South African Financial Markets Act Overview

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Questions and Answers

What is required of an OTC derivative provider before they can advertise their services?

Must have a financial guarantee from the government

Must be authorized by the Authority under section 6(8) of the Act (correct)

Must be registered as a financial institution

Must hold a minimum capital reserve

Which entity must report OTC derivative transactions once accepted for clearing?

The trade repository

The relevant central counterparty (correct)

The financial advisor of the counterparty

The OTC derivative provider

Which criteria must the Authority consider when deciding eligibility for mandatory clearing of OTC derivative transactions?

The level of operational standardization and liquidity (correct)

The credit rating of the counterparties

The compliance with international trade agreements

The historical performance of the underlying asset

What form must an authorized OTC derivative provider report their transactions in?

A standardized electronic template prescribed by the Authority Signup and view all the answers

What is the role of the Prudential Authority in relation to OTC derivative transactions?

To concur with the Authority on eligibility criteria for mandatory clearing Signup and view all the answers

What must be ensured by an authorized OTC derivative provider for transactions deemed eligible for clearing?

They must be cleared through a licensed central counterparty Signup and view all the answers

What is one of the primary considerations for the Authority when deciding on mandatory clearing requirements?

Level of counterparty credit risk Signup and view all the answers

In which of the following situations must an OTC derivative provider submit an authorization application?

When wishing to provide OTC derivative services Signup and view all the answers

What is the primary aim of the Financial Markets Act of 2012 in South Africa?

To enhance transparency and promote investor confidence in financial markets Signup and view all the answers

Which Act was repealed by the Financial Markets Act of 2012?

The Securities Services Act, 2004 Signup and view all the answers

What significant commitment is addressed by the Financial Markets Act regarding OTC derivatives?

To improve the transparency of financial trading through a phased reform approach Signup and view all the answers

Which body is empowered by the Financial Markets Act to create rules and directives for its members?

The Johannesburg Stock Exchange (JSE) Signup and view all the answers

What type of market abuses does the Financial Markets Act explicitly prohibit?

Insider trading and market manipulation Signup and view all the answers

Which of the following does the Financial Markets Act focus on regulating?

Market infrastructure such as exchanges and clearing houses Signup and view all the answers

What was one of the key motivations for the enactment of the Financial Markets Act regarding OTC trading?

To reduce risks associated with OTC derivatives Signup and view all the answers

What does the Financial Markets Act encourage among market participants?

Adherence to fair, safe, and transparent practices Signup and view all the answers

What is one of the main objectives of the Act regarding the South African financial markets?

To ensure that the markets operate in a fair, efficient, and transparent manner Signup and view all the answers

Which statement is a requirement for an OTC derivative provider to be authorised?

They must meet criteria of financial soundness and proper standards of business Signup and view all the answers

What aspect does the Act not cover?

Collective Investments Signup and view all the answers

Which of the following is NOT considered a measure to increase confidence in South African financial markets as outlined in the Act?

Most securities services provided are unregulated Signup and view all the answers

Which group is explicitly mentioned as being subjected to the regulations of the Act?

Regulated persons and services provided by them Signup and view all the answers

What potential impact does imposing a clearing requirement have on the South African market?

It may enhance the competitiveness of the financial market Signup and view all the answers

What is required of ODPs in terms of client interaction according to the Act?

They must implement written policies for client categorization Signup and view all the answers

What is an objective of promoting international competitiveness of the South African financial markets?

To attract foreign investment and expertise Signup and view all the answers

What is a fundamental principle of conduct standards for authorised users and participants of independent clearing houses?

They must act honestly and fairly, with due skill, care, and diligence. Signup and view all the answers

Under what condition can a regulated person be subject to a conduct standard?

If the required standard is not prescribed in another law or conduct standard. Signup and view all the answers

Which of the following is NOT a requirement for an authorised user when acting in a client relationship?

To maintain absolute confidentiality at all times. Signup and view all the answers

What should a conduct standard ideally mandate about the ownership interests of a regulated person?

