Building blocks
21 October 2015
Cross-border infrastructure remains inadequate in Africa, but the foundations are there if the continent’s countries can work together
Image: Shutterstock
How does the clearing and settlement infrastructure in Africa compare to the likes of Europe and Asia?
Stephen Tetteh: The comparison can be examined in terms of international standardisations and global regulations, cross-border transactions, and the structure of the clearing and settlement infrastructure.
Recent developments in the clearing and settlement infrastructure in Africa are geared towards the adoption and implementation of international best practices. Over the years, the clearing and settlement infrastructures in Africa have consistently been developed in line with specific global requirements. The rational is to provide efficient and cost-effective clearing and settlement processes that are capable of eliminating basic fundamental market risks.
A number of African markets are adopting the principles for financial market infrastructures as a benchmark in developing their markets. Ghana is upgrading its systems to ensure true delivery-versus-payment in its settlement process that is linked to the real-time gross settlement systems of the central bank. The new system will utilise the SWIFT and FIX protocols to ensure easy communications interface with other external systems.
Even though the facilities needed to hold securities in dematerialisation format are presently available, some markets continue to accept securities holding in paper format alongside the electronic book keeping. The challenge facing Africa is the preference of investors to hold securities in paper format instead of book entry format. Ghana, as of the end of August, had achieved an 87 percent conversion of paper share certificates at the depository.
Clearing and settlement infrastructure in Africa is primarily composed of exchanges and central securities depositories (CSDs). As a result, clearinghouses and central counterparties (CCPs) that form critical components of the clearing and settlement infrastructure network hardly exist in Africa.
Cross-border transactions are also limited across Africa. Unlike Europe, which has successfully harmonised its clearing and settlement infrastructure to pave the way for cross-border transactions, Africa’s clearing and settlement infrastructure is highly fragmented, hence its inability to achieve efficient cross-border transactions.
The challenge includes multiplicity of currencies, many of which are inconvertible, and the inability to harmonise the regulatory environment for clearing and settlement. Cash settlement is somehow divided between the use of central bank money and commercial bank money. While some jurisdictions use the central bank for cash settlement, others use commercial banks. In Ghana, for instance, there is a policy to settle both fixed income securities and equity securities using central bank money by the end of 2015.
What kind of technical standards are in place in your jurisdiction, and cross-border?
Tetteh: Technical standards in Ghana are determined by local regulators. The Securities and Exchange Commission is the authority responsible for setting the technical standards for clearing and settlement infrastructure in Ghana’s securities market. The CSD Act 2007 (Act 733), the Securities Industry Law (PNDC Law 333) and the Securities and Exchange Commission Regulations 2007 (LI1728) also govern clearing and settlement infrastructure. The Bank of Ghana also provides regulatory oversight for dealings in money market instruments. The Securities Industry Law (PNDC Law 333) is being reviewed to take in new market requirements and standards.
Others technical standards are covered in the Companies Code and tax regulations, which are all undergoing reviews in line with modern trends. As a young market, the standards are now evolving as the commission is building its capacity to provide regulatory oversight and leadership in market development.
In addition to the local regulatory standards, the Ghana CSD was awarded an ISO certificate ISO 27001:2005 in 2013. In September 2015, the Ghana CSD migrated from ISO 27001-2005 to ISO 27001-2013. Studies are being carried out to develop a business case for the adoption of ISO 15022 and ISO 20022.
The CSD also conducts regular stress testing, penetration and vulnerability assessments on its systems to ensure the safety of its information assets.
Other important technical standards that bind the operations of the clearing and settlement infrastructure in my jurisdiction are the principles for financial market infrastructures. The commission has started preparation to enforce adherence.
Of course, cross-border transactions in Africa are limited. Most are limited to activities of global and local custodians that carry out transactions on behalf of foreign clients. Consequently, there are no unified technical standards for cross-border activities in Africa.
However, several attempts are being made to harmonise the existing technical standards in the various jurisdictions within Africa. In view of this, the continent has been divided into various sub-regions. The core objective of the regionalisation exercise is to implement technical standards and to integrate the various markets so as to facilitate cross-border transactions. The regional groups include the Southern African Development Community, the West African Economic and Monetary Zone, the Common Market for East and Southern Africa, the Arab Maghreb Union, the East African Community, and the West African Capital Market Integration Council (WACMIC), of which Ghana is a member.
