Capital markets and structured investments

The South African debt capital market is regulated mainly by the Financial Markets Act (FMA), the Companies Act and the Banks Act. The Collective Investment Scheme Control Act and the Exchange Control Regulations may also be applicable to some debt instrument structures.

To offer and issue debt securities, an issuer must be registered as a bank, or authorized as a branch of a foreign bank under the Banks Act or must offer and issue debt securities in compliance with one of the available exemptions. The most prominent exemption for non-bank issuers is the exemption set out in the Commercial Paper Regulations which applies to prospective issuers that are listed companies or issuers that have a net asset value of at least ZAR100 million for at least 18 months prior to any issue of commercial paper.

The offer and sale of debt securities by a non-resident in South Africa is subject to the prior approval of the Financial Surveillance Department and SARB.

The Financial Advisory and Intermediaries Services Act (FAIS) prohibits any person other than a person licensed under the FAIS from marketing debt securities, acting as an intermediary in offers and sales of debt securities and recommending or providing guidance on the purchase of securities.

A corporate special purpose vehicle (SPV) is commonly used for issues of asset-backed securities, high yield debt securities and other types of secured debt securities. This SPV structure is not generally used for issues of unsecured debt securities. The trust structure is not commonly used for issues of debt securities, as a trust is not the most tax-efficient way of structuring these types of transactions. However, there are circumstances where the trust structure has been used.

Types of debt instruments include:

• securities characterized by the type of interest or payment;
• debentures;
• bonds;
• notes;
• derivative instruments;
• convertible debt securities;
• exchange-traded funds or notes;
• asset-backed debt securities;
• depository receipts; and
• warrants.

The disclosure requirements

Section 96 of the Companies Act sets out types of offers that are not offers to the public.

They are:

• an offer to persons that deal with securities in the ordinary course of business, banks, mutual funds, financial institutions and financial services providers and wholly owned subsidiaries of banks, mutual funds, financial institutions and financial services providers; and
• an offer where the total acquisition cost of the securities for any single offeree is equal to or greater than a certain threshold, which is currently ZAR1 million.

Where the offer is not to the public, the offer does not require a prospectus.

If the offer is an 'offer to the public' as defined in the Companies Act, the issuer must prepare and register a prospectus satisfying the requirements of the Companies Act. There are certain exemptions as to what constitutes an ‘offer to the public’ (see section 96 of the Companies Act as discussed above).

JSE Limited (JSE)

Subject to compliance with both the Debt Listings Requirements and the listings requirements relating to the main market of the JSE, an issuer can list its debt securities on the main market of the JSE. An issuer may also list its debt securities on an alternative exchange of the JSE called the Interest Rate Market.

Yes. 

Issuing debt securities and investing in debt securities

The JSE can suspend the listing of debt securities on failure by an issuer to comply with the Debt Listings Requirements of the JSE – which include ongoing disclosure obligations. The JSE can also censure the issuer (publicly or privately) or impose a fine or any other penalty that is appropriate in the circumstances.

Macro-economic risks

South Africa has recently received a credit-rating downgrade, which has prompted issuers to sidestep the bond market and opt for less public forms of fundraising. A number of South Africa's state-owned entities are in precarious financial positions with their respective corporate governance structures coming under increasingly intense public scrutiny.

In terms of the Collective Investment Schemes Control Act (CISCA), no Management Company (see Establishing and investing in debt and hedge funds – establishment) may publish any advertisement, brochure or pamphlet referred to in before the management company has been informed by the Registrar of Collective Investment Schemes that he has no objection to the terms thereof.

Qualified Investor Hedge Funds (QIHFs) may only be marketed to Qualified Investors (see Establishing and investing in debt and hedge funds – investor considerations), whilst any investor may invest in a Retail Investor Hedge Funds (RIHFs). As a result, RIHFs are more highly regulated than QIHFs in terms of the risk profile of the assets under investment.

For more information, see Managing and marketing debt and hedge funds – investment management restrictions.

No person may manage a fund which is open to the public for investment without being registered in terms of the Collective Investment Schemes Control Act (CISCA) or licensed in terms of the Financial Advisory and Intermediaries Services Act (FAIS).

For registration of Management Companies, see Establishing and investing in debt and hedge funds – establishment.

