Issue: June - Aug 2013
With share dematerialisation, pension funds can and should have JSE investments registered in their own names. STRATE chief executive Monica Singer tells trustees how to go about it.
The article by Mehluli Mncube, “STRATE skewed” (TT March - May), highlights certain shortcomings in the indirect holding system used in the SA market.
In short, Mr Mncube rightly points out that the use of multiple tiers of nominees hampers the ability of shareholders to exercise their rights against the company in which they’re invested. This is due to the nominee’s name appearing on the company’s shareholder register and not the name of the actual investor.
But indirect or nominee holding on the system is not the only account structure available to investors. Since its inception, Strate has been committed to upholding the rights of investors, in addition to its stated objectives of bringing efficiencies and reducing risks in the financial markets.
Recognising the difficulties that investors may face, the Strate rules governing market conduct have always made provision for an investor to open a so-called Own Name Client (ONC) account with one of the participants in the Strate system. Such an ONC would have its name recorded in the securities register of the investee company, and would not be acting through a nominee but in its own right as a shareholder. As a result, the investor would be able to exercise all of its rights against the company without any of the “plumbing blockages” that Mr Mncube describes.
In addition, Strate has recently introduced a new account type called the Segregated Depository Account (SDA). While the ONC account is opened at the participant, the SDA is opened by the participant at Strate itself in the name of the investor. In order to preserve the integrity and reliability of the system, participants continue to administer the account on behalf of the investor.
Singer . . . better options than default
The SDA was introduced in the wake of the 2008 financial crisis, during which it became clear that risk-averse central securities depositories (such as Strate) were far more resilient in the face of economic turmoil than other financial institutions (such as banks). An institutional investor that wishes to mitigate the risk of a participant becoming insolvent should open an SDA with Strate.
Assets in the SDA are properly segregated. They remain the property of the investor and are not regarded as the assets of Strate. In the event of a participant’s insolvency, the assets of the investor are not trapped among the assets of the participant until the insolvency administrator is able to unravel the complex web that makes up a modern business. Instead, the investor can pre-appoint a secondary participant, immediately transfer its account from the primary participant that is facing insolvency to the secondary participant, and continue trading with a minimal disruption.
As with the ONC account, an investor with an SDA has its own name recorded in the securities register of the company and is therefore able to exercise its rights as a shareholder directly and not through a nominee. Both the ONC account and the SDA are classified as direct holding systems. They enable a pension fund to actively manage its shareholder rights without the shortcomings inherent in the indirect holding system.
Recognising the advantages of a direct holding system, Strate has been advocating the introduction of a Securities Ownership Register (SOR) for equities. Such a scheme would involve opening accounts at Strate for every investor in shares, including all retail investors. All investors will be recorded in the securities register of the company and will be able to exercise their rights directly.
Aside from a few specific instances, the indirect holding system and nominees will be abolished. Under an SOR, the benefits of an SDA in terms of protection of assets and preserving the rights of shareholders will be made available to all investors as a matter of course. Strate is driving this initiative. It will bring the SA financial markets to the forefront of international trends.
It is incumbent on investors, including pension-fund trustees, to research their options on account structures and not merely accept the default selection of their chosen participant. As pointed out by Mr Mncube, the nominee structure used in the indirect holding system brings great efficiencies in administration to the participants that use it. However, what is most convenient for a participant may not be the most appropriate structure for a pension fund.
We would recommend that pension funds investigate the opening of SDAs as a means of complying with their governance requirements in terms of Regulation 28 and FSB Circular PF 130.