Disclosure to clients of relevant material information is necessary. Signup and view all the answers

Which of the following best describes the conduct standard's position on safeguarding client funds?

Proper separation and protection of client funds and securities is essential. Signup and view all the answers

How does the conduct standard suggest participants should handle conflicting interests?

Act fairly and disclose the conflict when appropriate. Signup and view all the answers

What does proper record-keeping entail according to the conduct standards?

Keeping accurate and accessible records of transactions and client interactions. Signup and view all the answers

What principle is central to both clearing members and other regulated persons regarding market integrity?

They must uphold the integrity of the financial markets. Signup and view all the answers

What must a person do to act as an authorised user?

Be authorized by a licensed exchange in terms of the exchange rules Signup and view all the answers

Under which condition can an individual carry on the business of buying or selling listed securities?

By complying with section 24 of the Act Signup and view all the answers

What is required to act as a clearing member?

Authorization by a licensed exchange or independent clearing house Signup and view all the answers

Which of the following is NOT a requirement for a person to provide securities services?

Meeting the criteria specified in section 74 Signup and view all the answers

Who can perform the functions of a trade repository?

Only those licensed under section 56 of the Act Signup and view all the answers

Which condition leads to the prohibition of advertising or canvassing for the business of an authorised user?

If the person does not have authorization by the exchange rules Signup and view all the answers

Which requirement must an authorised user adhere to?

Only provide services authorized by a licensed exchange Signup and view all the answers

What must a participant do to provide securities services?

Receive authorization from a licensed central securities depository Signup and view all the answers

Study Notes

South African Financial Markets Act 19 of 2012

The Act aims to ensure that South African financial markets operate fairly, efficiently, and transparently to promote investor confidence
It repealed the Securities Services Act, 2004, and is the primary legislation governing the regulation of financial markets, market infrastructure, and securities services in South Africa
The Act provides a framework for regulating over the counter (OTC) derivatives in South Africa, a key G20 commitment

Objects of the Act

The Act seeks to:
- Ensure that the South African financial markets are fair, efficient, and transparent
- Increase confidence in the South African financial markets by:
  - Requiring that securities services be provided in a fair, efficient and transparent manner
  - Contributing to the maintenance of a stable financial market environment
  - Promoting the protection of regulated persons, clients, and investors
  - Reducing systemic risk
  - Promoting the international and domestic competitiveness of the South African financial markets and of securities services in the Republic

Applicability of the Act

Applies to:
- Regulated persons and services provided by regulated persons
- Issuers
- Clients
- Market abuse
- Matters incidental to the above
Does not apply to:
- Collective Investments
- Activities regulated by FAIS
- Any law or common law relating to gambling or wagering
- The activities of a regulated person relating to goods and services that are subject to the Consumer Protection Act

OTC Derivative Provider Regulations

An OTC derivative provider must be authorised by the Authority
An application for authorisation must be made in the prescribed manner and contain the prescribed information

Reporting Obligations

An authorised OTC derivative provider must report OTC derivative transactions to a licensed trade repository or a licensed external trade repository in the prescribed form and manner
Where OTC derivative transactions have been accepted for clearing, the relevant licensed central counterparty or licensed external central counterparty must report all OTC derivative transactions that it has accepted to a licensed trade repository or licensed external trade repository in the prescribed form and manner

#### Clearing Requirements

The Authority may, with the concurrence of the Prudential Authority:
- Determine eligibility criteria for OTC derivative transactions to be subject to mandatory clearing
- Conduct assessments into other categories of OTC derivative transactions upon which additional mandatory clearing requirements could be based
An authorised OTC derivative provider must ensure that an OTC derivative transaction determined by the Authority to be eligible for clearing is cleared through a licensed central counterparty or a licensed external central counterparty in the prescribed manner
The Authority, when determining clearing eligibility, must have regard to:
- The suitability of the OTC derivative transaction for clearing, and other relevant considerations, such as the level of contractual and operational standardisation, volume, and liquidity of the relevant OTC derivative transactions
- The effect on the efficiency, integrity, and stability of the South African financial system
- Interconnectedness between counterparties to the relevant classes of OTC derivative transactions and the impact on the levels of counterparty credit risk
- Resources and suitability of the central counterparty available to clear the relevant OTC derivative transactions
- Impact on the competitiveness of the South African market of imposing a clearing requirement in relation to the relevant OTC derivative transactions
- Any other matters that the Authority considers relevant