Under FAIS, four types of licenses are issued to asset managers:

• category I (issued to financial services providers providing non-discretionary intermediary services or advice);
• category II (issued to financial services providers who provide discretionary fund management);
• category IIA (issued to financial services providers who manage hedge funds on a discretionary basis); and
• category III (issued to administrative financial services providers who aggregate client funds or securities, often through providing one-stop investment platform services).

Such license holders (Authorized Financial Services Providers) are bound by principles and rules set out in the relevant codes of conduct created by the Financial Sector Conduct Authority (previously known as the Financial Services Board) (FSCA).

Individuals exercising oversight over the rendering of financial services by a license holder under the FAIS (Key Individuals) or who represent the license holder in rendering financial services to clients (Representatives) must successfully complete certain regulatory examinations prescribed by the FSB.

Hedge fund managers must comply with the Category IIA (Hedge Fund Financial Services Provider) license requirements under FAIS in order to manage investor funds. Hedge fund managers must also register as such with the Registrar of Collective Investment Schemes in terms of section 42 of Collective Investment Schemes Control Act (CISCA).

In addition to the above, hedge funds are regulated in terms of board notice 52 of 2015 (Financial Sector Conduct Authority (previously known as the Financial Services Board)): Determination on the Requirements for Hedge Funds) (Board Notice 52), in terms of which, inter alia:

• Both Qualified Investor Hedge Funds (QIHFs) and Retail Investor Hedge Funds (RIHFs) must appoint a separate depository for the safekeeping of assets.
• Managers of QIHFs and RIHFs must comply with leverage, liquidity and asset exposure restrictions imposed by the FSCA. Restrictions are also placed on a fund's ability to invest in derivatives. RIHFs are placed under more stringent restrictions in terms of exposure limits and permitted securities for investment.
• All fund managers must report to the Registrar of Collective Investment Schemes on a quarterly basis, which report must contain information on, inter alia:
  • the value assets in long/short positions as a percentage of total assets invested;
  • the exposure permitted under the fund mandate and the actual exposure applied at quarter end;
  • the method used to calculate exposure; and
  • a list of all portfolios administered by that manager.
• Hedge fund managers must provide the Registrar of Collective Investment Schemes with their audited annual financial statement and annual report within 90 days of their year end.

‘Derivative Instruments’ are included in the definition of ‘securities’ under the Financial Markets Act (FMA). Any person wishing to carry on the business of buying or selling listed securities must either be an authorized user or effect such transactions through an authorized user. As such anyone wishing to enter into listed derivatives contracts in South Africa must be authorized by a licensed exchange or enlist the services of such a person.

Unlisted derivatives (OTCs), have historically been largely unregulated. The large majority of OTCs in South Africa are traded and cleared bilaterally and there have been no central risk management regimes imposed outside of the limits which the counterparties impose upon themselves.

Following the 2007-2008 financial crisis, in line with its G20 obligations, South Africa begun the process regulating OTCs and is moving towards a system of central clearing by enacting the FMA, which requires (once fully implemented) that all future derivatives trading will need to be performed through central counterparties (CCPs). The counterparties will each contract with the CCP, which will result in the CCP taking settlement risk and thus being more circumspect in the types of transactions they allow.

No CCP's have, as yet, been licensed in South Africa and the regulation of the OTC market is currently managed through increased reporting requirements on entities which bilaterally clear derivative contracts. The latest draft amendments to the FMA include provisions to allow for the JSE Limited to act as clearing agent for OTCs until 2022, at which point all CCPs will need to be independently owned and managed.

South Africa has a robust derivative market, which makes up approximately 7.5% of GDP, and as such uses all the main types of derivatives contracts, including:

• forwards;
• futures;
• swaps (such as interest rate or currency swaps); and
• options (call options and put options).

Banks are the primary traders of derivatives in South Africa and as a result the most commonly traded derivatives are:

• interest rate derivatives (swaps), which make up 85% of the derivative transactions traded in the South African domestic market; and
• foreign exchange derivatives (currency swaps), which make up approximately 12% of South Africa's derivative trading.

Commodity and Agricultural derivative contracts (futures and options) are also traded extensively in the South Africa.

As discussed above, South Africa has not been exempt from the regulatory attention afforded to OTC derivative trading, particularly in the last seven to ten years. As such the reporting requirements in respect of derivative transactions have become increasingly onerous and as South Africa begins licensing CCPs there will be additional compliance and regulatory costs imposed on people transacting in derivatives.