Financial Markets Act (FMA)

Financial Markets Act (FMA)

• FMA No. 19 of 2012 ensures South African financial markets operate fairly, efficiently, and transparently to promote investor confidence
• This act repealed the Securities Services Act, 2004 (No. 36 of 2004), and is the primary legislation governing financial markets in South Africa
• The FMA provides a framework for regulating over-the-counter (OTC) derivatives in South Africa, a key G20 commitment
• The National Treasury announced and adopted a phased approach to implementing OTC derivatives regulatory reform after extensive consultation
• The Act aims to improve OTC trading in derivatives and eliminate misleading and conflict of interest trading
• The FMA seeks to align the legislative and regulatory framework with international standard-setting bodies' recommendations, G20, Basel Committee on Banking Supervision, and International Organisation of Securities Commissions
• This act also allows Self-Regulatory Organizations (SROs) to create rules/directives to regulate members
• Members approved by a licensed exchange, providing products/services, don't require an FSP license
• The FMA focuses on licensing and regulation of exchanges, central securities depositories, clearing houses, trade repositories, and market infrastructure
• Further, the act focuses on the prohibition of insider trading and other market abuses
• The FMA prohibits improper practices and promotes fair, safe, and free market participation

What the FMA Provides For

• Regulation of financial markets
• Exchange licensing/regulation, central securities depositories, clearing houses, and trade repositories
• Regulation/control of securities trading, clearing/settlement, and the custody/administration of securities
• Prohibition on insider trading and other market abuses
• Approval of nominees
• Framework for codes of conduct
• Replacement of the Securities Services Act of 2004, as amended by the Financial Services Laws General Amendment Act of 2008, aligning with international standards

Objects of the Act

• The Act aims to make South African financial markets fair, efficient and transparent
• Further, the act seeks to increase confidence in the South African financial markets
  • By offering securities in a fair, efficient and transparent manner
  • Contributing to a stable financial market environment
  • Promoting regulated persons, clients and investors protection
  • Reducing systemic risk
  • Promoting international competitiveness of the South African financial markets and services
• The FMA applies to regulated persons, issuers, services provided by regulated persons, clients, market abuse, and matters incidental to the above
• The FMA does not apply to Collective Investments, FAIS-regulated activities, or laws relating to gambling/wagering
• The act doesn't apply to regulated persons' activities related to goods/services under the Consumer Protection Act

Prohibitions Enforced by the Act

• No individual must act as an authorized user unless authorized by a licensed exchange following exchange rules
• One must comply with section 24 to carry on the business of buying or selling listed securities
• A person cannot provide securities services for unlisted securities against section 6(7)
• A person cannot act as a participant unless authorized by a licensed central securities depository in terms of section 31
• A person cannot act as a clearing member unless authorized by a licensed exchange or independent clearing house
• A person cannot act as a nominee unless approved under section 76
• A person cannot perform the functions of or operate as a trade repository unless licensed under section 56
• A person cannot advertise regarding the business of an authorised user, participant or clearing member unless permitted by exchange/depository/clearing house rules
• A person who is not a licensed exchange, central securities depository, trade repository, or clearing house, i.e. participant, authorised user, clearing member, approved nominee may not suggest there is a connection
• An authorised user can only use the securities services authorized by a licensed exchange
• A participant can only use the securities services authorized by a licensed central securities depository

Requirements for Exchange Rules

• These rules must be consistent with the FMA
• The exchange rules must provide equitable criteria for the authorization/exclusion of authorized users
  • No person will be admitted as an authorized user unless of good character and high business integrity
  • The person must be managed by those of high character/integrity who comply with training standards
• These rules ensure that there is authorization and criteria for authorization of the securities services that the authorized users may provide
  • Including security services listed on an exchange
• The exchange authorizes its users to perform securities services for securities not listed on the exchange
• These rules provide parameters for capital adequacy, guarantee, and risk management requirements
• Further, requirements must be prudent and may differ for authorized users/activities
• They must be efficient, honest, transparent and fair regarding listed securities transactions
• These rules must outline the manner in which transactions in listed securities are cleared and settled
• If the exchange hasn't appointed a clearing house, it must state which transactions can be cleared
• State the circumstances in which the exchange may refuse to clear a transaction under its rules
• Exchange rules must monitor settlement obligations of users and their clients
• These rules regulate transactions in listed securities entered from first communication without invitation
• Provided in sections 38(3) and 41, state the circumstances in which a transaction may be declared void
• No authorized user conducts business with anyone believed to need approval as a nominee under section 76 without ensuring approval
• The exchange approves a nominee of an authorized user, who holds securities in a securities/central securities account
• Establish the manner in which compliance is monitored by the exchange with this Act and exchange rules
• Provides conditions for an officer/employee of an authorised user to advise or conclude listed securities transactions
• Rules state the circumstances in which trading may be suspended or halted
• Establishes the manner in which securities services are conducted for the authorized user
• Stipulates rules for the operation of a trust account by an exchange or authorized user according to section 21
• Stipulates the manner in which authorized users comply with section 22
• Stipulates the recording of transaction effected through the exchange, and monitoring compliance by authorized users
• Stipulates the surveillance of any matter relevant for the Act and exchange rules, and the circumstances authorized users may advertise
• Rule states that any complaints the authorized users have against the exchange must be made, considered and responded to
• The rule also states the manner in which a complaint against an authorized user/employee must be investigated
• For the steps taken to investigate an authorized user by a person delegated for investigation and the disciplinary functions
• Establishes the manner in which the authorized user who conducted an investigation is believed to be able to furnish information during investigation
• Establishes the terms relating to insurance, guarantee, and compensation funds

