Financial Markets Act (FMA) PDF

Financial Markets Act (FMA) --------------------------- The Financial Markets Act 19 of 2012 of South Africa seeks to ensure that financial markets in South Africa operate fairly, efficiently, and transparently to promote investor confidence. The Act repealed the Securities Services Act, 2004 (No 3...

Financial Markets Act (FMA) --------------------------- The Financial Markets Act 19 of 2012 of South Africa seeks to ensure that financial markets in South Africa operate fairly, efficiently, and transparently to promote investor confidence. The Act repealed the Securities Services Act, 2004 (No 36 of 2004), and is now the primary legislation governing the regulation of financial markets, market infrastructure and securities services in South Africa. Furthermore, the Act provides a framework for regulating over the counter (OTC) derivatives in South Africa; a key G20 commitment. In the National Treasury document, Reducing the Risks of Over-The-Counter Derivatives in South Africa, the Treasury announced and adopted a phased approach to the implementation of OTC derivatives regulatory reform after an extensive consultation process. The Act seeks to improve OTC trading in derivatives and do away with misleading and conflict of interest trading. It also seeks to bring the legislative and regulatory framework in line with the recommendations of international standard setting bodies such as the G20, Basel Committee on Banking Supervision and the International Organisation of Securities Commissions. The FMA also allows for a Self-Regulatory Organisation, such as the JSE, to create rules and directives to regulate its authorised users (members). As such members who are approved by a licensed exchange and who provide products and services (such as TSP or ISP) as approved by the exchange do not need to apply for an FSP license. The Act primarily focuses on the licensing and regulation of exchanges, central securities depositories, clearing houses, trade repositories and market infrastructure, as well as the prohibition of insider trading and other market abuses. The Financial Markets Act 2012 sets out extensive prohibitions against market manipulation and insider trading. It prohibits improper practices and is aimed at ensuring that market participants operate in a market that is free, safe, and fair. **What does the Act Provide for?** In summary, the FMA Act provides for - - the regulation of financial markets; - the licensing and regulation of exchanges, central securities depositories, clearing houses and trade repositories; - the regulation and the control of securities trading, clearing and settlement, and the custody and administration of securities; - the prohibition of insider trading, and other market abuses; - the approval of nominees; - the framework for codes of conduct; and - the replacement of the Securities Services Act, 2004, as amended by the Financial Services Laws General Amendment Act, 2008, so as to align this Act with international standards and to provide for matters connected therewith. A diagram of a circular structure Description automatically generated with medium confidence ### Summary OTC Derivatives Regulation Regulations with respect to requirements for the regulation of **unlisted securities** are made in terms of section 5(1)(a) of the FMA. For the purposes of the Regulations, an 'OTC derivative' means an unlisted derivative instrument, other than foreign exchange spot contracts and physically settled commodity derivatives. The **FMA provides** for the **regulation and supervision** of the OTC derivatives market and related market infrastructures, such as clearing houses and trade repositories that are necessary for the implementation of G20 requirements. All standardised OTC derivative contracts should be **traded on exchanges or electronic trading platforms**, where appropriate, and **cleared through central counterparties**. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts are subject to higher capital requirements. **Providing securities services in OTC derivatives** is a regulated activity. The categorisation of OTC derivative providers (ODPs) as regulated persons that conduct regulated activity in relation to OTC derivatives is necessary to provide the scope of coverage of the regulatory framework. Derivatives market participants may not conduct the activity of an ODP in South Africa unless authorised by the Financial Sector Conduct Authority (FSCA) in terms of section 6(8) of FMA ### Chapter II: Requirements for the Regulation of OTC Derivatives Section 2 of the Regulations: Requirement to be authorised 1. A person may not--- a. act as an OTC derivative provider; or b. advertise or hold itself out as an OTC derivative provider, unless authorised by the Authority in terms of section 6(8) of the Act. 2. An application for authorisation as an OTC derivative provider must be made in the manner, and contain the information, prescribed by the Authority. Section 3 of the Regulations: Reporting obligations 1. An authorised OTC derivative provider must report OTC derivative transactions to a licensed trade repository or a licensed external trade repository in the form and manner prescribed by the Authority under section 58 of the Act. 2. Where OTC derivative transactions have been accepted for clearing, the relevant licensed central counterparty or licensed external central counterparty must, as soon as practicable, report all OTC derivative transactions that it has accepted to a licensed trade repository or licensed external trade repository in the form and manner prescribed by the Authorities under section 58 of the Act. Section 4 of the Regulations: Clearing 1. The Authority may, with the concurrence of the Prudential Authority--- a. determine eligibility criteria for OTC derivative transactions to be subject to mandatory clearing; and b. conduct assessments into other categories of OTC derivative transactions upon which additional mandatory clearing requirements could be based. 2. An authorised OTC derivative provider must ensure that an OTC derivative transaction determined by the Authority in terms of sub regulation (1) as eligible for clearing, is cleared through a licensed central counterparty or a licensed external central counterparty in the manner prescribed by the Authority. 3. In making a determination in terms of sub regulation (1), the Authority must have regard to--- a. 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; b. the effect on the efficiency, integrity, and stability of the South African financial system; c. the interconnectedness between counterparties to the relevant classes of OTC derivative transactions and the impact on the levels of counterparty credit risk; d. the resources and suitability of the central counterparty available to clear the relevant OTC derivative transactions; e. the impact on the competitiveness of the South African market of imposing a clearing requirement in relation to the relevant OTC derivative transactions; and f. any other matters that the Authority considers relevant. Section 5 of the Regulations: Category of regulated person An authorised OTC derivative provider is a regulated person in terms of section 5(1)(b) of the Act. *"a category of regulated persons, other than those specifically regulated under this Act, if the securities services provided, and the functions and duties exercised, whether in relation to listed or unlisted securities, by persons in such category, are not already regulated under this Act, and if, in the opinion of the Minister, it would further the objects of the Act in section 2 to regulate persons in such categories."