Financial Markets Act, 2012 – Regulating over-the-counter derivatives markets

16 Aug 2016

On 21 July 2016, National Treasury (Treasury) published the third draft of ministerial regulations to the Financial Markets Act (Regulations), draft criteria for authorization as an OTC derivative provider (Criteria) and a draft code of conduct for authorized OTC derivative providers (Code). Draft requirements and duties for trade repositories (TR Requirements), setting out the criteria for authorisation as a trade repository as well as the ongoing obligations proposed to be imposed on licensed trade repositories, were also published alongside the Regulations, the Criteria and the Code.

The Regulations, the Criteria and the Code are aimed at supporting the objectives of the Financial Markets Act and at ensuring that South Africa meets its international commitments to making regulatory and legislative reforms to the OTC derivatives market in alignment with international standards. In its explanatory memorandum, Treasury explains that the implementation of the reforms to the OTC derivatives market is likely to continue beyond 2018.

The Regulations have been compiled following the latest comments from the public and stakeholders, and are aimed at:

  • extending the scope of regulatory oversight to the OTC derivatives market and its participants;
  • prescribing criteria for the assets and resource requirements applicable to market infrastructures licensed to perform the functions and duties specified under the Financial Markets Act;
  • providing for the organisational and resource requirements to govern the activities of central counterparties (CCPs) and trade repositories;
  • prescribing additional safeguards applicable to CCPs, in order to ensure the safety, soundness and integrity of the financial markets;
  • providing for the approval of external central securities depositories (CSDs) in order to facilitate CSD-CSD linked arrangements; and
  • setting out transitional arrangements to allow market participants to comply with the Regulations’ proposed requirements.

The Regulations confirm that a person who, as a regular feature of business and transacting as principal, originates, issues, sells or makes a market in an OTC derivative is to be designated as an OTC derivative provider (ODP), and so as a ‘regulated person’ for the purposes of the Financial Markets Act, 2012 (FMA).

In order to be authorised as an ODP, comprehensive requirements will need to be met, as outlined in the Criteria. The applicant will need to be financially sound in terms of prescribed fit and proper requirements, and the competency of the applicant’s directors and senior managers to discharge the applicant’s duties and functions will need to be demonstrated. Operational ability will also need to be proven. For these reasons and others, the regulation of OTC derivatives under the FMA heralds a new era in South African financial services regulation. Once finalised, the Regulations will impact parties, including foreign parties, seeking to enter into principal-to-principal OTC derivatives trades with South African counterparties (noting, in the case of foreign parties, that deference to foreign regulators may take place in certain instances).

Apart from the initial authorization requirement, ODPs, once authorised, will also be faced with a host of ongoing compliance obligations imposed under the Code. The current draft of the Code intends to impose on ODPs the duty to (amongst others):

  • ensure that adequate levels of financial and operational resources are maintained in order to minimise potential losses to clients and other financial market participants;
  • enter into written agreements governing trading relationships with clients or counterparties; and
  • ensure the timely confirmation of non-centrally cleared OTC derivatives transactions after execution.

It is anticipated that ODP authorisation will begin six months after the coming into force of the Regulations.

Comments on the Regulations, Criteria, Code and TR Requirements can be submitted via email to Ms Petula Sihlali  – [email protected]

The deadline for submission is 31 August 2016.

To access the above mentioned documents, please click here

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)

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