Participant Failure Manual

PRESENTED BY: Bev FurmanDATE: August 2008

Strate is licensed as a CSD and SRO.

In terms of the SSA, Strate must supervise compliance by Participants.

During 2003 Strate commenced a project to consider the impact should a Participant fail.

The objective - document a Participant Failure Procedure Manual which would outline, inter alia,

the steps to be taken to ensure the settlement of trades already reported by the failed Participant

and to move its Clients’ Securities to accounts at alternative service providers.

Version Four was released in December 2006.

Manual was criticised for being too narrow in scope and focus and for excluding the full impact to

the JSE and BESA.

In May 2007 the “Project Stakeholders” agreed to initiate a new project and jointly draft a more

comprehensive Procedure Manual.

Role of PricewaterhouseCoopers, FSB and SARB.

The “as-is” scenario.

Legal foundation / legislative changes.

Definition of “failure” and “Failure Manager”.

Background

The term “manage the failure process” will include the following core responsibilities:

Oversee the finality of the settlement of transactions in the settlement timeline immediately

following the declaration of a Participant failure (as defined);

Oversee the migration of Client Securities Accounts to a new service provider; and

Oversee the processing of Corporate Actions (Equities and Bonds) and Capital Events (Money

Market).

Representatives from Strate act as , or Strate appoints a “Failure Manager”.

The role of the Failure Manager is limited to the oversight of securities operations (as above) of a failed

Participant on behalf of the curator, judicial manager and/ or liquidator.

The role of the Failure Manager is completely separate from Strate’s role as Regulator and Supervisor of its

Participants.

Failure Manager assumes no liabilities.

Legislative changes.

Interim endorsement of the proposal.

Introduction to the Failure Manual

The term “ failure” is limited to the financial failure of a Participant and limited specifically to:

Curatorship;

Judicial Management; and/ or

Liquidation (whether provisional or final).

Constitution of the Participant Failure Crisis Committee

Activation

Curator will no longer honour any cash commitments of the Failed Participant; or

Non-Bank Participant – liquidator or judicial manager appointed to oversee / wind-down the business .

Termination of Strate participation and Strate Rules.

Definition of Failure

Inter-dependency in the settlement environment.

What needs to be done by each stakeholder to ensure that the failure is managed in the most efficient and

least disruptive manner.

Failure Manager

STRATE Supervision

Strate – as CSD

Exchanges (including surveillance divisions)

Participants

Business Partners

Issuers

Clients

Stakeholder Roles and Responsibilities

Rolling settlement

Contractual settlement

SFIDvP

Principle of “fail one-fail all”

Overview of the Strate Settlement Process

Settlement on Date of Failure

Assumption #1 – Announcement of Curatorship will be EOD

Assumption #2 – SARB will honour payment obligations – Settlement Assurance Option 1.

Settlements following the Date of Failure

Securities are ring-fenced and freely transferrable.

Cash is trapped (including SLB cash collateral, Corporate / Capital Events).

Assumption #3 – divert cash away from failed entity.

Settlement

The Failed (Full) Participant holds securities as an agent, therefore these securities are not trapped.

The migration of Clients’ securities are catered for in the Strate Rules:

“3.10.2 A Participant, its trustee, liquidator, curator, judicial manager, administrator or other lawful agent

must, upon notification of the Participant’s termination, transfer all Securities Accounts to other

Participants in accordance with Client instructions in terms of Rule 5.6.3.9, the Client Mandate, Rules

and Directives.”

“3.10.3 Where a Client has not provided a Participant with the instructions referred to in Rule 3.10.2 within

30 (thirty) calendar days of the Participant, its trustee, liquidator, curator, judicial manager,

administrator or other lawful agent giving notice to the Client of its termination in terms of Rule 5.7.7,

the Participant, its trustee, liquidator, curator, judicial manager, administrator or other lawful agent

shall transfer the Client’s Securities Account to another willing Participant in its discretion and

advise the Client of the details of the receiving Participant.”

Transferring of Securities

Ito section 69 of the Banks Act, all cash deposited within a Failed Bank Participant or Failed Clearing

Bank of a Non-Bank Participant, forms part of the banks fungible pool of assets. Cash is trapped.

Cash proceeds from the date after failure (F+1) for DvP transactions and cash collateral from SLB activities,

to be re-directed into a new Cash Suspense Account (CSA).

Cash from Corporate Actions / Capital Events to be re-directed into a new Corporate Action Suspense

Account (CASA).

Legislative changes.

SARB’s support iro adjusting the Curatorship Guidelines is critical for the success of the Failure Manual.

Re-routing of Cash – Assumption #3

Nature and functioning of Cash Suspense Account

Re-route cash from sale transactions and cash collateral proceeds for securities lending returns.

Clients can deposit “New-Cash” into this suspense account to ensure settlement of pending or new purchase

trades.

Details of the account to be loaded into the Failed Participant’s custody and CSD systems.

This cash account will either be in the name of a Nominee of the Failed Participant or Strate.

Operationally the account will be administered by the staff of the Failed Participant or by the Failure Manager.

Clients, Issuers, JSE, BESA and Members of the Exchanges will be allowed to deposit/ withdraw “New-Cash”

into this suspense account.

Commit to purchase trades based on re-routed cash in CSA, New-Cash or transfer from CASA.

Nature and functioning of Corporate Action Suspense Account

This cash account will either be in the name of a Nominee of the Failed Participant or Strate.

Cash account to be utilised:

to record all cash payments to an Issuer (Rights Officer, New Issues)

by shareholders / Clients of Failed Participant (e.g. dividends)

The suspense account will administered by the Failure Manager.

Claims procedure.

May be permitted to use any “New-Cash” in this suspense account to fund any upcoming settlement.

Settlement Assurance Option 1– SARB will manage (provide the necessary liquidity) the failure of a

Participant in the payments arena on failure date.

The systems and infrastructure of the Failed Participant will be operational.

The curator, judicial manager and/ or liquidator will allow the Failure Manager access to these systems.

The NPSD will permit the re-routing of cash to alternate suspense accounts.

The re-routing of cash will not affect the updating of Clients accounts within the Failed Participant.

Securities are ring-fenced and freely transferable;

All DFP and RFP transactions must be allowed to settle – no cash implications;

Committed RvP transactions must be uncommitted and recommitted on a case-by-case basis if “New-Cash”.

Participants must de-activate auto-commit functionality.

Assumptions for the Failure Manual

Failure Manager to be able to instruct the Failed Participant to uplift commits without affecting the legal

recourse of the Client.

The Failed Participant’s system and those of Strate, the JSE and BESA can produce reports and information

timeously.

All “Surviving Participants” will be able to deal with increased activity, i.e. an increase in the number of new

accounts and management thereof, increased volume in transaction due to new Clients etc.

FICA requirements for Clients of the Failed Participant will not be required to be completed immediately.

Suspend trading.

Assumptions for the Failure Manual

Committee will oversee the operational aspects of the management of a Failed Participant.

Constituted on the announcement of curatorship, judicial management or on the application of liquidation.

Will report on the management of the Failed Participant to the Strate Crisis Committee.

Composition – Members versus representatives

Terms of Reference

Escalation procedures and communication plan.

Participant Failure Crisis Committee - PFCC

Decision Trees