* To be authorised as an ODP, an applicant must meet the criteria prescribed and prove its financial soundness as part of fit and proper requirements. All ODPs will be required to, 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. ### ### What are the Objects of the Act? Section 2 of the Act: Objects of Act This Act aims to: - ensure that the South African financial markets are fair, efficient, and transparent; and - 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; and - promoting the international and domestic competitiveness of the South African financial markets and of securities services in the Republic. 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. In addition, the Act does not apply to the activities of a regulated person that relates to goods and services that are subject to the Consumer Protection Act. ### What prohibitions does the Act enforce? Section 4 of the Act: Prohibitions and adherence to authorisation by authorised users, participants and clearing members 1. No person may -: a. act as an authorised user unless authorised by a licensed exchange in terms of the exchange rules; b. carry on the business of buying or selling listed securities unless that person complies with section 24; c. provide securities services in respect of unlisted securities in contravention of conditions imposed or prescribed under section 6(7); d. act as a participant unless authorised as a participant by a licensed central securities depository in terms of section 31; e. act as a clearing member unless authorised by a licensed exchange or a licensed independent clearing house, as the case may be; f. act as a nominee unless that person is approved under section 76; g. perform the functions of or operate as a trade repository unless that person is licensed under section 56; or h. 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. 2. A person who is not: a. licensed as an exchange, a central securities depository, a trade repository, or a clearing house; b. a participant; c. an authorised user; d. a clearing member; e. an approved nominee; or f. an issuer of listed securities, 3. An authorised user may only provide the securities services for which it is authorised by a licensed exchange in terms of the exchange rules. 4. A participant may only provide the securities services for which it is authorised by a licensed central securities depository in terms of the depository rules. 5. 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, as the case may be, in terms of the exchange rules or clearing house rules, as the case may be. ### Chapter VIII Conduct Standards Section 74 of the Act Conduct standards for regulated persons 1. Conduct standards may prescribe requirements in relation to- a. authorised users, participants or clearing members of independent clearing houses or central counterparties; or b. 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. 2. 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. Section 75 of the Regulation Principles of Conduct Standards 1. A conduct standard for authorised users, participants or clearing members of independent clearing houses or central counterparties must be based on the principle that-  a. An authorised user, participant or clearing member of an independent clearing house or central counterparty must- i. act honestly and fairly, with due skill, care, and diligence and in the interest of a client; ii. uphold the integrity of the financial markets; iii. have and effectively employ the resources, procedures, and technological systems for the conduct of its business; b. an authorised user, in addition to paragraph (a), must- i. 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; and  ii. act fairly in a situation of conflicting interests. 2. A conduct standard for regulated persons, other than the regulated persons mentioned in subsection (1), must be based on the principle that the regulated person must-  a. act honestly and fairly, with due skill, care, and diligence and, where applicable, in the interests of a client or member; and b. uphold the integrity of the financial markets. 3\) A conduct standard may provide for- a. the disclosure to a client of relevant material information, including the disclosure of actual or potential own interests; b. proper record-keeping c. avoidance of fraudulent and misleading advertising, canvassing, and marketing; d. proper safekeeping of transaction documents of clients; e. proper separation and protection of funds and securities of clients; and f. any other matter which is necessary or expedient to be regulated in a conduct standard for the achievement of the objects of this Act. ### Chapter XI Auditing  Auditor 1. Despite the provisions of any law, a regulated person must appoint and at all times have an auditor who engages in public practice and who has no direct or indirect financial interest in the business in respect of which the auditor is so appointed. 2. No firm of auditors, or a member of such firm, in which a regulated person or director, officer or employee of a regulated person has any financial interest, may be appointed as an auditor of a regulated person. 3. The Authority must approve the appointment of the auditor of every market infrastructure and may withdraw the approval if it is necessary. Section 90. Accounting records and audit  A regulated person must- 1. maintain on a continual basis the accounting records determined in joint standards and prepare annual financial statements that conform with the financial reporting standards prescribed under the Companies Act and contain the information that may be determined in joint standards; \[Refer to Board Notice 96 of 2013 for further details\]. 2. cause such accounting records and annual financial statements to be audited by an auditor appointed under section 89, within a period determined in joint standards or such later date as the Authority may allow on application by a regulated person; \[Refer to Board Notice 96 of 2013 for further details\]; and 3. preserve such records, which may be in electronic form, in a safe place for a period of not less than five years as from the date of the last entry therein. Section 92. Furnishing of information in good faith by auditor  The auditor must provide any report or information as required in terms of this Act despite the provisions of any contrary law or a provision of a code of professional conduct to which the auditor is subject. Section 93. Power of Authority to request audit 1. The Authority may at any time by written notice direct a regulated person to have its accounts, records and financial statements audited and to submit the results of such an audit to the Authority within the time specified in the notice. 2. A person who, pursuant to subsection (1), gives information, an explanation or access to records knowing that the information, explanation, or records are false or misleading, commits an offence.