Since 2010, WACMIC has instituted measures to integrate the various markets in the sub-region. The many focuses of WACMIC include establishing a harmonised trading, clearing and settlement framework, integrating the various trading platforms, synchronising listing and regulatory requirements, and appointing a qualified West African Brokers and Common Passport.
In view of this, WACMIC has set up a technical committee to develop technical standards for its trading, clearing and settlement infrastructure. The objective of WACMIC is similar to that of other regional bodies in Africa, though the approach may be different.
WACMIC, for instance, has developed what are called sponsored access rules and agreements. Under the sponsored access rules and agreements, brokers within the WACMIC region can trade and settle securities in markets other than their own, through local brokers. Other measures being implemented by WACMIC include the appointment of qualified West African brokers, which will have the flexibility to participate directly in the markets they wish to trade in across West African jurisdictions. The final step is the establishment of a fully integrated West African capital market where all the exchanges will be linked in a virtual West African securities market.
What are settlement times like for cross-border transactions? Could this be improved?
Kyari Abba Bukar: Settlement cycles have reduced considerably over the past 15 years, being driven by advances in technology, improved business processes and dematerialisation of shares/paper certificates into the CSDs.
The best international market practice is now considered to be a T+2 cycle and global markets are moving towards this protocol via regional or country level initiatives. Generally, European markets have moved to T+2. The Middle East operate a combination of T+2 and T+3, although Saudi Arabia operates T+0 using fully pre-funded model.
The move to T+2 and a shorter settlement cycle would mitigate credit, counterparty, operational, and settlement risks, and increase the ability to manage capital, boosting liquidity and enabling faster reinvestment of capital. T+2 would also increase market efficiency and straight-through processing (STP), and move towards a level global playing field.
Anthony Fischli: Markets across Africa settle on divergent cycles, contributing to increased rates of failure and higher costs and operational risks, particularly for cross-border transactions. At present, settlement times for domestic transactions vary from T+7 in Zimbabwe and Malawi, to T+3 in Nigeria and Kenya, to T+2 in Egypt and Rwanda. Although domestic settlement cycles can be shortened through automation, this fails to alleviate the inherent risks that accompany cross-border transactions in Africa. We find that cross-border settlement in Africa remains problematic given the overall lack of harmonisation across individual nations.
At present, most reform focuses on trade execution as opposed to securities settlement and clearing. Yet barriers to efficiency tend to be largest in the middle office, where trades are reconciled, matched and confirmed. In practice, it often takes days and/or weeks for cross-border transactions to be successfully executed, affirmed and settled. This often leads to significant slippage as delays in execution can lead to missed trading opportunities.
By taking a coordinated approach that is designed to improve the systems and infrastructure available for post-trade matching and confirmation of cross-border transactions, settlement cycles can be reduced and greater efficiencies can be achieved.
Tetteh: Since there are no organised cross-border transactions in Africa, settlement times for cross-border transactions fall under the domestic cycle. A number of jurisdictions are gradually reducing their settlement times to T+3.
In Ghana, for instance, equity settles T+3 while fixed income is T+2. However, T+0 and T+1 settlement are also allowed. This is to allow market participant the flexibility to choose the settlement times most suitable to their clients.
In terms of improvement, since the regional groups are integrating their markets, it is important that standard times are fixed for cross-border activities in Africa. This can be executed in the manner of Europe with the Target2-Securities programme.
How much disparity is there between the different African jurisdictions? What kind of complications does this pose?
Fischli: Although conditions are improving, there is still wide disparity across African jurisdictions as it relates to trading and settlement. Cross-border investment may be affected by differences in time zone, settlement cycle, share type limitations, ownership constrains and capital controls, among other items. For example, African investors must contend with foreign ownership limits in Mauritius, issuer-specific restrictions in Mozambique, indigenisation restrictions in Zimbabwe and statutory evidence of capital inflow or investment in Nigeria, among others. Cross-border investors must therefore employ robust internal controls, many of which are difficult to automate in practice. This can severely constrain the decision-making process and expose investors to exogenous policy-related risk.
We should also note that there are differences in the underlying brokerage, custody and statutory charges levied on cross-border investors. For example, brokerage in Malawi may be as high as 1 to 2 percent of notional, while brokerage in Morocco typically ranges from 0.3 to 0.7 percent, including statutory charges. Custodial fees also vary with safekeeping costs ranging from 0.2 to 0.5 percent per annum and transaction costs ranging from USD $75 to USD $250 one-way. Cross-border investors must take into account such complications when determining how best to initiate positions, exit investments or rebalance portfolios.