Regulated Persons

An authorised OTC derivative provider is a regulated person in terms of the Act
To be authorised as an ODP, an applicant must meet the prescribed criteria and prove its financial soundness as part of fit and proper requirements
All ODPs must, amongst other things, observe the proper standards of business and market conduct, and to establish, maintain and implement written policies and procedures for the categorisation of clients and counterparties

Prohibitions

No person may:
- Act as an authorised user unless authorised by a licensed exchange
- Carry on the business of buying or selling listed securities unless that person complies with section 24
- Provide securities services in respect of unlisted securities in contravention of conditions imposed or prescribed under section 6(7)
- Act as a participant unless authorised as a participant by a licensed central securities depository
- Act as a clearing member unless authorised by a licensed exchange or a licensed independent clearing house
- Act as a nominee unless that person is approved under section 76
- Perform the functions of or operate as a trade repository unless that person is licensed under section 56
- In any manner, directly or indirectly, advertise or canvass for carrying on the business of an authorised user, participant or clearing member, unless that person is an authorised user, participant or clearing member, or an officer or employee of an authorised user, participant or clearing member, who is so permitted in terms of exchange rules, depository rules or clearing house rules, as the case may be.
A person who is not:
- Licensed as an exchange, a central securities depository, a trade repository, or a clearing house
- A participant
- An authorised user
- A clearing member
- An approved nominee
- An issuer of listed securities,
- May not advertise or canvass for carrying on the business of an authorised user, participant or clearing member.
An authorised user may only provide the securities services for which it is authorised by a licensed exchange
A participant may only provide the securities services for which it is authorised by a licensed central securities depository
A clearing member may only provide the clearing services or settlement services for which it is authorised by a licensed exchange or licensed independent clearing house

Conduct Standards

Conduct standards may prescribe requirements in relation to:
- Authorised users, participants or clearing members of independent clearing houses or central counterparties
- Any other regulated person, where the required standard of conduct is not prescribed in another law or conduct standard, and a conduct standard is necessary or expedient for the achievement of the objects of this Act
A conduct standard is binding on authorised users, participants or clearing members of independent clearing houses or central counterparties or any other regulated person in respect of whom the conduct standard was prescribed, as the case may be, and on their officers and employees and clients

Principles of Conduct Standards

A conduct standard for authorised users, participants or clearing members of independent clearing houses or central counterparties must be based on the principle that:
- An authorised user, participant or clearing member of an independent clearing house or central counterparty must:
  - Act honestly and fairly, with due skill, care, and diligence and in the interest of a client
  - Uphold the integrity of the financial markets
  - Have and effectively employ the resources, procedures, and technological systems for the conduct of its business
- An authorised user, in addition to the above must:
  - Seek information from a client regarding his or her financial position, investment experience and objectives where appropriate to the category of securities services provided and to the business of the client
  - Act fairly in a situation of conflicting interests
A conduct standard for regulated persons, other than those mentioned above must be based on the principle that the regulated person must:
- Act honestly and fairly, with due skill, care, and diligence and, where applicable, in the interests of a client or member
- Uphold the integrity of the financial markets.
A conduct standard may provide for:
- The disclosure to a client of relevant material information, including the disclosure of actual or potential own interests
- Proper record-keeping
- Avoidance of fraudulent and misleading advertising, canvassing, and marketing
- Proper safekeeping of transaction documents of clients
- Proper separation and protection of funds and securities of clients

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Description

Explore the South African Financial Markets Act 19 of 2012, which governs the regulation of financial markets to ensure fairness, efficiency, and transparency. This quiz covers key objectives and the Act's role in promoting investor confidence and regulating over-the-counter derivatives.