2011 FINANCIAL MARKETS BILL ACCORDS WITH GLOBAL BEST PRACTICE

Tuesday, July 31, 2012
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The world's ongoing financial crises have highlighted the need to tighten the regulation of financial markets and securities exchanges on international and domestic levels.
The Financial Markets Bill is intended to address the local need for such legislation, bringing South African legislation into line with international best practice. When enacted, it will replace the Securities Services Act, 2004.
The Financial Markets Bill will apply to, amongst others, owners of securities (including listed and unlisted shares, notes, derivative instruments, bonds, debentures, participatory interests in a collective investment scheme, instruments based on an index and securities listed on an external exchange), central securities depositories and participants, authorised users and nominees as well as third parties.
The Bill contemplates the licensing of "Trade Repositories" providing unlisted securities services (including over-the-counter derivatives), which are currently unregulated.
Trade Repositories will be required to maintain a centralised electronic database of records of transaction data. The duties to be imposed on them are aimed at:

ensuring efficient management of unlisted securities;

ensuring a balance between oversight (enhancing transparency in the market, and

facilitating risk identification and assessment and market surveillance); and

maintaining the confidentiality of information that is received.

The Bill will also provide for independent clearing houses in order to facilitate the clearing of unlisted securities through a "Central Counter Party".
The registrar's powers under the Securities Services Act will be extended in the Financial Markets Bill, in line with international best practice.
The registrar will have the power to:

approve of listings requirements;

determine licence applications;

prescribe reporting obligations of a Trade Repository;

prohibit a person providing "any securities services" for unlisted securities.

The definition of "securities services" will include "buying and selling of securities for own account or on behalf of clients as a business, the use of the trading system or infrastructure of an exchange to buy and sell listed securities, the furnishing of advice to any person, management of securities, clearing and settlement services, settlement of transactions in securities".
While the limited prohibition on insider trading will remain unchanged, the Bill, when enacted, will provide a new defence to parties to a bona fide commercial transaction amongst insiders that is not designed to benefit from the price sensitive information.
On the other hand, liability for the offence of insider trading will extend to a person who executed an offending transaction on behalf of another person, where he had reason to suspect that such a person was an insider.
The Bill's provisions propose a dramatic change to the general position in insolvency law, as those who hold security in securities will not be able to secure their claims to ensure that such claims are satisfied first in the event of insolvency.
Instead, their claims' ranking will be based on the point in time when their rights to the securities were acquired.
Giving effect to the UNIDROIT Convention and changing the existing South African law position, the Bill will also limit the power of an administrator of an insolvent estate by providing that, if an agreement is binding on third parties, it will also bind the administrator and creditor.
This overview of certain notable aspects of the draft legislation is based on the draft published in November 2011. No date has been given for the enactment.