Tetteh: Africa is composed of 54 countries with each jurisdiction having its own currency. This generates huge disparity among the various currencies in Africa and therefore exposes the continent to foreign exchange risk. Most of these currencies are not tradable and therefore use other international currencies for settlement.
Another important disparity is in the area of regulations. Regulations such as tax policies are designed to suit local market conditions. The differences in the legal requirements of the various jurisdictions complicate the legal risk facing the market, particularly in the area of cross-border activities.
Bukar: Not much disparity exists between African jurisdictions in terms of CSDs. All CSDs meet to share best practices, so they operate similar post-trade services.
Having said that, the sophistication needed to deliver efficient post-trade services is lacking due to different levels of automation. Africlear will provide economies of scale in this respect through technology solutions. Differing market structures also mean that different account structures are used. Most African CSDs settle trades on a beneficiary owner model but a few also use omnibus accounts. Finally, all of Africa’s CSDs are at different stages in complying with the principles for financial market infrastructures.
What would you consider the biggest challenge for securities services in the African continent? How about opportunities?
Tetteh: The biggest challenge is how to harmonise the various currencies within Africa. There are opportunities for Africa to establish international CSD and CCP clearing and settlement infrastructure that will provides multicurrency clearing and settlement services.
Africa is a huge opportunity for investment in numerous sectors. The poor infrastructure for water, energy, transport and communications, education, health and so on provide attractive incentives. Yields in Africa are now among the highest in the world.
Fischli: African investors face a number of challenges when attempting to access and/or exit individual markets.
Although many of these challenges can be addressed via improved technology and securities market infrastructure, each country suffers from its own set of legacy issues, ranging from outdated processes to insufficient power and connectivity.
In addition, many African countries suffer from a deficiency of skilled financial market professionals, a serious issue that can further hinder the speed and efficiency of investment processes.
Among the challenges often cited by investors are interest and dividend payment delays, impaired allotment procedures, and insufficient safeguards for the protection of shareholder rights.
Certainly, these challenges create opportunities for firms and individuals with sufficient skill, resources and expertise.
In our experience, we find that most central banks, local exchanges, depositories and regulatory authorities are open to ideas and suggestions that will open their markets and allow them to compete more successfully for investment from abroad.
Although improved connectivity, integration and alignment are key elements, we believe that solutions designed to offer increased transparency and control will deliver the greatest impact.
Stephen Tetteh: The comparison can be examined in terms of international standardisations and global regulations, cross-border transactions, and the structure of the clearing and settlement infrastructure.
Recent developments in the clearing and settlement infrastructure in Africa are geared towards the adoption and implementation of international best practices. Over the years, the clearing and settlement infrastructures in Africa have consistently been developed in line with specific global requirements. The rational is to provide efficient and cost-effective clearing and settlement processes that are capable of eliminating basic fundamental market risks.
A number of African markets are adopting the principles for financial market infrastructures as a benchmark in developing their markets. Ghana is upgrading its systems to ensure true delivery-versus-payment in its settlement process that is linked to the real-time gross settlement systems of the central bank. The new system will utilise the SWIFT and FIX protocols to ensure easy communications interface with other external systems.
Even though the facilities needed to hold securities in dematerialisation format are presently available, some markets continue to accept securities holding in paper format alongside the electronic book keeping. The challenge facing Africa is the preference of investors to hold securities in paper format instead of book entry format. Ghana, as of the end of August, had achieved an 87 percent conversion of paper share certificates at the depository.
Clearing and settlement infrastructure in Africa is primarily composed of exchanges and central securities depositories (CSDs). As a result, clearinghouses and central counterparties (CCPs) that form critical components of the clearing and settlement infrastructure network hardly exist in Africa.
Cross-border transactions are also limited across Africa. Unlike Europe, which has successfully harmonised its clearing and settlement infrastructure to pave the way for cross-border transactions, Africa’s clearing and settlement infrastructure is highly fragmented, hence its inability to achieve efficient cross-border transactions.
The challenge includes multiplicity of currencies, many of which are inconvertible, and the inability to harmonise the regulatory environment for clearing and settlement. Cash settlement is somehow divided between the use of central bank money and commercial bank money. While some jurisdictions use the central bank for cash settlement, others use commercial banks. In Ghana, for instance, there is a policy to settle both fixed income securities and equity securities using central bank money by the end of 2015.
What kind of technical standards are in place in your jurisdiction, and cross-border?
