy, imposes prohibitive capital penalties on banks which deal with clearing houses that aren’t CPSS-IOSCO compliant. If the clearing house that the bank deals with as a clearing member is not CPSS-IOSCO compliant, banks will have to hold up to ten times more capital against their clearing house positions. This will result in the derivatives market becoming increasingly expensive to participate in. Basel III is scheduled to come into effect in January 2013.
There is currently R320 billion traded on the derivatives market in South Africa at any time, with R14 billion in initial margins.
“The JSE believes that the achievement of CPSS-IOSCO compliance is a major step forward for Safcom, and an important move to enhance the credibility of the South African market 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 is critical to ensuring 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, Safcom’s other market participants, as well as the JSE’s regulator, the Financial Services board, which reviewed and assessed the compliance activities.
Having achieved compliance for clearing in the exchange-traded environment, the JSE believes that the next logical step is to work with the market to assess the need to centrally clear the Over the Counter (OTC) derivatives market. “Internationally, the move is towards having OTC derivatives cleared through a regulated clearing house,” says Fourie. “Having Safcom certified as a CPSS-IOSCO compliant clearing house for exchange-traded derivatives creates a great foundation for the future development of a CPSS-IOSCO-compliant OTC offering.”
Achieving compliance was strategically important for the JSE as it enhances risk standards, impacts market credibility and the liquidity of the exchange. As part of the compliance, Safcom established an enhanced default fund which enhances investor protection, 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.
“In addition, Safcom remains a global leader with regards to the protection of client assets due to the SAFCOM requirement for segregation of funds and assets. This should ensure that we avoid many of the losses associated with defaults experienced in other jurisdictions due to a lack of segregation.”
“Safcom is committed to continually improving its operations and services, and aligning itself with the changing needs of the market. We are fully aware of the vital 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 system,” she says.
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Safcom First In World To Achieve CPSS-IOSCO Compliance
Date 11/12/2012