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.

Generally, funds in South Africa are classified as collective investment schemes and are regulated by the Collective Investment Schemes Control Act (CISCA).

A Collective Investment Scheme is defined in CISCA as ‘a scheme, in whatever form, including an open-ended investment company, in pursuance of which members of the public are invited or permitted to invest money or other assets in a portfolio, and in terms of which:

• two or more investors contribute money or other assets to and hold a participatory interest in a portfolio of the scheme through shares, units or any other form of participatory interest; and
• the investors share the risk and the benefit of investment in proportion to their participatory interest in a portfolio of a scheme or on any other basis determined in the deed’.

The primary forms of collective investment schemes are detailed in Establishing and investing in debt and hedge funds – common structures.

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.

The definition of ‘Hedge Fund’ for the purpose of applying CISCA is ‘an arrangement in pursuance of which members of the public are invited or permitted to invest money or other assets and which uses any strategy or takes any position which could result in the arrangement incurring losses greater than its aggregate market value at any point in time, and which strategies or positions include but are not limited to (a) leverage; or (b) net short positions.’

Although Collective Investment Schemes do not need to be registered, all companies which wish to manage collective investment schemes (Management Companies) must register with the Registrar of the Collective Investment Schemes in terms of section 42 of CISCA. Also see Managing and marketing debt and hedge funds – investment management restrictions.

Provided that private equity funds are not made available to members of the public, the structures under which they operate are not directly regulated by the FSCA.

Asset managers and hedge funds

Collective Investment Schemes (CIS) (both Hedge Funds and Unit Trusts are classified as CISs)

CIS in securities

The portfolio consists mainly of securities and includes local funds registered with the FSCA (most collective investment schemes fall in this category).

CIS in properties

The portfolio consists mostly of shares in property investment companies or directly held property.

CIS in participatory bonds

The scheme consists mostly of participatory bonds.

Declared CIS

This is a scheme declared by the Minister of Finance as a CIS (eg hedge funds, as above).

Foreign CIS

These are foreign schemes which solicit investments from South Africans. In terms of Collective Investment Schemes Control Act (CISCA), a foreign CIS must apply to the Registrar of Collective Investment Schemes to be approved and registered.

En commandite partnerships

En commandite partnerships are regulated by the common law. The main advantage of this type of partnership is that a commanditarian, or limited partner, is not liable for the debts of the partnership in an amount greater than its investment commitment to the partnership (provided applicable common law requirements are met). The managing partner (also known as the general partner) has unlimited liability for the debts of the partnership.

Also see Entity establishment. 

Debenture funds

Investors in debenture structures subscribe for debentures issued by a company. The company lends or contributes the proceeds of such subscription to a trust. The trust appoints a hedge fund manager to manage its portfolio of assets, and vests income and gains resulting from the portfolio in the holders of the debentures (in their capacities as beneficiaries of the trust).

Private equity funds

En commandite partnerships

See above and also see Entity establishment. 

Bewind trusts

A bewind trust is a type of trust vehicle registered under the Trust Property Control Act, in terms which the applicable assets that are subject to the trust arrangements are owned by the beneficiaries of the trust, but the trustees of the trust hold and manage such assets. When a bewind trust is used for purposes of a private equity vehicle, the cash contributions of the investors to the trust form the initial assets of the trust. Each investor is a beneficiary of the trust, and the investors own the assets of the trust jointly in undivided shares in proportion to their respective contributions.

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) there are two categories of hedge funds, namely Qualified Investor Hedge Funds (QIHFs) and Retail Investor Hedge Funds (RIHFs).

RIHFs are aimed at the general public whilst QIHFs are aimed at more advanced investors.

There are no requirements in order to invest in an RIHF and RIHFs are able to set their own minimum investment levels.

Only 'Qualified Investors' may invest in QIHFS. A Qualified Investor is an investor which invests a minimum investment of ZAR1 million per hedge fund and has:

• demonstrable knowledge and experience in financial and business matter which would enable the investor to assess the merits and risks of a hedge fund investment; or
• appointed a Financial Services Provider (authorized in terms of Financial Advisory and Intermediaries Services Act (FAIS)) who has demonstrable knowledge and experience to advise the investor regarding the merits of a hedge fund investment.

The regulations relating to QIHFs are not as stringent as those attached to RIHFs, with QIHFs having more autonomy over their risk profiles and not being subject to the same liquidity and exposure requirements as RIHFs. For more information, see Managing and marketing debt and hedge funds – investment management restrictions.

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

‘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.