Financial Markets Act (FMA) Overview South Africa

Overview of the Financial Markets Act (FMA)

• The FMA, Act 19 of 2012, applies to South Africa
• Aims to ensure fairness, efficiency, and transparency in financial markets
• Seeks to boost investor confidence
• Repealed the Securities Services Act, 2004 (No 36 of 2004)
• The FMA is now the primary legislation for regulating financial markets, market infrastructure, and securities services in South Africa

Regulation of OTC Derivatives

• Provides a framework for regulating Over-The-Counter (OTC) derivatives in South Africa
• Fulfills a key commitment made by the G20
• Follows a phased approach to OTC derivatives regulatory reform after extensive consultation, as per the National Treasury document, Reducing the Risks of Over-The-Counter Derivatives in South Africa
• Aims to improve OTC trading and eliminate misleading or conflict of interest trading

Legislative and Regulatory Alignment

• Aligns the legislative and regulatory framework with international recommendations.
• Bodies include: G20, the Basel Committee on Banking Supervision, and the International Organisation of Securities Commissions

Self-Regulation

• Empowers Self-Regulatory Organizations like the JSE to create rules and directives
• Rules govern authorized users or members
• Members approved and who provide products/services (TSP/ISP) by a licensed exchange are exempt from needing an FSP license

Primary Focus Areas

• Licensing and regulation of exchanges
• Central securities depositories
• Clearing houses
• Trade repositories
• Market infrastructure
• Prohibiting insider trading and market abuses
• Act 2012 sets out extensive prohibitions against market manipulation and insider trading
• Prevents improper practices
• Promotes a free, safe, and fair market

Provisions of the FMA

• Regulation of financial markets
• Licensing and regulation of exchanges
• Central securities depositories, clearing houses, and trade repositories
• Regulation and control of securities trading, clearing, settlement, custody, and administration
• Prohibition of insider trading and other market abuses
• Approval of nominees
• Framework for codes of conduct
• Replacement of the Securities Services Act, 2004, as amended by the Financial Services Laws General Amendment Act, 2008
• Alignment with international standards, matters are connected

Objects of the FMA

• Aims to ensure fair, efficient, and transparent South African financial markets
• It seeks to increase confidence in financial markets by requiring fair, efficient, and transparent securities services
• It contributes to a stable market environment
• It promotes the protection of regulated persons, clients, and investors
• Reduces systemic risk and promotes international and domestic competitiveness

Scope of Application

• Applies to; regulated persons, issuers, clients, market abuse and incidental matters
• Does not apply to; Collective Investments, activities regulated by FAIS, gambling or wagering laws, activities of regulated individuals subject to the Consumer Protection Act

Enforcement

• Section 4 outlines prohibitions and authorization adherence for authorized users, participants, and clearing members
• Acting as an authorized user without exchange authorization is prohibited
• Buying or selling listed securities without complying with Section 24 is prohibited
• Providing securities services for unlisted securities against imposed conditions is not allowed
• Participants must be authorized by a licensed central securities depository
• Clearing members need authorization from a licensed exchange or independent clearing house
• Acting as a nominee without approval per Section 76 is not allowed
• Conducting trade repository functions without a license under Section 56 is outlawed

Restrictions and Permissions

• Advertising or canvassing for business as an authorized user/participant/clearing member requires proper authorization
• Only licensed entities/participants/authorized users/clearing members/approved nominees/listed securities issuers can represent themselves as such
• Authorized users may only provide authorized securities services per exchange rules
• Participants can only provide authorized securities services within depository rules

Clearing Member Limitations

• Clearing members can offer clearing/settlement services as authorized by a licensed exchange/clearing house under specified rules

Exchange Rule Compliance: Essential Elements

• Must be consistent with the FMA
• Must provide equitable criteria for authorizing/excluding users
• No admission/business continuation without integrity, character, and compliance with training/experience standards

Security Services Authorization

• The rules must outline authorization and criteria for security services offered by authorized users
• Provision of authorization and criteria for distinct user categories by distinguishing between the user types
• Provision of authorization and criteria for security types listed on an exchange, in respect to which a user may provide service
• The rules must authorize users to perform services for unlisted securities,
• Rules must address capital adequacy, guarantee, and risk management requirements, ensuring user compliance
• The rules must establish these requirements as prudent, allowing for differentiation across user categories or activities

Fair Transactions and Clearing

• Mandates an efficient, honest, transparent, and fair framework for transactions
• Transactions in listed securities must be cleared and settled appropriately.
• Governs transaction clearing determinations managed by exchanges
• Governs circumstances where exchanges may refuse to clear transactions
• Mandates monitoring settlement obligations for authorized users and clients

Transaction Regulations

• Governs the regulation of transactions in listed securities triggered by unsolicited communications