Tetteh: Technical standards in Ghana are determined by local regulators. The Securities and Exchange Commission is the authority responsible for setting the technical standards for clearing and settlement infrastructure in Ghana’s securities market. The CSD Act 2007 (Act 733), the Securities Industry Law (PNDC Law 333) and the Securities and Exchange Commission Regulations 2007 (LI1728) also govern clearing and settlement infrastructure. The Bank of Ghana also provides regulatory oversight for dealings in money market instruments. The Securities Industry Law (PNDC Law 333) is being reviewed to take in new market requirements and standards.
Others technical standards are covered in the Companies Code and tax regulations, which are all undergoing reviews in line with modern trends. As a young market, the standards are now evolving as the commission is building its capacity to provide regulatory oversight and leadership in market development.
In addition to the local regulatory standards, the Ghana CSD was awarded an ISO certificate ISO 27001:2005 in 2013. In September 2015, the Ghana CSD migrated from ISO 27001-2005 to ISO 27001-2013. Studies are being carried out to develop a business case for the adoption of ISO 15022 and ISO 20022.
The CSD also conducts regular stress testing, penetration and vulnerability assessments on its systems to ensure the safety of its information assets.
Other important technical standards that bind the operations of the clearing and settlement infrastructure in my jurisdiction are the principles for financial market infrastructures. The commission has started preparation to enforce adherence.
Of course, cross-border transactions in Africa are limited. Most are limited to activities of global and local custodians that carry out transactions on behalf of foreign clients. Consequently, there are no unified technical standards for cross-border activities in Africa.
However, several attempts are being made to harmonise the existing technical standards in the various jurisdictions within Africa. In view of this, the continent has been divided into various sub-regions. The core objective of the regionalisation exercise is to implement technical standards and to integrate the various markets so as to facilitate cross-border transactions. The regional groups include the Southern African Development Community, the West African Economic and Monetary Zone, the Common Market for East and Southern Africa, the Arab Maghreb Union, the East African Community, and the West African Capital Market Integration Council (WACMIC), of which Ghana is a member.
Since 2010, WACMIC has instituted measures to integrate the various markets in the sub-region. The many focuses of WACMIC include establishing a harmonised trading, clearing and settlement framework, integrating the various trading platforms, synchronising listing and regulatory requirements, and appointing a qualified West African Brokers and Common Passport.
In view of this, WACMIC has set up a technical committee to develop technical standards for its trading, clearing and settlement infrastructure. The objective of WACMIC is similar to that of other regional bodies in Africa, though the approach may be different.
WACMIC, for instance, has developed what are called sponsored access rules and agreements. Under the sponsored access rules and agreements, brokers within the WACMIC region can trade and settle securities in markets other than their own, through local brokers. Other measures being implemented by WACMIC include the appointment of qualified West African brokers, which will have the flexibility to participate directly in the markets they wish to trade in across West African jurisdictions. The final step is the establishment of a fully integrated West African capital market where all the exchanges will be linked in a virtual West African securities market.
What are settlement times like for cross-border transactions? Could this be improved?
Kyari Abba Bukar: Settlement cycles have reduced considerably over the past 15 years, being driven by advances in technology, improved business processes and dematerialisation of shares/paper certificates into the CSDs.
The best international market practice is now considered to be a T+2 cycle and global markets are moving towards this protocol via regional or country level initiatives. Generally, European markets have moved to T+2. The Middle East operate a combination of T+2 and T+3, although Saudi Arabia operates T+0 using fully pre-funded model.
The move to T+2 and a shorter settlement cycle would mitigate credit, counterparty, operational, and settlement risks, and increase the ability to manage capital, boosting liquidity and enabling faster reinvestment of capital. T+2 would also increase market efficiency and straight-through processing (STP), and move towards a level global playing field.
Anthony Fischli: Markets across Africa settle on divergent cycles, contributing to increased rates of failure and higher costs and operational risks, particularly for cross-border transactions. At present, settlement times for domestic transactions vary from T+7 in Zimbabwe and Malawi, to T+3 in Nigeria and Kenya, to T+2 in Egypt and Rwanda. Although domestic settlement cycles can be shortened through automation, this fails to alleviate the inherent risks that accompany cross-border transactions in Africa. We find that cross-border settlement in Africa remains problematic given the overall lack of harmonisation across individual nations.
At present, most reform focuses on trade execution as opposed to securities settlement and clearing. Yet barriers to efficiency tend to be largest in the middle office, where trades are reconciled, matched and confirmed. In practice, it often takes days and/or weeks for cross-border transactions to be successfully executed, affirmed and settled. This often leads to significant slippage as delays in execution can lead to missed trading opportunities.
