Participant Failure Manual

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Participant Failure Manual
PRESENTED BY Bev Furman DATE August 2008
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• 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.

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• 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 Strates role as Regulator and
  Supervisor of its Participants.
• Failure Manager assumes no liabilities.
• Legislative changes.
• Interim endorsement of the proposal.

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• 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.

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• 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

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• Rolling settlement
• Contractual settlement
• SFIDvP
• Principle of fail one-fail all

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• 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.

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• 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
  Participants 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 Clients Securities
  Account to another willing Participant in its
  discretion and advise the Client of the details
  of the receiving Participant.

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• 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 (F1)
  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.
• SARBs support iro adjusting the Curatorship
  Guidelines is critical for the success of the
  Failure Manual.

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• 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 Participants 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.

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• 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.

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• 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.

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• Failure Manager to be able to instruct the Failed
  Participant to uplift commits without affecting
  the legal recourse of the Client.
• The Failed Participants 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.

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• 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.

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