Transaction Validity and Nominee Approvals

• Governs voiding circumstances for listed security transactions [subject to sections 38(3) & 41]
• Prohibits authorized users from working without verifying required nominee approval under Section 76 for the counterparty

Nominee and Compliance Monitoring

• Exchange approval of authorized user nominees holding securities in a securities/central securities account must be in place
• The exchange should oversee authorized user compliance with the FMA, exchange rules, and directives

Trading Conditions and Trust Accounts

• Conditions around authorized user officers/employees buying/selling listed securities, advising, or concluding deals on an authorized user's behalf must be in place
• Circumstances must outline when officers/employees may be denied exchange access
• Circumstances for suspending/halting trading in listed securities should be covered
• A generalized framework should describe how authorized users conduct authorized securities services
• Rules must be in place for exchange/user trust account operations per Section 21

Authorized User Compliance and Transaction Recording

• Outlines authorized user compliance requirements with Section 22
• Includes recording transactions on the exchange
• Monitoring authorized user compliance with exchange rules and directives
• Overseeing all matters relevant to the Act, exchange rules and exchange directives

Business Practices and Complaints

• Dictates conditions and manner for authorized user advertising/business canvassing
• Includes a process for authorized user complaints against the exchange, for responding to functions the exchange is responsible for
• Directs complaint response procedures against authorized users or the officer/employee of the authorized user

Investigative Steps and Reporting

• Exchange protocols for investigation and discipline actions to be taken against users, or their staff, who fail to comply with the exchange rules
• Requires a report on disciplinary proceedings to the registrar within 30 days after being completed

Providing and Producing Information

• Those believed to furnish information on the investigation subject or possession of relevant documents can be required to appear before a person conducting an investigation to produce such document

Insurance, Guarantee, Compensation Fund

• In relation to 8(1)(h) insurance, guarantee, compensation fund or other warranty must establish procedures for the following;
• Those who must contribute to maintain such insurance, guarantee, compensation fund or other warranty
• The exchange fee amount due for such instruments
• Different categories of claims that may be brought against them
• Restrictions on claims
• Control and administration requirements
• Ownership determinations for such instruments

Client Disclosure and Fees

• Authorized users must disclose service fees to clients, giving specific monetary amounts or calculation method if not pre-determinable
• Authorized users can set diverse transaction fees
• Sets purposes and process for issuing exchange directives

Oversight and Financial Instruments

• Specifies supervisory measures to ensure exchange compliance under section 10(2)(c), (d), and (e)
• Framework for the authority on instruments where the exchange may limit the revocation of settlement instruction given by an authorized user or its client
• Framework on insolvency proceedings where a transaction may be revoked when prior to settlement
• Under what authority an exchange or authorized user terminate transactions underway during instances of insolvency.

Securities and Inter-Dealer Broking

• Details arrangements for the administration of securities and funds held for own account or on behalf of client by an authorized user
• Should be in line with settlement of unsettled transactions, under insolvency, or default proceedings regarding that authorized user
• Mandates procedure for authorized user as an inter-dealer broker's activities, to include the manner in which bids and offers will be broadcast

Transaction Protocols and Notifications

-Governs circumstances for authorized user transactions in listed securities, using the services of a non-authorized inter-dealer broker

• Rules governing the authorized user to notify the exchange upon commencement of any proceeding of insolvency
• Supervision duties imposed on authorized users by the Financial Intelligence Centre Act

Conflict and Compliance

• Prevents conflict with and demands due regard for all applicable depository rules in section 2(e), 2(bb) and 2(cc) rules
• Prevents conflict of the rules with section 8 of the National Payment System Act in section 2(bb) and (cc)

External Authorization and Securities Services

• Requirements for Registrar oversight, may provide for exchange rule's approval process for external authorized user, should sections 5(1)(c) & (2) be adhered to
• If the exchange rules provide for these approvals, the rules must provide, in accordance with paragraph (a) for the identification of which security service shall be administered by the exchange

Supervisory Authority

• What will be authorized & regulated by the supervisory authority where the external authorized user is authorized/supervised
• Rule application extent to all authorized users generally, and for exchanges

Additional Exchange Rules

• Exchanges may, with Registrar approval, set more rules that are not inconsistent with this Act. Exchange Rule Binding

Exchange rules made under this section bind the following:

• the exchange, the authorized users of the exchange
• issuers of securities listed on that exchange, the officer's and employees of the exchange, its authorized users, and issuers, and the clients of its authorized users.