By taking a coordinated approach that is designed to improve the systems and infrastructure available for post-trade matching and confirmation of cross-border transactions, settlement cycles can be reduced and greater efficiencies can be achieved.
Tetteh: Since there are no organised cross-border transactions in Africa, settlement times for cross-border transactions fall under the domestic cycle. A number of jurisdictions are gradually reducing their settlement times to T+3.
In Ghana, for instance, equity settles T+3 while fixed income is T+2. However, T+0 and T+1 settlement are also allowed. This is to allow market participant the flexibility to choose the settlement times most suitable to their clients.
In terms of improvement, since the regional groups are integrating their markets, it is important that standard times are fixed for cross-border activities in Africa. This can be executed in the manner of Europe with the Target2-Securities programme.
How much disparity is there between the different African jurisdictions? What kind of complications does this pose?
Fischli: Although conditions are improving, there is still wide disparity across African jurisdictions as it relates to trading and settlement. Cross-border investment may be affected by differences in time zone, settlement cycle, share type limitations, ownership constrains and capital controls, among other items. For example, African investors must contend with foreign ownership limits in Mauritius, issuer-specific restrictions in Mozambique, indigenisation restrictions in Zimbabwe and statutory evidence of capital inflow or investment in Nigeria, among others. Cross-border investors must therefore employ robust internal controls, many of which are difficult to automate in practice. This can severely constrain the decision-making process and expose investors to exogenous policy-related risk.
We should also note that there are differences in the underlying brokerage, custody and statutory charges levied on cross-border investors. For example, brokerage in Malawi may be as high as 1 to 2 percent of notional, while brokerage in Morocco typically ranges from 0.3 to 0.7 percent, including statutory charges. Custodial fees also vary with safekeeping costs ranging from 0.2 to 0.5 percent per annum and transaction costs ranging from USD $75 to USD $250 one-way. Cross-border investors must take into account such complications when determining how best to initiate positions, exit investments or rebalance portfolios.
Tetteh: Africa is composed of 54 countries with each jurisdiction having its own currency. This generates huge disparity among the various currencies in Africa and therefore exposes the continent to foreign exchange risk. Most of these currencies are not tradable and therefore use other international currencies for settlement.
Another important disparity is in the area of regulations. Regulations such as tax policies are designed to suit local market conditions. The differences in the legal requirements of the various jurisdictions complicate the legal risk facing the market, particularly in the area of cross-border activities.
Bukar: Not much disparity exists between African jurisdictions in terms of CSDs. All CSDs meet to share best practices, so they operate similar post-trade services.
Having said that, the sophistication needed to deliver efficient post-trade services is lacking due to different levels of automation. Africlear will provide economies of scale in this respect through technology solutions. Differing market structures also mean that different account structures are used. Most African CSDs settle trades on a beneficiary owner model but a few also use omnibus accounts. Finally, all of Africa’s CSDs are at different stages in complying with the principles for financial market infrastructures.
What would you consider the biggest challenge for securities services in the African continent? How about opportunities?
Tetteh: The biggest challenge is how to harmonise the various currencies within Africa. There are opportunities for Africa to establish international CSD and CCP clearing and settlement infrastructure that will provides multicurrency clearing and settlement services.
Africa is a huge opportunity for investment in numerous sectors. The poor infrastructure for water, energy, transport and communications, education, health and so on provide attractive incentives. Yields in Africa are now among the highest in the world.
Fischli: African investors face a number of challenges when attempting to access and/or exit individual markets.
Although many of these challenges can be addressed via improved technology and securities market infrastructure, each country suffers from its own set of legacy issues, ranging from outdated processes to insufficient power and connectivity.
In addition, many African countries suffer from a deficiency of skilled financial market professionals, a serious issue that can further hinder the speed and efficiency of investment processes.
Among the challenges often cited by investors are interest and dividend payment delays, impaired allotment procedures, and insufficient safeguards for the protection of shareholder rights.
Certainly, these challenges create opportunities for firms and individuals with sufficient skill, resources and expertise.
In our experience, we find that most central banks, local exchanges, depositories and regulatory authorities are open to ideas and suggestions that will open their markets and allow them to compete more successfully for investment from abroad.
Although improved connectivity, integration and alignment are key elements, we believe that solutions designed to offer increased transparency and control will deliver the greatest impact.
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