The securities lending industry is crucial for maintaining liquidity in South African financial markets. For the last few years the securities lending industry has grappled with difficulties surrounding the provision of bonds and equity securities as collateral for securities loans.
Traditional South African pledges have proven to be impractical due to, amongst other things, intraday changes in exposure and the inability of a secured party to take possession of the securities that are pledged.
Outright transfers of collateral securities, on the other hand, would provide the securities lending industry with a practically workable way to ensure that parties are secured and are able to act quickly in the event of a default. Arrangements similar to a South African outright transfer are standard in other jurisdictions.
The introduction of the Financial Markets Act (in particular section 39(2)) was an important legal step in clarifying the validity of outright transfers of collateral securities. Market participants have, however, been unable to avail themselves of any benefit of this change due to the adverse tax consequences – including in respect of securities transfer tax and capital gains tax – that currently may arise on an outright transfer of collateral securities.
Although no specific proposal was made, in the recent South African Budget Speech, the Minister of Finance mentioned that the government will look at ways to alleviate these adverse tax consequences while ensuring that any tax relief on collateral does not give rise to tax avoidance. The right amendments to the tax legislation could greatly simplify how the securities lending industry secures loan exposures, making this vital activity less risky for everyone involved. Stay tuned!