How are frontier markets evolving in a post-trade environment?
There has been significant positive developments within sub-Saharan Africa’s markets over the last decade, and there is a genuine commitment to address the infrastructural challenges in the region. Almost all sub-Saharan markets now have a functioning infrastructure, as far as capital markets are concerned. This basically means that you have a stock exchange and a central depository.
Both Kenya and Botswana have introduced automated trading systems in the last two years. Nigeria is currently replacing its automated trading system, having already lifted restrictions on short-term government securities. Nigeria is expected to introduce securities lending capabilities in the longer term.
Looking at Southern Africa, Angola hopes to open a stock exchange by 2015, and Zimbabwe plans to introduce a central securities depository (CSD) in the short term.
Markets, including Zimbabwe, are looking at how they can keep improving, in terms of compliance, with all G30 recommendations and other international benchmarks. We are seeing greater alignment between securities regulators in the region, and with the international trade body of the International Organization of Securities Commissions (IOSCO).
Overall, I think there is a lot of positive progress in the development of Africa’s capital markets, but naturally, you have to distinguish South Africa from the rest of the African continent. South Africa is the most developed and sophisticated financial market in Africa, with world-class infrastructure, and fully aligned with the changes being adopted in developed and other large emerging markets. The rest of Africa—which is what some may refer to as a frontier market—still has some work to do. But I believe regulators in most African markets are committed to developing their financial sectors, and are making progress towards adopting new changes to attract and facilitate improved domestic and foreign investment.
What do you think the future holds for sub-custody businesses in the region?
The future of the sub-custody business is definitely promising. Demand for Africa is strong and has exceeded pre-financial crises levels. Sub-Saharan Africa is on track to deliver more than 5 percent growth from 2012 to 2013, and Africa’s growing investor interest is reflected in areas such as foreign direct investment and activity in the securities market. We have seen substantial flows in debt markets across East Africa, Nigeria and Ghana. South African asset managers have been increasingly looking for investment opportunities in offshore markets, and prefer to operate via single providers for both domestic and offshore assets. By comparison, other African markets are primarily dominated by global and domestic investors investing in local markets.
Increased interest from foreign and regional investors is now driving demand for sub-custody services, attracting more international and domestic banks into the sector. Standard Chartered Bank launched their securities services business in 2010 and today is one of the largest securities services providers on the continent, with a footprint across 18 markets. We aim to provide more options to foreign and domestic investors in South Africa, following our acquisition of Absa’s South African custody business in April 2013.
What do you believe is an acceptable liability for custody and sub-custody providers?
I think that liability is a particular challenge for the region, given the region’s capital markets are still evolving. Other than South Africa, which is developed in terms of infrastructure and regulation, the rest of the region still has some catching up to do.
There are many areas where foreign investors would like to see improvements, such as settlement risk, corporate actions and governance. Sub-custodians working as agents for their clients, typically do not take liabilities arising from market inefficiencies.
To what extent will global regulation affect the post-trade industry?
Strate, South Africa’s CSD, has made a significant contribution in mitigating risk, bringing efficiencies to the South African financial markets and improving its profile as an investment destination. Strate’s recent initiatives include a clearing house for listed derivatives, participation in Clearstream’s global liquidity hub, segregated accounts and a move to a T+3 settlement cycle.
But considering the rest of Africa is still making progress in developing their capital markets environment, new global developments around automation or derivatives are not really applicable because a lot of these products are not yet available.
The majority of African markets remain focused on improving their settlement processes, and working on areas such as settlement guarantees, corporate actions and improving operational efficiencies (eg, CCI processing in Nigeria). Markets such as Kenya and Nigeria have plans to introduce derivatives products to provide more options to investors.
But having said that, regulators in the region are fully aware of global developments. There is a lot more dialogue going on between the regulators in the region, and with their counterparties internationally. An efficient market infrastructure is a pre-requisite for attracting global investors.
What kinds of players are looking for increased exposure to the African markets?
Africa is now attracting the attention of institutions, either investing directly in the market or in a variety of structures (exchange-traded funds, listed notes, etc). Apart from international funds from OECD markets, there is an increasing trend of intra-Africa investments. Increased allocation from domestic pension funds in key markets such as South Africa, Nigeria and Ghana will help in widening local and regional capital markets. Another positive trend is that global institutional investors see Africa as having the greatest overall investment potential of all global frontier markets, and plan to increase their asset allocation in African markets from 1 to 5 percent by 2016.
Increased investor interest in emerging market local currency debt has helped advance the understanding of, and interest in, local currency debt in Africa. Significant efforts are being made by several key countries in Africa—an example of this is the African Financial Markets Initiative (AFMI), an initiative of the African Development Bank (AfDB), which is looking to develop capital markets to increase local debt issuance, spur investor interest, strengthen participation, and promote capital transformation across the region.
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