Recent proposed amendments to the rules of Strate, South Africa’s central securities depository (the “Strate Rules”) will effect a significant change to how uncertificated securities are pledged, but will not solve all of the problems that market participants hoped would be addressed.
When enacted, section 39(3) of the Financial Markets Act, 2012 made provision for the pledge and cession in securitatem debiti of a securities account “in the manner provided for in the depository rules”. For some time, it was unclear whether such a pledge could be effected prior to Strate providing for the securities account pledge in the Strate Rules. Historically, the inability to pledge a securities account, rather than individual securities, has been administratively burdensome in a number of spheres. For example, in margining transactions where securities may be posted as collateral on an intra-day basis, it has been necessary for the securities account provider (the central securities depository participant (“CSDP”), authorised user or nominee) to re-place the entry prescribed in section 39(1) of the Financial Markets Act each time there is any change to the number or type of securities in the account.
The proposed amendments finally deal with the securities account pledge in what is set to become rule 7.6.2, described in the explanatory language to the amendments as the “wheelbarrow pledge”. It provides: “188.8.131.52 [a] pledge or cession in securitatem debiti, as constituted by an agreement, in respect of all the Securities held in a Securities Account at the point in time when the pledge or cession in securitatem debiti was effected, must: 184.108.40.206.1 be effected by Entry in the Securities Account of the pledgor or cedent in favour of the pledgee or cessionary; and 220.127.116.11.2 specify the name of the pledgee or cessionary, and the date of Entry” (our emphasis).
Market participants must take note that the proposed amendment does not, in fact, achieve the aim of alleviating the administrative burden in margining-type transactions. The securities account pledge will only cover those securities in the securities account at the time the pledge is effected. It will not cover securities subsequently added to the account. It will remain necessary for the CSDP, authorised user or nominee to re-effect the pledge each time new securities are added to the securities account if a valid pledge over all securities in the securities account is required.
In a related change, a CSDP (authorised users and nominees are not mentioned here) will be required, where the CSDP sends statements to its clients in accordance with Strate rule 5.8.5, to also send such statements to pledgees and cessionaries. It is not yet clear when the new Strate Rules will come into effect.