Other Provisions

• To disclose fees for services, and monetary amount for each service, or calculation when this is not pre-determinable is permitted
• To charge a fee authorized users for different categories of transactions is permitted
• Exchange directives and supervisory measures are permitted
• The authority of, and the circumstances under which an exchange may limit revocation of a settlement instruction by an authorized user/client is permitted
• Arrangements for securities/funds administration held for own account or on behalf of a client, including unsettled transactions and under insolvency in the case of an authorized user are permitted
• Stipulates the manner in which an authorized user acting as an inter-dealer broker is required to conduct its services
• Rules state an authorized user must notify that the exchange an insolvency proceeding has commenced and can supervise duties imposed by the Financial Intelligence Centre Act
• Rules must prevent the exchange from conflicting with depository rules or the National Payment System Act -The exchange rules may provide approval of external authorized users for authorized users of the exchange under requirements prescribed by the registrar
• The rules must provide for identification of securities services regulated by exchange rules and those authorized/regulated by the supervisory authority
• Exchange rules apply to all authorized users and the services the user has been authorized by the exchange

Restriction on Borrowing/Repledging Securities

• A user cannot borrow against pledged listed securities more than the amount they have lent the pledgor on said securities
• A user cannot repledge listed securities without the written consent of the pledgor

Marking/Recording Details of Securities

• If any listed security information comes into possession of an authorized user, they mush store the information to establish the identity of the owner

Restriction on Alienation of Securities

• An authorized user may only alienate listed securities deposited with them if the person depositing them has authorized in writing

Segregation of Funds

• Every authorized user must maintain a trust account at a bank for clients' funds and must deposit payments or cash instruments on the receipt day
• Client funds must be in the trust account and separate from bank funds

Section 2 of the Regulations: Requirement to be approved

• A person is not permitted to provide OTC derivative services unless authorized by the Authority under section 6(8) of the Act
• Authorisation applications as an OTC derivative provider should be made as prescribed by the Authority.

Section 3 of the Regulations: Reporting obligations

• An authorized OTC derivative provider must report OTC derivative transactions to a licensed trade repository or a licensed external trade repository as prescribed by the Authority
• If OTC derivative trades are accepted for clearing, the central counterparty must report the transaction to trade repositories or relevant external parties.

Section 4 of the Regulations: Clearing

• The Authority may conduct tests to determine eligibility criteria for subjecting OTC derivatives to mandatory clearing
• Tests are carried out in accordance with Prudential Authority
• An authorized OTC derivative provider must ensure that any eligible for clearing, is cleared through central parties

Section 5 of the Regulations: Category of regulated person

• An authorized OTC derivative provider is a regulated person in terms of the act

COFI Bill and the Financial Markets Act

• Enhancing the efficiency and integrity of financial markets is a focus of the FSCA as well as protection of customers
• Public regulation of markets include assessing whether the forces of supply and demand accurately reflect price as well as avoiding manipulative conduct and providing a legal basis for financial dealings
• The regulation of the markets is under review in South Africa, to build efficiency and competition amongst the market
• The FSCA handles the licensing of market infrastructure
• The COFI Bill licenses securities service providers and sets operational standards
• This means members are governed by the FSCA and stay subject to rules and regulations
• Conduct standards should align with FSCA requirements.
• FMR committees work to strengthen the conduct in standards by market participants including specific tools of implementation and legislation needed to support the conduct.