Preventing Unauthorized Actions

• An authorized user may not borrow against pledged listed securities an amount in excess of the outstanding balance of any amount the user may have lent the pledgor for their securities

Written Consent

• An unauthorized user can not repledge listed secured securities without any written consent from the pledgor

Essential Security Details

• For a title document dealing with listed securities, possessors of said document in title as an authorized user must act to record store the details as soon as possible
  • This ensures readily establish the owner's identity

Securities and Written Authorization

• In adherence to Exchange rules, an authorized user may only alienate deposited listed securities by the person who authorized it in writing

Trust Accounts

• Every authorized user must open a trust account at the bank
• The account is designated for client funds
• A trust account may use an exchange, into which any instruments/payment must be deposited in by the receipt date
  • Any deposit into the user's account or after banking hours must be placed into the trust by the start of business the day after.

Allowable Trust Account Contents

• A trust account can only contain funds of clients.
• It may not include the funds of an exchange/authorized user

Funds Exempt from Trust Account Deposits

• Payment made to the authorized user by a buyer of listed securities when;
  • Against delivery of such securities to the buyer; or
  • Against being marked as the property of the buyer

Debt Payments and Payment Transfers

Funds are exempt where it relates to payment for debt and transfer of funds

• Are preceded by a payment from the authorized user against debt of the security that is the authorized user to the seller
• Law other exchange rules specifically provide some to transfer the funds

Distinguishing of Ownership and Security Status

• Funds and any funds which have not been deposited into a trust account, where subsection 1 is not applied but are identifiable belonging to trust property

Payments in Trust

• Funds deposited withdrawal with authorized used for payment
  • Person entitled to payment as with any law and existing exchange, where all payment against cheque are instruments not honored when authorized user must pay shortage when a default occurs

Costs and Instruments

• All funds and other instrument shall be recognized by all and other charges for account purposes.
• Withdrawals of clients are subject to trust funds.

Interest Payments and Excess Funds

• All the funds interest of a trust account is payable to the owner after the fees are extracted payment or claim must deposit to be a trust payment

Jurisdictional Provision

• High court jurisdictional over all users or registrar/other entity may prohibit usage of trust funds when good cause is shown

Accountability and Segregation Directives

• Deposit security for all separate accounts or other security, the agent maintains security and all funds must security accounts and ensure identifiable Account Balancing
• 21 A

Aggregating Security Numbers

• All the security amount for and for other third party security which also authorized by registrar the day period or the period time Balancing
• 22B any time different in such rules

Assets as Trust Property

• Security identifies and for all persons and be trust act

Stockbroker Designations

• Stockholders also authorized entity that acts in a financial and regulatory and financial security standards Security - 24
• In adherence to listed regulatory security the actions and users which must adhere to standards
• It may deal regulatory and other financial institute that may provide service

Authorized Users and Client Services

• Stock- 24A 2
• Stockholders can provide services that provide all access to clients and may be regulatory when and if they are allowed to perform
• Registration- 24 1 all users that provide the service that clients act must provide their name and all contact the register

Information Disclosure

• 24-0 The registration security name and the contact address must all be open to to service standards Ownerships- 37
• 34 all service must to the same security and holder

Ownership and Security Status

• Segregation and identification
• 37 4 for all securities hold by parties for the trust

The Law and the Transferee

• A holder from act where the transferee the is all to the property

In Accordance and Effect

• In accordance with act where the effect against transfer

Agreements of Security

• Agreement the where the security the is the agree and all laws that is in the place

Central Security Accounts

• Under control of central authority act is valid

Record Standards

• When the central standards is security is in correct is may be correct or must proper to fix if otherwise

Act Requirements

• Regulations of act under certain requirements standards is may may be be set or adhere -All users and the security to not under rule or other stand

Standards and the Act

• 74-2 STANDARDS that perform the employees for the law and they must do the with the company

Skills and Actions

• The user skill with be equal to the other company act and regulations to be the equal. Act the Security
  • all person client security and security and action act all perform

Disclosure and Safeguarding

• Security is all act if disclosure all security funds for act all clients actions etc
• Nominees act and user which and what action by Must user that is not act must ider to this act Approval -90

Appointed Auditor

• An auditor to always maintain must be always maintained and if not not and must maintained and if not to appoint of law

Functions of the Auditor

• Must report to regulatory and they perform duties but no report with - Actions that all client financial is and correct

Functions of the Authority

• Authority to direct and auditor who is a regulated and the reasons to auditor which prevent all actions

• Authority to to send copy to a regulated of auditors if a auditor has done of or to a market and client if and as it way

• To provide client the right to not perform the services and they can withdraw

Regulations on OTC derivative

• Authority may not provide OTC service - User must adhere to the Prudential for service or not act

• To only do is with a regulated person

Clearing Regulations

• An regulatory may and can make an other action

An Anothorised can Do

• The correct actions is must Provide service to SA
• Regulatory act is good