Country Focus: South Africa
Securities Lending in South Africa is deemed a mature over-thecounter stock borrow and loan ("SBL") market and is considered by J.P. Morgan as a market with moderate growing demand for liquidity and revenue opportunities. Many SBL market observers have stated that the lack of formal regulation around SBL has held back the market growth and overseas investment community participation.
However, this year has seen an increase in directional interest, especially in the Financial, Telecom, Consumer and Mining sectors. Of note were stocks such as Kumba Iron, which has commanded fees above 75 basis points, and stocks of significant interest such as African Investment Bank and Anglo Platinum with fees in the range of 50-150 basis points.
Most companies pay a dividend in April and then again in June through September. Typically the yields are low, which is reflected in the "all in level" rates ranging from 88 to 91.50, with demand coming from offshore borrowers. Individual companies can issue a Secondary Tax Credit ("STC") which is applied to all clients and taken into account when trading the underlying security. The desk has a robust procedure in place to account for STC's when lending the underlying security over record date. Other forms of demand include corporate actions and M&A activity, though this has been minimal. If capital investment grows into sub-Saharan commodity rich markets, this would benefit South African companies and the market, and we could see increased corporate activity in the region.
As part of our ongoing market intelligence, it has come to our attention that there is a possibility of lender sale and of loan recall settlement time frame mismatch that could result in a price differential cost. Current off market settlement practices in South Africa is a T+5 cycle; if the sale cannot be settled by T+10 due to the borrower's inability to return the stock due to liquidity reasons, the sale trade is cancelled. If the purchasing broker still wants to proceed with the transaction, either party could encounter a trading loss due to the stock price change from T to T+10 when the sale is re-booked. We can generally provide our lenders with two levels of comfort. First, we believe this type of sale failure settlement due to a late return of loaned stock is quite a rare occurrence and second, through the J.P. Morgan Agency Securities Lending indemnity provisions, the costs incurred may be recompensed to the lender by J.P. Morgan.
Looking forward, our present view on South African SBL activity is a contained positive, with continued directional activity in the mining sector and yield enhancement activity.